INDIA 19 March 2009

Cement Sector

Nadir? Not Yet

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

INDIA Cement

Cement
Initiation 19 March 2009
Sector valuations over cycles
14 12 P/BV --ACC VS AMBUJA

Underweight

Nadir? Not Yet
Valuations to remain subdued: We expect valuations to remain subdued for at least one year due to oversupply. Initiating coverage on the sector with an Underweight rating, Sell on ACC and India Cements, Reduce on Ambuja Cements Hold on Grasim, Accumulate on UltraTech and Buy on Shree Cements. Easing cement prices and deteriorating return ratios over FY10-11E are likely to keep valuations under pressure. Utilization levels to decline on increased capacity: The oversupply situation will lead to a fall utilization levels from 98% in FY08 to 91% in FY09, and further to 80% and 76% in FY10 and FY11, respectively. Incrementally, effective capacity is slated to register 17% CAGR over FY08-FY11 vs demand 8% CAGR. Sharp correction in cement prices inevitable: Declining utilization levels will likely result in a sharp correction in cement prices in FY10 with the fragmented southern region witnessing the maximum decline. We expect downward pressure across regions in FY11 on higher supplies from new capacities. Easing cost pressure, efficiency drives insufficient to sustain margins: Commissioning of new CPPs and split grinding units would only partly neutralize higher energy costs despite the easing of international coal prices. We estimate EBIDTA/tonne to decline by 16.5% over FY09-11 to Rs674. Key risks: Upside risk: Better price and production discipline, lower input costs and favourable government intervention. Downside risk: Breakdown of production and price discipline, increased cost pressure.

10 8 6 4 2 0 Jul-93 Aug-91 Aug-92 Jun-94 May-95 Apr-96 Jan-99 Nov-00 Nov-01 Sep-03 Aug-04 Jul-05 Jun-06 May-07
Feb-09

Mar-97

Feb-98

Dec-99

ACC

Ambuja

As on 17 March 2009

One-year indexed performanceCentrum cement universe vs Nifty
140 120 100 80 60 40 20 0 Aug-08 Oct-08 Apr-08 Mar-08 May-08 Sep-08 Dec-08 Jan-09 Mar-09 Nov-08 Jun-08 Jul-08

Centrum Cement Index

Nifty

Al l Indi a Demand Supply Ba lance mn MT Effective Capacity Cement Production Consumption Gr. (%) Consumption Clinker Exports Cement Exports Capacity Utilization FY07 FY08 FY09E FY10E FY11E 162 155 10.2 149 3 5.9 96 171 168 9.8 164 2 3.6 98 198 181 7.6 177 2.4 3.6 91 249 195 8 191 1.9 4.1 78 277 210 8 206 1.4 3.6 76

Average Cement Price Assum ption Rs per Bag Nor th East South West All India Dec-08 227 227 259 232 235 FY10E 207 207 234 207 215 FY11E 192 192 219 192 200

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

Company Name ACC * Ambuja Cements* Grasim Industries Ultratech Cement India Cements Shree Cements

Rating Sell Reduce Hold Accumulate Sell Buy

Mkt Cap Rsbn 104 102 134 60 28 21

CMP Rs 555 67 1461 480 98 603

Target Price (Rs) 436 61 1474 527 83 823

% Upside /Downside (21.4) (8.9) 0.9 10.0 (14.6) 36.6

EV/Ton (USD) FY09E FY10E 79.9 95.4 74.3 88.5 61.7 70.9 66.0 44.8 66.7 57.8 40.2 FY11E 75.1 86.5 54.2 56.9 55.3 27.9 FY09 2.1 1.8 1.2 1.7 0.9 2.0

P/BV (x) FY10E 1.9 1.6 1.1 1.4 0.9 1.6 FY11E 1.9 1.5 1.0 1.2 0.8 1.4

ROE (%) FY09E FY10E 23.6 21.2 20.8 30.5 17.3 58.2 17.7 15.7 15.5 22.8 13.0 25.6 FY11E 9.8 13.0 11.9 15.4 8.5 21.1 FY09E 20.9 19 15.2 18.6 12.3 25.5

ROCE (%) FY10E 16.2 14.4 12.1 15.3 9.4 14.8 FY11E 9.2 12 9.5 11.5 6.8 13.4

* Year ending December Source: Bloomberg, Centrum Research

Apr-08

Oct-02

Table of Contents
Executive Summary ………………………………………………………………………….………4 Investment Argument ………………………………………………………………………….……6 Downside risk remains despite undemanding valuations…………………………………..6 Oversupply concerns to outweigh compelling long-term demand dynamics……………..8 Sharp correction in cement prices inevitable………………………………………………10 Easing cost pressure and efficiency drives insufficient to sustain current margins……….12

Valuation ……………………………………………………………………………………………15 Key Risk……………………………………………………………………………………..20 Annexure……………………………………………………………………………………21

Companies ACC ………………………………………………………………………………….……...22 Ambuja Cements…………………………………………………………………………...31 Grasim Industries…………………………………………………………….…………….40 UltraTech Cement……………………………………………………………..…………...50 India Cements……………………………………………………………….……………..59 Shree Cements…………………………………………………………………………….68

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Cement Sector

Executive Summary
We initiate coverage on the Indian cement sector with an Underweight rating as oversupply and loss of pricing power would weigh on valuations for at least one year. We have covered six companies (ACC, Ambuja Cements, Grasim Industries, Ultra Tech Cement, India Cements and Shree Cements), which had a combined 50.5% market share in FY08. Between 17 March 2008 and 17 March 2009, our cement index, as measured by the cumulative market capitalization of these six companies, has performed in-line with the S&P CNX Nifty giving a negative return of 40% (the Nifty had a negative 39% return). The meltdown in equities post the sub-prime financial crisis in the US, tightening of FII inflows and hardening interest rates in India coupled with sharp increase in energy cost and expectations that cement prices would decline on new capacity led to this steep correction. Valuations of the stocks under our coverage have come off from a peak of 3.2-6.9x P/BV and EV/tonne of US$154-280 in Oct 2007 to 0.9-1.9x P/BV and US$34-90/tonne as on 17 March 2009. Valuation could see further contraction during FY10 as 95mt of capacity additions over FY09-11 would bring down utilization levels resulting in a sharp drop in cement prices. We estimate 17.5% earnings decline over FY0911 despite correction of energy prices. ROE would contract by 11.1pp from 23.5% in FY09E to 12.4% in FY11E, comparable with FY03 ROE of 10.2% (excluding India Cement and UltraTech). The decline in return ratios coupled with the lack of acquisition triggers is expected to result in the valuations of ACC and Ambuja Cements further contracting to their FY03 average of 1.5x P/BV and at a 10-30% discount to asset replacement cost. We have a Sell rating on ACC and India Cements, Reduce on Ambuja Cements, Hold on Grasim Industries, Accumulate on UltraTech and Buy on Shree Cements.

Oversupply concerns outweigh compelling long-term demand dynamics
For India with 1bn plus population and US$3tn economy (in PPP terms, World Bank estimates) on a high-growth trajectory, the long-term demand dynamics for cement remains compelling. Cement demand is a proxy of economic growth and would be supported by the following factors. Rise in urban population (2.6% CAGR over 2001-2025) to 533mn on migration to cities for better jobs (Source: Planning Commission) Estimated shortage of 24.7mn dwelling units in urban areas (Source: Planning Commission) The imperative for building sound physical infrastructure for sustained growth Also supporting our argument of compelling demand dynamics is the fact that only 44% of urban houses and 11.9 % of rural houses are made from concrete roofs (Source: India Census 2001). Further, the government’s thrust of providing affordable houses to the economically and socially weak groups could give a significant boost to cement demand as demonstrated by the experience in states like Andhra Pradesh where an ambitious project for providing houses to lowincome groups coupled with higher spending on infrastructure boosted cement consumption to 25% CAGR over FY05-FY08. Historically, cement demand has grown by about 1.1-1.2x GDP growth (see annexure) and registered 8% CAGR over the last 10 years. We believe higher GDP growth and thrust on infrastructure could translate into a higher cement demand at over 9% CAGR over the next 5 years.

Slowdown in GDP growth to impact demand in near-term
However, over FY09-11E demand growth is expected to be subdued on account of the economic slowdown and growth would primarily be a function of counter-cyclical measures to revive infrastructure and realty growth. Centrum Research has forecast GDP growth at 5.5% and 7.5% in FY10 and FY11, respectively. In such a scenario, maintaining an 8% CAGR in cement would be a challenge.

Utilization levels to fall on increased capacity
On the supply side, we estimate that cement industry would be adding about 95mt capacity over FY09-11E with the southern region alone accounting for 44mt. We expect utilization levels to decline from 98% during FY08 to 91% in FY09 and further to 80% in FY10 and 76% in FY11. In such a scenario, maintaining production and price discipline would become increasingly difficult with the southern region worst hit. We expect average cement prices to decline by Rs25 per bag in the southern region and by Rs20 in other regions from the current levels of Rs235 at all-India level with a further decline of Rs15 across regions in FY11. On the cost front, easing of international coal prices and sea freight is expected to provide relief to coast-based plants dependent on international coal. However, freight costs would increase marginally as benefits of lower road freights would be offset by 8% hike in rail freight on account of reclassification of cement in December 2008 by Indian railways. 4 Cement Sector

Recent government interventions to provide only temporary relief
Over the last three months, the government has reversed most of the measures it had initiated in CY07 to curtail the rise in cement prices. The reduction of excise duty by 4% has given cement companies a cushion of Rs8-10 per bag (Rs4-6 per bag passed on to consumers) and the reimposition of CVD on imported cement prices has brought import of cement from Pakistan to a halt. Besides cement demand would also be supported by counter-cyclical measures aimed at reviving growth. However, government intervention can at best be expected to sustain 8% demand CAGR over FY09-11. Capacity additions being far in excess of demand, we expect that government measures would be able to sustain the prices only temporarily. In this context, we view the recent price hike by the cement companies are only an aberration.

Earnings outlook and valuations-Worsening return ratios to weigh down valuation
We estimate companies under our coverage would register a 16.6% decline in earnings over FY0811 with EBIDTA/tonne falling from a peak of Rs1,092 in FY08 to Rs674 in FY11. We expect the overall universe’s ROE to decline from a high of 34.4% in FY08 to 12.4% in FY11E. This would be comparable to the ACC’s ROE of 9% registered during FY03. Grasim and Ambuja Cements (then Gujarat Ambuja) had recorded ROEs of 12% and 14%, respectively, in FY03. Under an overcapacity scenario when cement prices could possibly take a sharp hit and the sensitivity of cement companies’ earnings to prices is very high, we believe P/BV and asset-based (EV/tonne) methodology is more appropriate than earnings-based matrix like P/E multiple or EV/EBIDTA to value the space. Cement companies are trading at about 0.9-2x FY10E P/BV, and US$33-94 on an EV/tonne basis, a 59% discount to 18% premium to FY10E replacement cost of US$75-90/tonne. Though these valuations look reasonable in absolute terms, they are still at premium to the P/BV of 1.43x commanded by Gujarat Ambuja between July 2002 and June 2003. We believe that with ROEs set to decline to their FY03 levels in FY11, valuations should also fall to the levels of FY03. Historically, ACC commanded higher P/BV of 1.9x during FY03 as compared to 1.5x by Gujarat Ambuja on account of acquisition triggers. Now, we believe valuations would be primarily determined by growth in profitability and return ratios. Besides lack of M&A trigger could be drag on valuations. Hence we have an Underweight stance on the sector. Among the covered companies, we believe ACC (Sell) and Ambuja Cements (Reduce) are expensive, while UltraTech (Accumulate) and Grasim (Neutral) are better placed on account of benefits of efficiency enhancement drives and ongoing capacity expansions. Sharp correction in pet coke prices and new revenue stream from merchant power sales would sustain Shree Cement (Buy) robust earning. India Cements’ (Sell) valuation would be under stress over concerns of inevitable oversupply coupled with fragmentation in its key southern India market.
Exhibit 1: Valuation Summary
Mkt Cap Rs (Bn) 104 102 134 60 28 21 CMP Rs 555 67 1461 480 98 603 Target Price 436 61 1474 527 83 823 % Upside /Downside (21.4) (8.9) 0.9 10.0 (14.6) 36.6 70.9 66.0 44.8 EV/Ton (USD) FY09E FY10E 79.9 95.4 74.3 88.5 61.7 66.7 57.8 40.2 FY11E 75.1 86.5 54.2 56.9 55.3 27.9 FY09 2.1 1.8 1.2 1.7 0.9 2.0 P/BV (x) FY10E FY11E 1.9 1.6 1.1 1.4 0.9 1.6 1.9 1.5 1.0 1.2 0.8 1.4 FY09E 23.6 21.2 20.8 30.5 17.3 58.2 ROE (%) FY10E 17.7 15.7 15.5 22.8 13.0 25.6 FY11E 9.8 13.0 11.9 15.4 8.5 21.1 FY09E 20.9 19 15.2 18.6 12.3 25.5 ROCE (%) FY10E 16.2 14.4 12.1 15.3 9.4 14.8 FY11E 9.2 12 9.5 11.5 6.8 13.4

Company Name ACC * Ambuja Cements* Grasim Industries Ultratech Cement India Cements Shree Cements

Rating Sell Reduce Hold Accumulate Sell Buy

* Year ending December Source: Bloomberg Centrum Research

5

Cement Sector

Investment Argument
Downside risks remain despite undemanding valuations
We expect valuations of major cement manufacturers to remain under stress over FY09-10E as expectations of a sharp correction in cement prices and deteriorating ROEs would result in the P/BV multiples contracting. We expect valuations to stabilize at about 1.5x FY10E P/BV and at 1030% discounts from current replacement cost of US$75-90/tonne. This means cement stocks are susceptible to further downsides from current levels. Further, the lack of pricing power precludes a trigger for any re-rating of the sector before the end of FY10. Using ACC and Ambuja Cements as proxies for the cement sector, we see the P/BV multiple fell from a peak of 5.2x and 4.2x in Dec 2007 to 1.96x and 1.61x on 17 march 2009. The asset valuations also fell from US$250-300/tonne to US$75-$88/tonne during the same time period. This was in-line with the last two cement cycles of 1994-96 and 2001-02 when valuations contracted sharply following the drop in cement prices as return ratios deteriorated. Going ahead, we expect valuations to track the previous cycles when after correcting sharply from their peaks in 2001-02, stocks traded in a narrow band till the time visibility on improving demand supply balance emerged and brought an expectation of cement price hike and consequent improvement in return ratios.

Exhibit 2: Asset valuations - ACC and Ambuja Cements
600 500 400 EV/Ton($) 300 200 100 0 Jul-91 Jan-95 Mar-96 Jul-98 Sep-92 May-97 Apr-03 Nov-93 Sep-99 Nov-00 Feb-02 Jun-04 Aug-05 Oct-06 Dec-07 Feb-09 Asset Value -ACC Vs Ambuja

Exhibit 3: P/BV multiples – ACC and Ambuja Cements
(x) 14 12 10 8 6 4 2 0 Jul-93 Apr-96 Feb-98 Dec-99 Jul-05 Aug-91 Aug-92 Aug-04 Mar-97 Nov-00 Nov-01 May-95 Sep-03 May-07 Apr-08 Jun-94 Jan-99 Jun-06 Oct-02 P/BV --ACC VS AMBUJA

ACC

Ambuja

$50

$80

ACC

Ambuja

Source: Bloomberg, Company, Centrum Research

We believe valuations during FY10E would be impacted by negative news flows, chiefly decline in cement prices as supplies from newly commissioned plants enter the market. We expect ROEs of ACC and Ambuja Cements to decline from their peaks of 34% and 32%, respectively, in CY07 to 17.7% and 15.7% in CY09E, and further to 9.8% and 13% in CY10E. Further, with utilization levels declining, we believe valuations would tests their lows. Any up-tick is likely only on increased utilization levels post FY11. Exhibit 4: ROEs over cycle (%)
ROE 45 40 35 30 25 20 15 10 5 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E ACC Ambuja Cements

Source: Company, Centrum Research

6

Cement Sector

P/BV and EV/tonne a more appropriate valuation methodology In a cyclical downturn, we prefer valuation methodologies like P/BV multiple and asset-based multiple (EV/tonne) against earning-based multiples like P/E and EV/EBIDTA. During a downturn, earnings contract significantly on account of the companies’ high earnings sensitivity to cement prices. The P/BV and EV/tonne multiple gives a better picture to find the bottom of the sector. (Refer Annexure-II Sensitivity of earning to cement price decline.) Replacement cost to decline in-line with commodity cycle In-line with the commodity cycle, the cost of setting up a green-field cement plant increased from US$75-90 in FY06 to US$100-120 in FY08. With commodity prices easing, replacement costs are expected to come down to U$75-90/tonne, which would be reflected in the cement sector’s asset valuations. Strong balance sheets precludes M&A activities Buoyed by robust earnings during FY05-09, cement manufacturers cleaned their balance sheet by paying-off old debts, added new capacity and initiated efficiency enhancement drives like setting up coal-based captive power plants and split grinding units. We expect the sector to have a net debt-equity ratio of 0.1x in FY11 against 0.6x in FY04. We believe strong balance sheets and prospects of reasonable earnings would help the industry tide over the ensuing downturn with relative ease. The flip side is that this would also result in the absence of any significant trigger for M&A activities as smaller cement players would not be desperate to sell. Exhibit 5: Debt-equity ratios to decline
Net Debt/Equity FY02 ACC Ambuja Cements UltraTech Cements Shree Cement Grasim Industries India Cement Centrum Cement Universe Source: Company, Centrum Estimates 1.8 0.4 3.2 0.9 1.5 0.5 FY04 0.9 0.3 2.0 1.4 0.1 5.7 0.6 FY08 (0.2) (0.3) 0.7 0.4 0.5 0.6 0.2 FY09E (0.2) (0.1) 0.7 0.2 0.4 0.5 0.2 FY11E 0.2 (0.1) 0.3 (0.2) 0.2 0.4 0.1

7

Cement Sector

Near-term oversupply concerns outweigh compelling long-term demand dynamics
Historically, cement demand has grown at 1.1-1.2x GDP growth and register 8% CAGR over last 10 years (FY1998-2008). We believe that with increased thrust on infrastructure, a 9-10 % CAGR over next 5 years is a distinct possibility. However, in the near-term (FY09-11), demand is expected to be subdued on account the slowdown in the economy as India faces global headwinds. In this scenario, demand growth would be primarily be determined by the efficacy of government’s counter-cyclical measures like increased spending on infrastructure and cheap loans for the housing sector. According to Centrum Research estimates, GDP is expected to grow 5.5% in FY10 and 7.5% in FY11. In such a scenario, an 8% demand CAGR over FY10-11 would be a challenge. Exhibit 6: Cement consumption and GDP growth
(Rsbn) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 40 FY91 GDP 60 80 100 120 140 GFCF 160 (mn ton) 6,000 4,000 2,000 180 FY08 (Rsbn) 12,000 10,000 8,000

Source: Centrum Research

For India with a 1bn plus population and the 3rd largest economy in PPP terms (World Bank Estimates) in a high-growth phase, long-term demand dynamics remain compelling. India’s cement demand, a proxy of economic growth and urbanization, remains a compelling long term story primarily due to lower per capita consumption (144kg in FY08), as against the 400kg world average and 1,000kg in China. Exhibit 7: Per capita cement consumption in India still low
(kg) 1,200 1,000 800 600 400 200 Americas (Ex US) Asia (Ex China) CIS US India China World Japan Africa EU 549 524 417 405 339 305 305 143 128 Per Capita Cement Consumption 2008 1014

Exhibit 8: Indian cement sector has scope to grow
(Mn mt) 1,600 1,400 1,200 1,000 800 600 400 200 China India USA Japan Russia Spain 164 115 58 58 58 1349 Market Size

Source: Centrum Research

Source: Centrum Research

8

Cement Sector

The following reasons make us sanguine that long-term demand dynamics for cement remain intact. India’s urban population is expected to increase to 533mn by 2025 (2.6% CAGR over 20012025) on back of migration to cities for better jobs and prospects (Source: Report of 11th FiveYear Plan Working Group on Urban Housing, Ministry of Housing & Urban Poverty Alleviation). There was an estimated shortage of 24.7mn urban housing units at the beginning of 11th Five-Year Plan (Source: Report of 11th Five-Year Plan Working Group on Urban Housing, Ministry of Housing & Urban Poverty Alleviation). Out of the existing 145mn housing units nationwide, only 44% of urban houses and 11.9 % of rural houses were made with concrete roofs (Source: Census 2001). In a bid to boost and upgrade infrastructure, the government has more than doubled the allocation for infrastructure to Rs20.7tn during the 11th Five-Year Plan with focus on creating long-term physical infrastructure assets like roads, bridges, ports, irrigation dams, hydroelectric and thermal power and railways. Besides, the shift of building roads on a BOT basis may encourage the creation of RMC roads vs. bitumen-paved roads, as they are costeffective over long term, owing to lower maintenance costs. Government role in providing affordable houses to the economically and socially weaker groups/low income groups, either through interest subsidies or direct incentives could give a significant boost to cement demand as demonstrated in states like Andhra Pradesh.. Utilization levels to fall on capacity build-up On the supply side, we estimate that the industry would be adding about 95mt of additional capacity over FY09-11 with southern region alone accounting for 45mt. We estimate 17% CAGR in effective available capacity to 277mt over FY08-11. Under our demand growth assumption of 8% CAGR over FY09-11, the capacity utilization would come off from a peak of 98% in FY08 to 92% in FY09 and further to 80% and 76% in FY10E and FY11E. Exhibit 9: Capacity utilisation levels to come down
(mn MT) Capacity at Beginning of year Operative Capacity Capacity Addition During the Year Add On Capacity Effective Capacity Cement Production Consumption Growth assumption Consumption Clinker Exp Cement Exports Capacity Utilization (%) FY06 155 152 6 2 155 142 12.0 136 3.2 6.0 92 FY07 161 158 7 4 162 155 10.2 149 3.1 5.9 96 FY08 168 163 31 8 171 168 9.8 164 2.4 3.6 98 FY09E 199 189 24 8.8 197 181 8.0 177 2.4 3.6 92 FY10E 222 215 54 29 245 195 8.0 191 1.9 4.1 80 FY11E 276 270 17 7 277 210 8.0 207 1.4 3.6 76

Source: Centrum Research

Besides, of the 95mt capacity added during FY09-11, the top six groups which command a market share of 73% in FY08 would add 57mt (60% of new capacity added).This would bring down consolidation in industry below FY08 level. Exhibit 10: Market shares of cement companies in India (FY08)
Market Share All India Others 27%

Birla 32%

Shree Cement 4% Jaypee Group 4% JK Group 4% India cement 6% Holc im 23%

Source: CMA

9

Cement Sector

A surplus scenario and fragmentation in the industry would make price understanding among players increasingly difficult. This is especially so in the southern market, which looks most promising at present on account of higher growth and a tightened demand scenario, would get much more fragmented with about 24.8mt (55%) of new capacity being added by smaller players and utilization levels falling to 73% and 71% in FY10 and FY11 respectively from a high of 98% in FY08. Options of increasing blending and better product mix already exhausted Cement manufacturers have been increasing the sale of blended cement over the years by using fly ash and slag, by-products of power plants and steel plants respectively as blending material for producing Portland Pozzolana Cement (PPC) and Portland Blast Furnace Slag Cement (PBFC). The sale of blended cement constituted 75% of the total cement sales in FY08 as against 50% in FY03 and blending ratio (cement production/clinker used) increased from 1.19x to 1.33x. This leaves very little possibility of improving the product mix by increasing blending ratio. In fact, the industry will either reduce the blending ratio on its own to curtail supplies to maintain production and price discipline among players or just see more of OPC supplies coming from new players as they try to establish their foothold (A scenario of pricing pressure coupled with worsening product mix). Though it is difficult to visualize the industry’s manoeuvrability to maintain price discipline through adjusting product mix, we hazard to say that overall trade-off of changing product mix to maintain could at best be neutral. Exhibit 11: Product mix over the years
Product Mix FY01 Production (Mn Ton) OPC (%) PPC (%) PBFC (%) Others (%) Total (%) Blending Ratio Source: CMA 93.6 62.0 26.2 11.0 0.8 100.0 1.1 FY02 102.5 56.3 31.5 11.6 0.6 100.0 1.2 FY03 111.4 50.3 38.7 10.4 0.5 100.0 1.2 FY04 117.5 45.5 44.4 9.6 0.5 100.0 1.2 FY05 127.6 43.9 47.2 8.4 0.5 100.0 1.2 FY06 141.8 39.4 52.2 8.0 0.4 100.0 1.3 FY07 155.7 31.2 60.1 8.3 0.4 100.0 1.3 FY08 168.2 25.5 66.1 8.1 0.4 100.0 1.3

Exhibit 12: Blending ratio has peaked out
(X) 1.50 1.40 1.30 1.30 1.20 1.10 1.00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 1.17 1.13 1.19 1.21 1.23 1.26 1.33 Blending ratio

Source: CMA

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Cement Sector

Sharp correction in cement prices inevitable
With new supplies expected to bring down utilization levels to 80% in FY10 and 76% in FY11, we believe a sharp correction in cement prices is inevitable. We expect prices would correct by about Rs21 per bag from Q4FY09 levels. We have assumed an Rs20/bag decline in prices in the eastern, western and northern regions and Rs25/bag decline in the southern region in FY10 (from Q4FY09 levels), with a further decline of Rs15 bag across all regions in FY11. A tight supply scenario had led to significant increase in cement prices from 2006 onwards with the average all-India prices rising from Rs160 in Jan 2006 to Rs239 in Oct 2008. Prices were Rs234 per bag in Jan 2009 post the reduction in excise duty in Dec 2008. The extent of cement price fall would vary across regions and would be determined by the ability of players to effect production and price discipline based on new capacity addition and consolidation level in each zone. In our view, the eastern and western regions are relatively better placed due to lower capacity addition and already high levels of consolidation. The northern region’s consolidation advantage would be partly offset by higher capacity additions. In the southern region, lower consolidation and higher capacity addition would make any price understanding increasingly difficult. Exhibit 13: Cement prices headed south
Average Cement Prices (All India)

260 240 220 Rs/50 Kg Bag 200 180 160 140 120 100 Jul- 09E
South FY06 49.0 47.5 2.4 2.0 49.5 45.4 39.4 24.9 1.1 6.0 1.1 (4.9) 91.7 FY07 51.4 49.9 2.5 1.8 51.6 50.2 44.8 13.8 0.3 6.2 1.2 (5.1) 97.2 FY08 FY09E FY10E 53.9 52.4 8.7 2.6 54.9 54.2 49.2 9.7 0.1 6.2 1.2 (5.0) 98.6 62.6 60.6 16.4 6.5 67.1 60.1 54.1 10.0 0.1 7.2 1.2 (6.0) 89.6 79.0 77.0 22.0 12.9 89.9 65.4 58.4 8.0 0.1 8.2 1.2 (7.0) 72.8 FY11E 100.1 98.6 5.5 0.5 99.0 70.1 63.1 8.0 0.1 8.2 1.2 (7.0) 70.8

Source: Industry, Centrum Research

Overview of the four zones
Exhibit 14: Demand-supply dynamics by zone
Zone FY06 Capacity at Beginning of year Operative Capacity Capacity Add ition D uring th e Year Add On Cap aci ty Effective Capacity Produc tion Con sumpt ion Growth assumptio n Expor ts Transfer to other Zone Transfer from ot her Zo ne Net Transfer From o ther Z one Capacity Utilization 53.7 52.6 2.5 0.6 53.2 52.2 47.6 6.6 1.0 5.4 1.9 (3.6) 98.1 FY07 56.1 55.1 3.3 1.9 56.9 56.1 52.3 9.8 0.8 4.5 1.5 (3.0) 98.5 North* FY08 FY09E FY10E FY11E 59.4 58.3 14.7 4.4 62.7 61.5 57.3 12.2 0.8 4.7 1.3 (3.4) 98.2 74.1 68.7 6.4 1.5 70.3 66.7 61.0 6.5 0.8 6.2 1.3 (4.9) 95.0 80.5 77.9 18.9 8.4 86.3 72.1 65.9 8.0 0.8 6.7 1.3 (5.4) 83.6 99.4 97.3 1.5 1.0 98.3 77.4 71.2 8.0 0.8 6.7 1.3 (5.4) 78.7 FY06 29.4 29.4 (0.4) (0.4) 28.9 27.1 25.9 5.5 6.9 2.1 7.8 5.7 93.6 FY07 28.9 28.9 28.9 30.0 28.3 9.1 7.8 1.9 7.9 6.1 103.7 West FY08 FY09E FY10E FY11E 28.9 28.9 2.9 28.9 30.7 32.2 14.0 5.1 1.7 8.6 6.9 106.0 31.8 31.4 31.4 30.4 34.2 6.0 5.1 1.7 10.6 8.9 96.8 31.8 30.8 7.4 4.5 35.3 31.2 36.9 8.0 5.1 1.7 12.6 10.9 88.3 39.2 38.2 9.1 4.5 42.7 33.1 39.9 8.0 4.1 1.7 12.6 10.9 77.5 FY06 23.0 23.0 1.3 23.0 20.1 22.7 11.5 0.2 1.2 4.0 2.7 87.6 FY07 24.2 24.2 1.1 24.2 22.1 24.0 5.9 0.1 1.0 3.0 2.0 91.1 East FY08 FY09E FY10E FY11E 25.4 23.5 4.6 1.0 24.5 23.8 25.3 5.7 0.0 1.0 2.5 1.5 97.4 30.0 27.9 0.9 0.8 28.6 26.4 27.9 10.0 0.0 1.0 2.5 1.5 92.2 30.9 29.5 6.1 3.8 33.3 28.6 30.1 8.0 0.0 1.0 2.5 1.5 86.0 37.1 35.7 1.0 0.9 36.6 31.0 32.5 8.0 0.0 1.0 2.5 1.5 84.8

*Equivalent of North plus Central Regions of CMA Source: Centrum Research

Northern region: The northern region is a structurally strong market with high consolidation. The top 5 players had an 88% market share in FY08. The addition of 26mn new capacity over FY09-11, all by the top 5 players, would keep the northern market fairly consolidated. The region would also benefit from reinstatement of CVD on imported cement as the northern market, especially Punjab, was earlier affected by imports from Pakistan. However, declining utilization level to 83.6% in FY10E and 78.7% in FY11E from a peak of 98.2% in FY08 would lead to softening of prices. 11

Cement Sector

Jul- 10E

Apr-01

Mar-02

Jun-99

Oct-95

Jul-98

Dec-93

May-00

Nov-94

Dec-04

Nov-05

Oct-06

Jan-93

Jan-04

Aug-08

Sep-96

Feb-03

Aug-97

Sep-07

Exhibit 15: Market share of players in the north (FY08)
Market Share in North

Others 12% Jaypee Group 10%
Rs/50 kg bags

260 240

Cement Price-All India Vs North Zone

Holcim 29%

220 200 180 160 140 120 Jul-04 Jul-05 Jul-06 Jul-07 Mar-04 Mar-05 Mar-06 Mar-07 Nov-04 Nov-05 Nov-06 Nov-07 Mar-08 Jul-08 Nov-08

JK Group 10%

Shree Cement 11%

Birla 28%

North

All India

Source: CMA, Centrum Research

Eastern region: The top 4 players command 87% market share. Capacity addition of 8mt over FY09-11 with 6mt by major players would keep the industry fairly consolidated. Utilization levels should stay at about 86% in FY10 and 85% in FY11. Exhibit 16: Market share of players in the east (FY08)
Market Share in East Others 13%

Cement Price-All India Vs East Zone

260 240
Birla 34%

Rs/50 kg bags

OCL INDIA 8%

220 200 180 160 140 120 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Mar-08
Jul-08

Lafarge India 19%

Mar-07

Mar-06

Mar-05

Mar-04

Jul-04

Jul-05

Holcim 26%

East

Jul-06

All India

Source: CMA, Centrum Research

Western region: The western market has been a fairly consolidated market with top 5 players having a 90% market share in FY08. Capacity additions of 16.5mt over FY 09-11 with 11mt (66%) coming from top 5 players would keep the industry fairly consolidated. Utilisation levels are estimates at 88% in FY10E and 78% in FY11E. However, the slowdown in exports (which constituted 18% of FY08 capacity) and increased supplies from southern region and diversion of exports to domestic markets could disrupt the demand-supply balance and price understanding amongst players. Exhibit 17: Market share of players in the west (FY08)
Mar ket Share in West Others 10 %

260 240 Rs/50 kg bags 220 200 180 160 140 120 Mar-04 Jul-04 Nov-04

Cement Price-All India Vs West Zone

JK G roup 4% Sanghi Indus Ltd 5% Mehata Group 6%

Birla 47 %

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Jul-07

Nov-07

Mar-08

West
Holcim 28 %

All India

Source: CMA, Centrum Research

12

Cement Sector

Nov-08

Jul-08

Southern region: The southern market has been relatively fragmented market with top 4 player commanding 64% market share in FY08. Capacity addition of 45mt during FY09-11 is expected to bring down the capacity utilization to 73% in FY10E and 71% in FY11E from 98% in FY08. Further, 25mt capacity addition (55% of total) by new/smaller players would further fragment the industry putting a sharp pressure on prices. Exhibit 18: Market share of players in the south (FY08)
Market Share of South
My Home Indus LTD, 5.29 Penna Cement, 6.13 others, 9.54 Birla, 24.12
Rs/50 kg bags 280 260 240 220 200 180 160 140 120 Mar-04 Mar-05 Mar-06 Mar-07 Nov-04 Nov-05 Nov-06 Nov-07 Mar-08 Nov-08 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Cement Price-All India Vs South Zone

Zurai, 7.13

Dalmia Cement, 7.32 Holcim, 9.10 Madras Cement, 12.39

India cement, 18.98

South

All India

Source: CMA, Centrum Research

Efficiency drives, easing cost pressure insufficient to sustain current margins
With falling cement prices, we believe savings from easing cost pressure would not be sufficient to sustain current margins. Power and freight costs constitute about 55% of total cost. Cement companies have been undertaking measure to enhance efficiency like commissioning CPPs to control power costs and installing split-grinding units to rationalize freight costs. They would also benefit from the steep fall in international coal and sea freights. We believe that the savings from these measures would be able to partly neutralize the cost push on energy front which are still higher than the FY08 average despite significant the easing of international coal prices. Despite these measures, unit operational cost of production would fall by mere 2.1% CAGR over FY09-11 to Rs2,359 in FY11 against 5.1 % CAGR fall in realization (to Rs3,033) leading to significant 16.5% CAGR reduction in EBIDTA per tonne to Rs674 in FY11E. The major cost element of cement are power & fuel (29%), freight (26.1%) and other expenses (23.9%), which include packing cost, repair and maintenance, and spares and consumables, employee cost (6.4%) and raw materials (limestone, gypsum and blending materials). Exhibit 19: Cost structure of cement industry
Operating Expenses/Ton (Rs) Energy Cost Freight Other Expenses Staff Cost Raw Material Total Op. Cost Realization/Ton EBIDTA/Ton FY04 470 320 405 95 209 1,500 1,805 306 FY08 646 578 530 142 319 2,215 3,307 1,092 CAGR FY04-08 8.2 15.9 7.0 10.7 11.2 10.2 16.3 37.5 % Cost (FY08) 29.1 26.1 23.9 6.4 14.4 100.0 FY09E 806 604 592 161 299 2,463 3,429 966 FY11E 683 639 579 155 304 2,359 3,033 674 CAGR (8.0) 2.8 (1.1) (2.0) 0.8 (2.1) (5.9) (16.5) % Cost (FY11) 28.9 27.1 24.5 6.6 12.9 100.0 128.6 28.6

Source: CMA, Centrum Research

Energy cost: We expect the cost of coal to peak at Rs491/tonne in FY09E and decline by 8.5% CAGR to Rs411 per tonne in FY11E. Increase in prices of domestic linkage coal prices (10% in June 2004 and 10% for Coal India Ltd and 15 % for North Eastern Collieries in Dec 2007) and the sharp rise in international coal prices and sea freight coupled with reduction of fixed price linkage to the sector, resulted in coal cost for the sector rising at 10% CAGR from Rs241 in FY04 to Rs352 in FY 08 and by further 39% in FY09E to Rs491. However, now with international coal easing and freight rates down, we expect the cost of coal to decline at 8.5% CAGR over FY09-11E to Rs400 assuming US$85 CIF for international coal and constant prices of domestic linkage coal.

13

Cement Sector

Exhibit 20: Coal prices and freight rates have declined
Price/Ton (USD) 250 200 150 100 50 0 Newcastle Spot Coal (USD)
14,000 12,000 10,000 8,000 6,000 4,000 2,000 May 05 May 07 May 04 Sep 04 May 06 Sep 05 Sep 06 Jan 07 Jan 04 Jan 05 Jan 06 Sep 07 Jan 08 May 08 Sep 08 Jan 09

Baltic Freight Index

Jan 06

Oct 06

Oct 05

Source: Centrum Research

Cement manufacturing is a power-intensive business and 1 tonne of cement requires about 85kWh of electricity. Electricity cost per tonne increased 5% CAGR from Rs244 in FY04 to Rs297 in FY08 caused by increase in tariffs (state grid rates increased 4.4% CAGR to Rs3.8 per unit, liquid fuel-based power plant rates surged 18% CAGR to Rs4.5 per unit and that from coal-based captive power plants increased 8.8% CAGR to Rs2.2 per unit). Dependence on state grid for power declined from 48% of total requirement in FY04 to 43% in FY08, while that from coal-based CPPs increased from 32% to 47%. Power sourced from high-cost liquid fuel based CPPs decreased from 19.7% to 9.2%. The cost savings on reduced dependence on grid power and DG sets was neutralized by increased cost of energy (international coal prices rose to Rs0.61/kCal in FY08 from Rs0.35/kCal in FY04.) We believe the commissioning of CPPs and softening fuel prices would lead to an 8.6% CAGR decline in the average cost of power over FY09-11 to Rs256 per tonne in FY11E after peaking at Rs306 per tonne in FY09. We expect power & fuel costs to peak at Rs806 per tonne in FY09. Thereafter, as the benefits of softening energy costs and coal-based CPP starts flowing, we expect the cost to decline 8% CAGR over FY09-11 to Rs683/tonne. The major beneficiaries of falling coal prices would be UltraTech, Grasim Industries, India Cements and Ambuja Cements which are dependent to the extent of 30-70% of their energy requirements on international coal. We have assumed CIF cost of international coal at US$85 per tonne and an exchange rate of Rs51.5/US$1 in FY10 and FY11. Shree Cements would be also benefit as it is completely dependent on pet coke whose prices have fallen over 50% from their peak of Rs8,100/tonne to Rs4,000/tonne at present. Despite softening of international coal prices, coal cost would still be under pressure as CIL is reducing the supplies of fixed-price linkage coal. Linkages were reduced from 100% to 75% of coal requirement. Actual supplies of linkage coal to Industry have come down in absolute term by 14% YoY in 3QFY09. In this scenario the industry would be forced to purchase coal from e- auction or international sources which are far costlier than linkage coal even at US$85 per tonne, Exhibit 21: International coal still costlier than domestic sources
Cost (Rs/KCAL) Distance From Port/Pithead (Km) Source Domestic-Linkage(AV of C/D/E/F) Domestic-Non Linkage International(CIF $37) International(CIF $93) International(CIF $85) International(CIF $200) Pet Coke @ 4000/ton 100 0.30 0.51 0.30 0.61 0.71 1.51 500 0.39 0.60 0.34 0.65 0.76 1.56 0.494 1,000 0.49 0.70 0.40 0.71 0.81 1.61 2,000 0.67 Current Cost Structure 0.88 100% premium to Coal FY04 Average Cost FY08 Average Cost FY10 Average cost Assumption Peak cost Current Landed Cost at Shree cement plant

Source: Centrum Research

14

Oct 08

Apr 07

Apr 08

Apr 06

Oct 07

Jan 09

Jan 07

Ju 07

Ju 06

Jan 08

Ju 05

Ju 08

Cement Sector

Logistics costs to stay high: We estimate the average logistic cost/tonne would increase at 2.7% CAGR over FY09-11 to Rs639 in FY11 based on 8% growth in rail freight cost in FY10 and flat road freight cost over FY09-11. During FY04-08 freight costs registered 16% on account of (1) Reporting of sales as freight inclusive instead of ex works after the implementation of VAT in March 2005; (2) The Supreme Court’s verdict against overloading on trucks in November 2005; and (3) Increase in diesel prices. During FY08, the cement sector’s dependence on rail and road was 38% and 62%, respectively. For shorter routes (below 400km) roadways are preferred mode of freight movements as it does not involve secondary transportation while railways become economical for lead distance above 400km. However, in an overcapacity scenario, the average lead distance might increase as companies explore new markets. Besides, despite the recent cut in diesel prices, there has not been any softening in the road freight cost due to pick up in demand for freight and recent reclassification of cement from by railways in December 2008 would lead to a hike of about 8% in rail freight transport in FY10E. Exhibit 22: Average road freight rates firm despite the recent cut in diesel prices
200 180 160 140 120 100 80 60 40 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jul-08 Jan-09

Source: Capitaline

Other expenses to remain under control: Other expenses comprising packing charges (linked to crude price), stores & spares and repair & maintenance registered 7% CAGR over FY04-08. We expect these costs to decline marginally over FY09-11E due to lower crude prices translating into lower cost of packing materials and benefit of possible reduction in maintenance cost due to modernization is offset by some decline in utilization level.

15

Cement Sector

Valuations
Valuations have corrected significantly from their peak in Oct 2007 and stocks are available at what we believe is a reasonable P/BV range of 0.9-2.0x and EV/tonne of US$34-94. However, expectations of a sharp correction in cement prices due to oversupply during FY10-11 would keep valuations under further stress. We expect the sector’s valuation to contract to FY03 level, in-line with the decline in overall ROE to 12.4%. We are negative on ACC (Sell) and Ambuja Cements (Reduce) due to expensive valuations. UltraTech Cement (Accumulate) and Grasim (Hold) are better placed on account of benefits of efficiency enhancement drives and ongoing capacity expansions. We believe a sharp correction in pet coke prices and new revenue stream from merchant power sales would sustain Shree Cement’s (Buy) robust earning. India Cements is a Sell as its valuations would be under stress over concerns of inevitable oversupply coupled with fragmentation in its key southern market.

Exhibit 23: ACC – P/BV
(x) 14 12

ACC – Asset value
USD/Ton
250 200
E terp rise valu e n

10 8 6 4 2 0

150 100 50
A pr-0 5 A pr-0 6 A pr-0 8 A pr-91 A pr-92 A pr-93 A pr-9 4 A pr-9 5 A pr-96 A pr-07 Ap r-9 7 Ap r-9 8 Apr -9 9 Ap r-0 0 Apr -0 1 Apr -0 2 Apr -0 3 Apr -0 4

0
Mar-92 Jan-95 Jul-04 Feb-93 Feb-94 Jul-05 May-07 May-08 Dec-95 Aug-02 Aug-03 Sep-00 Nov-98 Nov-97 Sep-01 Dec-96 Jun-06 Apr-91 Oct-99

$50

$100

$150

$200

ACC

Source: Bloomberg, Centrum Research

Exhibit 24: Ambuja Cement – P/BV
(x) 6.0

Ambuja Cement – Asset value
600 500
USD/Ton

5.0 4.0 3.0 2.0 1.0 0.0 Oct-96 Oct-04 May-92 May-00 Aug-98 Nov-03 May-08 Feb-94 Feb-02 Apr-93 Apr-01 Dec-95 Sep-97 Sep-05 Jun-91 Jan-95 Jun-99 Jan-03 Jun-07 Jul-06

400 300 200 100 0
Jul-91 Jul-95 Jul-01 Jul-05
Apr-07

Jul-97

Jul-93

Jul-99

Jul-03

USD50

USD150

Ambuja cement

Source: Bloomberg, Centrum Research

Exhibit 25:India Cement – P/BV
(x) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Apr-01 Apr-03 Apr-05 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-07

India Cement – Asset value
250 200

USD/Ton

150 100 50 0
Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-08

India Cement

50x

100x

150x

200x

India Cement

2X

2.5X

3.5X

1.5X

Source: Bloomberg, Centrum Research

16

Cement Sector

Jul-07

Exhibit 26: Grasim – P/BV
(x)

5 4 3 2 1 0
Apr-01 Apr-03 Apr-02 Apr-05 Apr-07
2.5X

Apr-04

Apr-06

Grasim

1.5X

2X

3.5X

Source: Bloomberg, Centrum Research

Exhibit 27: Shree Cement – P/BV
(x) 10 9 8 6 5 4 3 2 1 0 7

Apr-08

Shree Cement - Asset Value
20 0 18 0 16 0 14 0 12 0 10 0 80 60 40 20 0 EV/Ton Band of Shree Cement

USD/Ton

Apr-05

Apr-08
Aug-08
18 0

Apr-01

Apr-04

Apr-07

Apr-06

Apr-02

Apr-03

Oct-03

Oct-01

Oct-04

Oct-05

Oct-06

Oct-02

Oct-07

Apr-02

Apr-01

Apr-04

Apr-07

Apr-03

Apr-05

Apr-06

Apr-08

Oct-01

Oct-03

Oct-04

Oct-06

Oct-02

Oct-05

Oct-07

Oct-08

EV/Ton $

30 x

80 x

13 0x

18 0x

Source: Bloomberg, Centrum Research

Exhibit 28:UltraTech – P/BV
(x) 7 6 5 4 3 2 1 0
Nov-04 Aug-05 Aug-06 Aug-07 Feb-08 Aug-08 Nov-05 Nov-06 Nov-07 May-05 May-06 May-08 May-07 Nov-08 Aug-04 Feb-09 Feb-05 Feb-06 Feb-07

UltraTech – Asset value
20 0 18 0 16 0 14 0 12 0 10 0 80 60 40 20 0

USD/Ton

Aug-04

Aug-05

Apr-06

Apr-05

Aug-06

Apr-07

Dec-04

Dec-06

Aug-07

Dec-07

Apr-08

Ultrate ch

50 X

80 X

13 0X

13 0X

Ultratech

2x

4x

5x

6x

Source: Bloomberg, Centrum Research

17

Cement Sector

Dec-08

Dec-05

Oct-08

ACC: The high sensitivity of ACC’s earnings to cement prices makes is vulnerable in a declining realizations scenario. Besides its old assets make the company a high-cost producer despite the benefits of low-price linkage coal (60% dependence), coal-based CPPs (70%) and optimum product mix leaving very little option of improving its operating cost structure. At CMP, the stock trades at a PE of 11.3x CY09E and 19.3x CY10E, EV/EBIDTA of 5.7x and 8.4x and 1.9x and 1.9x on P/BV. We initiate coverage with a Sell rating and one-year price target of Rs436, valuing the stock at 1.5x CY09 P/BV.
Y/E Dec (Rsmn) CY07 CY08 CY09E CY10E CY11E Rev 58.5 70.7 77.2 78.3 79.1 YoY (%) 73.1 20.8 9.2 1.4 1.0 EBITDA 16.6 19.3 16.6 16.3 12.4 EBITDA (%) 28.3 27.3 21.5 20.8 15.7 Adj PAT 11.3 12.7 10.7 9.2 5.4 YoY % 229.3 12.6 (15.6) (13.9) (41.4) Fully DEPS 60.0 67.5 58.5 49.1 28.8 RoE (%) RoCE (%) 42.7 34.8 23.6 17.7 9.8 29.0 29.1 20.9 16.2 9.2 P/BV P/E (x) EV/EBITDA (x) 3.3 2.5 2.1 1.9 1.9 9.2 8.2 9.5 11.3 19.3 5.7 4.5 4.9 5.7 8.4

Source: Company, Centrum Research

Ambuja Cements: Though Ambuja Cements would benefit from falling international coal prices (40% dependence) and commissioning of new CPPs, its cost advantage would narrow as other cement manufacturers implements efficiency enhancement measures. At CMP, the stock trades at 1.6x P/BV and US$88.5/tonne on EV/tonne for CY09. Current valuation is still on the higher side of bear care average of 1.5x P/BV. Initiate with Reduce and one-year target price of Rs61.
Y/E Dec (Rsmn) CY06* CY07 CY08 CY09E CY10E Rev 62.7 56.3 62.3 61.9 63.3 YoY (%) 140.6 (10.2) 10.7 (0.7) 2.3 EBITDA 21.3 20.5 17.8 15.6 15.3 EBITDA (%) 34.0 36.3 28.5 25.1 24.2 Adj PAT 14.6 13.1 10.9 9.4 8.4 YoY % 212.1 (10.2) (16.6) (14.4) (10.8) Fully DEPS 9.6 8.6 7.2 6.1 5.5 RoE (%) 34.4 32.2 21.2 15.7 13.0 RoCE (%) P/BV 24 28.8 19 14.4 12 2.9 2.2 1.8 1.6 1.5 P/E (x) 7.0 7.8 9.4 10.9 12.3 EV/EBITDA (x) 3.9 3.9 5.0 6.1 6.1

Source: Company, Centrum Research

UltraTech Cements: Ultratech Cements is in process of ramping up its newly commissioned plant at Tadpatri in Andhra Pradesh that would help it boost volumes to offset lower realisations. The company would also benefit significantly from the fall in international coal prices and savings from its CPPs (225MW over FY09-10). At CMP, the stock trades at a PE of 6.6x FY10E and 8.2x FY11E, 1.4x and 1.2x P/BV, 4.4x and 4.5x EV/EBIDTA and US$67 and US$57 per tonne on EV/tonne. We believe this discount to ACC is not warranted given UltraTech’s better operating matrix. Accumulate with a one-year target price of Rs527, valuing the stock at 1.5x P/BV on FY10E.
Y/E Mar (Rsmn) FY07 FY08 FY09E FY10E FY11E Rev 49.7 56.2 62.5 67.2 68.1 YoY (%) 46.8 13.2 11.1 7.5 1.4 EBITDA 14.3 17.3 17.1 17.2 15.2 EBITDA (%) 28.8 30.8 27.3 25.5 22.4 Adj PAT 7.8 10.1 9.6 9.1 7.2 YoY % 248.7 28.7 (5.1) (5.5) (20.0) Fully DEPS 63.1 81.1 77.0 72.7 58.2 RoE (%) 55.9 45.2 30.5 22.8 15.4 RoCE (%) 24.2 23.8 18.6 15.3 11.5 P/BV 3.4 2.2 1.7 1.4 1.2 P/E (x) 7.6 5.9 6.2 6.6 8.2 EV/EBITDA (x) 5.3 4.6 4.9 4.4 4.5

Source: Company, Centrum Research

Grasim Industries: Grasim is ramping up its 4.4mt cement capacity at Sambhupura (Rajasthan) and expected to commission another 4.4mt plant in Kotputli in Rajasthan in Q1FY10. The company would also benefit from softening of international coal and pet coke prices (50%) and commissioning of CPPs. However, performance of the VSF division would remain subdued due to global slowdown and competition from substitutes. At CMP, the stock trades at 7.2x FY10E and 8.6x FY11E on P/E, 4.5x and 4.6x EV/EBIDTA, 1.1x and 0.95x P/BV. Initiate with a Hold rating and one-year SOTP-based price target of Rs1,474.
Y/E Mar (Rsmn) FY07 FY08 FY09E FY10E FY11E Rev 140.7 169.7 178.3 182.8 190.6 YoY (%) 37.6 20.6 5.1 2.5 4.3 EBITDA 39.7 49.6 43.5 42.0 37.3 EBITDA (%) 28.2 29.2 24.4 22.9 19.6 Adj PAT 19.7 26.2 21.2 18.5 15.6 YoY % 89.6 33.4 (19.3) (12.8) (15.8) Fully DEPS 214.6 286.2 231.0 201.5 169.8 RoE (%) 34.5 33.4 20.8 15.5 11.9 RoCE (%) 21.4 21.1 15.2 12.1 9.5 P/BV 2.0 1.5 1.2 1.1 1.0 P/E (x) 6.8 5.1 6.3 7.2 8.6 EV/EBITDA (x) 4.1 3.6 4.4 4.5 4.6

Source: Company, Centrum Research

18

Cement Sector

Shree Cements: A key player in the northern market, Shree Cements would benefit from the steep fall in pet coke prices. We believe the judicious capital allocation in CPP would enable it to sustain its earning through sale of merchant power. At CMP, the stock trades at a P/E of 7.1x FY10E and 7.1x FY11E (P/CEPS of 2.6 x and 2.4x), EV/EBIDTA of 2.7x and 1.9x, and P/BV of 1.6x and 1.4x. In asset value terms, the stock trades at US$39 and US$23 per tonne its FY10 and FY11 capacity. With ROCE estimated at 14.48 and 13.4% in FY10E and FY11E and ROE at 25.6% and 21.1%, valuation looks compelling. We initiate coverage with Buy and one-year price target of Rs823, an upside of 36% from current level. At the target price, the stock would be valued at 2.2x P/BV on FY10E and EV/ton of US$55.
Y/E Mar(Rsmn) FY07 FY08 FY09E FY10E FY11E Rev 14.1 21.1 26.1 24.1 26.0 YoY (%) 102.3 50.1 23.9 (7.9) 8.0 EBITDA 5.9 8.6 8.8 8.1 8.4 EBITDA (%) 42.1 40.9 33.5 33.9 32.2 Adj PAT 1.6 2.9 5.0 3.0 3.0 YoY % 899.6 81.3 72.7 (40.2) (0.3) Fully DEPS 45.6 82.6 142.7 85.4 85.2 RoE (%) 42.3 51.1 58.2 25.6 21.1 RoCE (%) 15.2 18.9 25.5 14.8 13.4 P/BV 4.2 3.1 2.0 1.6 1.4 P/E (x) 13.2 7.3 4.2 7.1 7.1 EV/EBITDA (x) 4.4 3.1 2.4 2.7 1.9

Source: Company, Centrum Research

India Cements: India Cement’s key southern market would witness serious price pressure on account huge capacity build up and fragmentation. The company would not be able to reap the full benefits of the decline in international coal prices which would be offset by its foray into shipping. At CMP, the stock trades at a PE of 6.9x FY10E and 9.8x FY11E, 4.4x and 5x on EV/EBIDTA, and 0.9x and 0.8x on P/BV. This is a significant premium to Shree Cements, a comparable peer, which has exposure to the northern market and 100% dependence on captive power and a superior balance sheet. We recommend Sell with a one-year price target of Rs83, valuing the stock at an EV/tonne of US$50/tonne and P/BV of 0.65x on FY10E and assigning a value of Rs 9 /share to its IPL franchise.
Y/E Mar(Rsmn) FY07 FY08 FY09E FY10E FY11E Rev 22.6 30.4 34.6 34.0 34.7 YoY (%) 46.3 35.0 13.6 (1.7) 1.9 EBITDA 7.3 10.8 10.4 9.3 7.6 EBITDA (%) 32.6 35.5 30.2 27.2 22.0 Adj PAT 4.8 6.5 4.8 4.0 2.8 YoY % 791.4 36.2 (26.5) (16.4) (29.8) Fully DEPS 18.4 23.1 17.0 14.2 10.0 RoE (%) 41.9 32.4 17.3 13.0 8.5 RoCE (%) 20.9 18.9 12.3 9.4 6.8 P/BV 1.8 1.1 0.9 0.9 0.8 P/E (x) 5.3 4.2 5.8 6.9 9.8 EV/EBITDA (x) 5.9 3.7 4.0 4.4 5.0

Source: Company, Centrum Research

Valuation matrix table
Company Name Rating ACC * Ambuja Cements* Grasim Industries Ultratech Cement India Cements Shree Cements Sell Reduce Hold Accumulate Sell Buy EV/Ton (USD) Mkt Cap Rs (Bn) 104 102 134 60 28 21 CMP Rs 555 67 1461 480 98 603 Target Price 436 61 1474 527 83 823 % Upside /Downside (21.4) (8.9) 0.9 10.0 (14.6) 36.6 70.9 66.0 44.8 FY09E FY10E 79.9 95.4 74.3 88.5 61.7 66.7 57.8 40.2 FY11E 75.1 86.5 54.2 56.9 55.3 27.9 P/BV (x) FY09 2.1 1.8 1.2 1.7 0.9 2.0 FY10E FY11E 1.9 1.6 1.1 1.4 0.9 1.6 1.9 1.5 1.0 1.2 0.8 1.4 ROE (%) FY09E 23.6 21.2 20.8 30.5 17.3 58.2 FY10E 17.7 15.7 15.5 22.8 13.0 25.6 FY11E 9.8 13.0 11.9 15.4 8.5 21.1 FY09E 20.9 19 15.2 18.6 12.3 25.5 ROCE (%) FY10E 16.2 14.4 12.1 15.3 9.4 14.8 FY11E 9.2 12 9.5 11.5 6.8 13.4

* Year ending December Source: Company, Centrum Estimates

19

Cement Sector

Key risks
Upside risks Better-than-expected demand growth would allow cement manufacturers to maintain production and price discipline leading to lower fall in cement prices Further easing of cost pressure Favourable government intervention Downside risks Early breakdown of production and price discipline due to weak demand or earlier than scheduled commissioning of plants Unanticipated cost pressure Adverse government intervention

20

Cement Sector

Annexure - I
Cement demand grew 8% CAGR over FY98-08 with cement /GDP growth multiple of 1.24
(%) 14 12 10 8 6 4 2 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 (2) (4) GDP Growth Consumption Growth - Cement Cement Growth Multiple FY08 GDP Vs Cement Demand Growth (x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 (0.5) (1.0)

Source: CSO, CMA

Annexure - II
Sensitivity of earnings To Rs 5/ bag cement price fall EPS (Rs) Company Name ACC Ambuja Cements Ultratech Cements Grasim Industries India Cements Shree Cements Source: Centrum Research FY10 E 49.1 6.1 72.7 201.5 14.2 85.4 FY11E 28.8 5.5 58.2 169.8 10.0 85.2 Sensitivity (%) FY10 11.6 10.1 11.9 8.0 12.8 14.7 FY11 21.6 12.5 14.7 10.4 20.8 15.7 ROCE (%) FY10 E 16.2 14.4 15.3 12.1 9.4 14.8 FY11E 9.2 12.0 11.5 9.5 6.8 13.4 Sensitivity (bps) FY10 168.6 134.2 150.1 98.1 95.7 165.6 FY11 158.2 124.6 126.3 90.6 101.2 141.0 ROE (%) FY10 E 17.7 15.7 22.8 15.5 13.0 25.6 FY11E 9.8 13.0 15.4 11.9 8.5 21.1 Sensitivity (bp) FY10 206.2 148.3 242.6 115.2 156.4 335.7 FY11 210.9 135.5 180.1 104.1 159.5 240.8

21

Cement Sector

INDIA Cement

ACC
Initiation 19 March 2009

Sell Target Price: Rs436 CMP: Rs555* Downside: 22%
*as on 17 March 2009

Weak construct Valuations to track operating performance: Historically, ACC has been commanding high valuations despite its subdued performance, primarily on account of acquisition triggers. We expect the market to value ACC purely on its earnings, with Holcim now having close to majority stake. Earnings highly sensitive to cement prices: ACC’s earnings are highly sensitive to cement prices. With prices set to decline, we estimate 29% de-growth y-o-y in earnings over CY08-10 with ROE declining 13.8pp to 9.8%. High-cost structure makes ACC susceptible to worsening product mix: ACC was a high cost producer at Rs2,149/tonne in CY08 vs industry average of Rs1,859/tonne. This exposes the company to further cost pressures in a scenario of worsening product mix. Little room to contain energy costs: The company’s high dependence on coal-based CPPs (70% of power requirement) and low-cost domestic coal linkages (60%) gives ACC little leeway in controlling energy cost at a time when domestic coal linkages are being reduced. Premium valuations not justified: At CMP, ACC trades at 11.3x CY09E and 19.3x CY10E, 5.7x and 8.4x EV/EBIDTA, and 1.9x and 1.9x P/BV. On an asset replacement basis, it is valued at US$74/tonne for CY09E and US$75/tonne for CY10E, which is a substantial premium to UltraTech, a company of same scale and superior earnings. Sell with target price of Rs436: We initiate coverage with a Sell rating and target price of Rs436 valuing the stock at 1.5x CY09 P/BV. At our target price, the stock would trade at a P/E of 8.9x, EV/EBIDTA of 4.44x and EV/tonne of US$58.

Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009 ACC IN ACC.BO 187.7 187.7 105.6/2.0 860/365 552,694 10

Shareholding Pattern
Public & Others, 17.0 Foreign, 10.6

Institutions, 23.0

Govt Holding, 0.2 Promoters, 46.2 Non Promoter Corp. Hold., 3.0

As on 31 December 2008

One Year Indexed Stock Performance
140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

ACC LIMITED

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

Price Performance (%)
1M ACC 2.5 6M (6.2) 1Yr (27.8)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Dec (Rsmn) CY07 CY08 CY09E CY10E

Rev 58.5 70.7 77.2 78.3

YoY (%) 73.1 20.8 9.2 1.4

EBITDA 16.6 19.3 16.6 16.3 12.4

EBITDA (%) 28.3 27.3 21.5 20.8 15.7

Adj PAT 11.3 12.7 10.7 9.2 5.4

YoY % 229.3 12.6 (15.6) (13.9) (41.4)

Fully DEPS 60.0 67.5 58.5 49.1 28.8

RoE (%) 42.7 34.8 23.6 17.7 9.8

RoCE (%) 29.0 29.1 20.9 16.2 9.2

P/BV 3.3 2.5 2.1 1.9 1.9

P/E (x) 9.2 8.2 9.5 11.3 19.3

EV/EBITDA (x) 5.7 4.5 4.9 5.7 8.4

CY11E 79.1 1.0 Source: Company, Centrum Research

Shareholding pattern (%)
Q408 Promoters Foreign Institutions Public & Others Total 43.0 15.12 20.91 21.0 100 Q109 43.0 9.13 22.39 25.5 100 Q209 46.2 8.9 23.2 21.7 100 Q309 46.21 9.4 23.0 21.4 100

Company Background
ACC is the largest and oldest player in the Indian cement sector with a capacity of 23.2mt and 12% market-share in FY08. It was formed in 1936 with the merger of 10 existing cement companies and was part of the Tata Group until 2000 when the Tatas sold their 14.45% stake to Ambuja Cements. In 2005, ACC became part of Swiss cement major, Holcim, through a structured deal between Holderind Investments, an investment arm of Holcim and Ambuja Cement in which Holderind Investment acquired a two-third stake in Ambuja Cement India, a subsidiary of Ambuja Cement (later raised to 100% with the exercise of a call option to acquire the remaining onethird stake) which in turn acquired a further 20% stake in ACC through an open offer.

Pan India presence

Key events/timelines
1936 2000 Established 1n 1936 as a result of merger of 10 existing companies. Ambuja Cements (then Gujarat Ambuja Cements) acquires 14.5% Tata’s stake through its investment arm Ambuja Cements India Limited (ACIL) valuing the company at US$ 144/ton ACC became part of Swiss cement major, Holcim, through a structured deal between Holderind Investments, an investment arm of Holcim and Ambuja Cement in which Holderind Investment acquired a two-third stake in ACIL which in turn acquired a further 20% stake in ACC through an open offer. Holcim raises its stake to 46.2 through raising its stake in ACIL from 67% to 100% through exercise of call option and also open market purchases of ACC Shares. Commissioning of 1.12mt brownfield expansion and 30MW CPP at Bargarh in Orissa Commissioning of 3mt brownfield expansion and 50MW CPP at Wadi (New) in Karnataka Commissioning of 3mt brownfield expansion and 30MW CPP at Chanda in Maharashtra

2005

2006-08 June 2009 Sept 2009 June 2010

Source: Company Source: Company

Key management personnel
Name Mr Sumit Banerjee Mr Sunil Nayak Mr J DattaGupta
Source: Company

Position Managing Director Chief Financial Officer Chief Commercial Officer

23

ACC

Investment Rationale
With no more acquisition triggers, valuations will now track operating performance ACC’s adverse cost structure makes it susceptible to worsening product mix The company has little leeway in containing energy costs due to high dependence on CPPs and fixed cost domestic coal

ACC is a high-cost producer despite high dependence on CPP and domestic coal (CY08/FY09)
Rs/ton 2,400 2,200 2,000 1,825 1,800 1,600 1,400 1,200 1,000 ACC Ambuja Ultratech Shree India Industry AV 1,750 2,149 1,960 1,859 Cost of Production- Ex freight

1,449

Source: Companies, Centrum Research

Summary Financials
Y/E Dec (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters (x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton Source: Company, Centrum Research CY06
58,512 73.1 16,554 180.1 28.3 2,610 792 1,573 14,726 3,939 (8.3) 11,270 229.3 19.3 14,112 (6,724) (4,273) 5,162 31,645 7,832 79 42,820 35,345 4,757 2,708 42,820 29.0 34.4 42.7 60.0 167.4 0.3 0.0 21.6 9.2 3.3 5.7 1.8 127.2

CY07
70,674 20.8 19,311 16.7 27.3 3,130 744 1,718 17,156 4,981 (1.9) 12,688 12.6 18.0 20,242 (10,504) (10,571) 1,240 41,623 3,147 81 48,230 40,384 7,906 (74) 48,230 29.1 33.4 34.8 67.5 221.1 0.2 (0.2) 26.0 8.2 2.5 4.5 1.3 87.6

CY08
77,197 9.2 16,624 (13.9) 21.5 3,205 400 2,780 15,822 5,252 (0.2) 10,708 (15.6) 13.9 17,079 (11,773) (2,985) 2,499 48,242 4,820 25 56,508 52,717 5,169 (1,390) 56,507 20.9 23.8 23.6 58.5 262.3 0.2 (0.1) 43.4 9.5 2.1 4.9 1.2 79.9

CY09E
78,276 1.4 16,292 (2.0) 20.8 3,559 550 1,551 13,757 4,540 (0.2) 9,217 (13.9) 11.8 10,421 (13,031) (4,947) (7,557) 53,063 4,820 25 61,328 62,358 5,000 (6,044) 61,328 16.2 18.3 17.7 49.1 290.7 0.2 0.0 29.6 11.3 1.9 5.7 1.3 74.3

CY10E
79,084 1.0 12,409 (23.8) 15.7 4,552 990 1,177 8,067 2,662 (0.2) 5,405 (41.4) 6.8 11,091 (13,800) 2,613 (96) 54,071 12,820 25 70,337 74,606 2,000 (6,283) 70,337 9.2 9.9 9.8 28.8 298.5 0.3 0.2 12.5 19.3 1.9 8.4 1.4 75.1

Sharp profit decline in CY10E

24

ACC

Investment Argument
Acquisition triggers gone, valuations to track operating performance
Historically, ACC commanded premium valuations over peers despite its poor earnings matrix primarily on account of the acquisition trigger. However, now with Swiss cement major Holcim having acquired a near majority (46.21%) stake in ACC and also majority stake in Ambuja Cements, the market would value both companies purely on earnings. We believe that given the high sensitivity of its earnings to cement prices, ACC’s earnings and therefore valuations would be impacted in a declining prices scenario. We estimate 27% degrowth in earnings over CY08-10 with ROE declining 13pp to 11% which compares with the 11.6% ROE of FY03. With ROE falling to FY02-03 range of 11-12%, we expect the average P/BV multiple of ACC and Ambuja Cements to contract to 1.5x the average valuation commanded by Ambuja Cements (then Gujarat Ambuja) in FY03. ACC’s valuation during FY03 would not be a right benchmark as acquisition trigger kept valuations at a premium at 1.9x.

Exhibit 1: ACC’s P/BV multiple (during FY0203) was higher …Due to Acquisition trigger
(x) 6 5 4 3 2 1 0

Exhibit 2: … despite lower ROEs (%)
ROE 45 40 35 30 25 20 15 10 5

P/BV --ACC VS AMBUJA

Aug-00

May-99

Oct-04

Mar-01

Oct-01

Jun-05

Aug-06

Aug-03

Mar-07

Mar-98

Jan-00

Jan-97

Jan-06

Nov-07

Jun-02

Aug-97

Oct-98

Mar-04

Jun-08

Jan-09

Jan-03

0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08FY09E FY10E FY11E ACC Ambuja Cements

ACC

Ambuja

Source: Company, Centrum Research

High-cost structure makes ACC susceptible to worsening product mix
ACC remains a high-cost producer at Rs2,173/tonne in CY08 vs the industry average of Rs1,859/tonne on account of its old plants. This exposes the company to further cost pressures in a scenario of worsening product mix for the industry. ACC already has among the best product mix in the industry with blended cement in the form of PPC/PBFC accounting for 90% of its sales against the industry average of 75%. However with more capacities and thereby competition emerging, the product mix of the industry as well as ACC is bound to shift to lower proportion of blended cements. Exhibit 3: ACC’s cost of production is the highest among peers
Rs/ton 2,400 2,200 2,000 1,825 1,800 1,600 1,400 1,200 1,000 ACC Ambuja Ultratech Shree India Industry AV 1,750 2,149 1,960 1,859 Cost of Production- Ex freight

1,449

Source: Company, Centrum Research

25

ACC

Little leeway in containing energy costs
The company’s high dependence on coal-based CPPs (70% of power requirement) and low-cost domestic coal linkages from Coal India (60%) gives ACC very little leeway in controlling energy costs. This is in contrast to other cement producers which are expected to see a substantial savings in energy cost in FY10 due to commissioning of coal-based CPP across plants (UltraTech and Grasim) or benefit from the fall in international coal/pet coke prices (Ambuja Cements, Shree Cement, UltraTech, Grasim and India Cements). Exhibit 4: ACC’s power and fuel costs to stay high

(Rs/ton) 1,000 800 600 400 200 ACC
FY08
Source: Centrum Research

Power and Fuel Cost Trend ACC Vs Industry

Ambuja Ultratech Shree India Industry Cements Cement Cements Cements Average
FY09 FY10 FY11

26

ACC

Financial Analysis
29% earnings de-growth over CY08-10E
We expect ACC to post flat revenue growth over CY08-10E to Rs77.85bn on back of 7% CAGR in volumes and 6.4% Y-o-Y decline in realizations. We expect 13.6% Y-o-Y decline in operating profit to Rs12.4 bn over CY08-10E and net profit to decline 29% Y-o-Y to Rs5.4 bn over the same period. We expect EBIDTA/tonne to decline 35% from Rs779/tonne in CY08 to Rs506/tonne in CY10 and EBIDTA margin contract 584bp to 15.7%. We have assumed an 8% CAGR in RMC revenue and a PBIT loss of Rs800mn and Rs600mn respectively in CY09E and CY10E, respectively. Exhibit 5: ACC’s operating and net profit to decline sharply
(Rsmn) Revenue EBIDTA Margin (%) Net Profit Source: Company, Centrum Research CY06 58,512 16,554 28.3 11,270 CY07 70,674 19,311 27.3 12,688 CY08 77,197 16,624 21.5 10,708 CY09E 78,276 16,292 20.8 9,217 CY10E 79,084 12,409 15.7 5,405

Exhibit 6: Operating performance
CY06 Cement sale (mt) Cement sale (Rsmn) Realization/tonne (Rs) EBIDTA/ton (Rs) RMC Sale (Rsmn) RMC PBIT Margin (%) Source: Company, Centrum Research 18.8 53,107 2,893 882 2,998 27 0.9 CY07 20.0 64,001 3,282 964 3,670 (607) (16.5) CY08 21.3 70,489 3,405 779 5,493 (918) (16.7) CY09E 22.5 72,061 3,291 723 6,222 (800) (12.9) CY10E 24.5 72,791 3,050 507 6,386 (600) (9.4)

Strong balance sheet, cash flow to finance ongoing expansion
ACC is incurring an Rs30 bn capex over CY08-10 to increase its capacity by 7.2mt to 30.4mt. The expansions would strengthen the company's position in the southern and eastern regions and would be financed by internal accruals and debt leaving the company with a net debt of Rs11.9bn and debt-equity ratio of 0.2 x in CY10E. Exhibit 7: Expansion projects underway
Project Bargarh Expansion Waddi- New Chanda Source: Company Capacity 1.12mt cement and 30MW power plant 3mt cement and 50MW power plant 3mt cement and 30MW power plant Time of commissioning Mid 2009 2HCY09 Mid 2010

27

ACC

Valuations
Valuations have come down significantly from Oct 2007 peaks ACC’s valuations have come down significantly from their peak one-year rolling forward P/BV of 4.92x in Oct 2007 to 2.1x at present. On a one-year rolling forward EV/tonne basis, valuations have plunged from US$275/tonne in Oct 2007 to US$74/tonne on17, March 2009. Exhibit 8: ACC’s valuations down but still higher than UltraTech’s
ACC CY09E Capacity (mt) Sale Volume (mt) EBIDTA/Ton (Rs) ROCE (%) ROE (%) P/BV (x) EV/Ton (x) EV/EBIDTA (x) P/E (x) Source: Centrum Research 27.3 22.5 723.2 16.2 17.7 1.9 74.3 5.7 11.3 CY10E 30.3 24.5 506.6 9.2 9.8 1.9 75.1 8.4 19.3 Ultratech FY10E 23.1 20.1 851.6 15.3 22.8 1.4 66.7 4.4 6.6 FY11E 25.1 20.8 732.8 11.5 15.4 1.2 56.9 4.5 8.2

At 1.9x CY09E P/BV, the stock trades at a significant premium to the average P/BV of 1.5X commanded by Ambuja Cement (then Gujarat Ambuja) in FY02-03. With earnings expected to degrow 29% CAGR over CY08-10, and ROE to dip to 11%, we expect the stock would come under significant pressure. We initiate coverage with a Sell rating and one-year price target of Rs423 valuing the stock at 1.5x CY09 P/BV. At our target price, the stock would trade at P/E of 8.9x CY09E, 4.44x on EV/EBIDTA and US$58 per tonne on EV/tonne. Exhibit 9: P/BV multiple to stay in lower narrow band
(x) 14 12 10 8 6 4 2 0 Mar-92 Apr-91 Oct-99 Aug-02 Aug-03 Jan-95 Jul-05 Jul-04 Feb-93 Feb-94 Nov-97 Nov-98 Sep-00 Sep-01 Dec-95 Dec-96 Jun-06 May-07 May-08

Source: Company, Centrum Research

Exhibit 10: Asset value has declined
USD/Ton
250 200 150 100 50 0

Apr-05

Apr-06

$50

$100

$150

$200

ACC

Source: Company, Centrum Research

28

Apr-08

Apr-91

Apr-92

Apr-93

Apr-94

Apr-95

Apr-96

Apr-99

Apr-01

Apr-02

Apr-03

Apr-04

Apr-07

Ap r-97

Ap r-98

Ap r-00

ACC

Key risks
Upside risks
Better production and price discipline in the cement industry could result in higher-thanestimated prices, thereby improving ACC’s earnings and valuations Government intervention that would boost demand like increased funds for infrastructure, boost to housing tax benefits specific to the sector could result in improved earnings

Downside risks
A breakdown of production and price discipline among cement players could impact ACC’s earnings Supplies from newly-commissioned plants hitting the market ahead our assumed schedule Any increase in the price of key inputs

29

ACC

Financials
Exhibit 11: Income Statement
Y/E Dec (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBIT from operations Other non op. income PBT bef. extra-ord. items Extra-ord. income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest Sh. of profit in associates PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin CY06 58,512 73.1 9,791 16.7 8,119 13.9 12,206 20.9 16,554 28.3 882 2,610 13,944 792 13,152 1,573 14,725 1,609 16,334 3,939 24.1 12,395 41.3 9.0 12,363 11,270 229.3 19.3 CY07 70,674 20.8 11,986 17.0 9,379 13.3 15,709 22.2 19,311 27.3 964 3,130 16,181 744 15,437 1,718 17,156 2,099 19,254 4,981 25.9 14,273 (8.3) 1.8 14,283 12,688 12.6 18.0 CY08 77,197 9.2 16,118 20.9 9,975 12.9 18,469 23.9 16,624 21.5 779 3,205 13,419 400 13,019 2,780 15,799 425 16,224 5,252 32.4 10,972 (1.9) 23.9 10,998 10,708 (15.6) 13.9 CY09E 78,276 1.4 15,961 20.4 11,005 14.1 17,506 22.4 16,292 20.8 723 3,559 12,732 550 12,182 1,551 13,733 13,733 4,540 33.1 9,193 (0.2) 23.9 9,218 9,217 (13.9) 11.8 CY10E 79,084 1.0 17,207 21.8 11,995 15.2 19,072 24.1 12,409 15.7 507 4,552 7,857 990 6,867 1,177 8,043 8,043 2,662 33.1 5,381 (0.2) 23.9 5,405 5,405 (41.4) 6.8

Exhibit 13: Cash flow
Y/E Dec (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC change Working capital adj. Gross cash from op. Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op and EI CF from investing Dec (Inc) in FA Pur (Sale) of Investment Cash from investment CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) CY06 14,726 2,610 660 17,995 (47) 18,042 3,930 14,112 2,047 16,158 (5,333) (1,392) (6,724) 216 (1,917) (890) (1,681) (4,273) 5,162 CY07 17,156 3,130 578 20,864 (1,299) 22,163 1,921 20,242 2,073 22,315 (8,319) (2,185) (10,504) 40 (4,393) (862) (5,356) (10,571) 1,240 CY08 15,822 3,205 (66) 18,961 (1,311) 20,272 3,193 17,079 178 17,257 (15,772) 3,999 (11,773) 14 1,766 (413) (4,351) (2,985) 2,499 CY09E 13,757 3,559 550 17,866 2,906 14,960 4,540 10,421 10,421 (13,200) 169 (13,031) (550) (4,396) (4,947) (7,557) CY10E 8,067 4,552 990 13,609 (144) 13,753 2,662 11,091 11,091 (16,800) 3,000 (13,800) 8,000 (990) (4,396) 2,613 (96)

Source: Company, Centrum Research

Exhibit 14: Key Ratios
Y/E Dec Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value DPS Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) CY06 28.3 26.5 25.2 19.3 73.1 180.1 229.3 29.0 34.4 42.7 1.4 (50.1) 13.3 104.3 40.8 60.0 79.9 167.4 15.0 0.3 0.0 21.6 9.2 3.3 5.7 1.8 1.8 CY07 27.3 25.3 24.3 18.0 20.8 16.7 12.6 29.1 33.4 34.8 1.5 (61.7) 15.8 115.8 38.3 67.5 92.7 221.1 20.0 0.2 (0.2) 26.0 8.2 2.5 4.5 1.3 1.5 CY08 21.5 21.0 20.5 13.9 9.2 (13.9) (15.6) 20.9 23.8 23.6 1.3 (79.6) 16.9 134.4 37.8 58.5 75.6 262.3 20.0 0.2 (0.1) 43.4 9.5 2.1 4.9 1.2 1.3 CY09E 20.8 18.2 17.6 11.8 1.4 (2.0) (13.9) 16.2 18.3 17.7 1.2 (65.0) 17.0 120.0 38.0 49.1 68.0 290.7 20.0 0.2 0.0 29.6 11.3 1.9 5.7 1.3 1.3 74.3 CY10E 15.7 11.4 10.2 6.8 1.0 (23.8) (41.4) 9.2 9.9 9.8 1.1 (65.0) 17.0 120.0 38.0 28.8 53.0 298.5 20.0 0.3 0.2 12.5 19.3 1.9 8.4 1.4 1.3 75.1

Source: Company, Centrum Research

Exhibit 12: Balance Sheet
Y/E Dec (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Cap. Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets CY06 1,875 29,770 31,645 79 7,832 3,264 42,820 49,447 19,618 29,829 5,515 35,345 4,757 6,539 2,290 6,225 4,486 19,540 16,832 2,708 10 42,820 CY07 1,878 39,744 41,623 81 3,147 3,380 48,230 55,923 21,993 33,931 6,453 40,384 7,906 7,417 3,058 7,464 4,400 22,340 22,413 (74) 14 48,230 CY08 1,878 46,364 48,242 25 4,820 3,421 56,508 61,139 24,536 36,603 16,114 52,717 5,169 7,993 3,579 9,915 5,541 27,028 28,418 (1,390) 11 56,507 CY09E 1,878 51,184 53,063 25 4,820 3,421 61,328 84,339 28,095 56,244 6,114 62,358 5,000 8,149 3,646 2,355 5,541 19,691 25,735 (6,044) 14 61,328 CY10E 1,878 52,193 54,071 25 12,820 3,421 70,337 105,139 32,647 72,492 2,114 74,606 2,000 8,233 3,683 2,259 5,541 19,717 26,000 (6,283) 14 70,337

Source: Company, Centrum Research

Source: Company, Centrum Research

30

ACC

INDIA Cements

Ambuja Cements
Initiation 19 March 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009 ACEM IN ABUJ.BO 1,522.6 1,522.6 105.4/2.0 129/43 17,55,304 2

Reduce Target Price: Rs61 CMP: Rs67* Downside: 9%
*as on 17 March 2009

Premium drivers dissipating
Acquisition triggers gone, cost advantage narrowing: With Holcim acquiring close to majority stake (45.68%) in Ambuja Cements, we see no more acquisition triggers. Further, with competitors catching up, its cost advantage is expected to narrow with EBIDTA/tonne advantage sliding from Rs212 in FY04 to Rs72 in FY11E. Valuations at premium to bear-case average: Valuations continue to be on the higher side of bear case average of 1.5x P/BV, despite a significantly fall from a peak of 4.1x P/BV in Oct 2007 to 1.65x currently and EV/tonne of US$304 to US$88.5. Expansions to strengthen presence in relatively consolidated market: The company is adding 4.4mt clinker capacity in Himachal Pradesh and Chhattisgarh to enhance presence in the structurally strong northern and eastern markets. It is also adding 5.5mn grinding capacity and CPPs to rationalize freight and power costs and a bulk terminal in Kochi to tap the deficit market in Kerala. Diversified fuel mix, new CPPs to result in lower energy cost: Ambuja Cements will likely benefit from the fall in international coal/pet coke prices and from savings at its new CPPs, thanks to the diversified fuel mix at its kiln and power plants. Reduce with target price of Rs61: We believe valuations are expensive at CY09E and CY10E P/E of 10.9x and 12.26x, EV/EBIDTA of 6.1 and 6.1x and EV/tonne of US$88.5 and US$86, respectively. Initiating coverage on the stock with a reduce rating and one-year price target of Rs61, implying a P/BV of 1.5x. Key risks: Upside: Higher cement prices on account of better production and price discipline. Downside: Worsening export market and cost push through energy price rally.

Shareholding Pattern
Public & Others, 9.7 Foreign, 26.6

Promoters, 46.5

Institutions, 15.9 Non Promoter Corp. Hold., 1.4

As on 31 December 2008

One Year Indexed Stock Performance
140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

AMBUJA CEMENTS L

Price Performance (%)
1M Ambuja (3.3) 6M (14.6) 1Yr (43.0)

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar(Rsmn) CY06* CY07 CY08 CY09E CY10E

Rev 62.7 56.3 62.3 61.9 63.3

YoY (%) 140.6 (10.2) 10.7 (0.7) 2.3

EBITDA 21.3 20.5 17.8 15.6 15.3

EBITDA (%) 34.0 36.3 28.5 25.1 24.2

Adj PAT 14.6 13.1 10.9 9.4 8.4

YoY % 212.1 (10.2) (16.6) (14.4) (10.8)

Fully DEPS 9.6 8.6 7.2 6.1 5.5

RoE (%) 34.4 32.2 21.2 15.7 13.0

RoCE (%) 26.4 33.1 24.6 17.5 12.6

P/BV 2.9 2.2 1.8 1.6 1.5

P/E (x) 7.0 7.8 9.4 10.9 12.3

EV/EBITDA (x) 3.9 3.9 5.0 6.1 6.1

Source: Company, Centrum Research

Shareholding Pattern (%)
Q408 Promoter Foreign Institutions Public & Others Total 46.5 23.1 13.7 16.8 100.0 Q109 46.5 21.2 15.8 16.5 100.0 Q209 46.5 21.6 15.6 16.4 100.0 Q309 46.5 22.0 15.9 15.6 100.0

Company Background
Ambuja Cements is the fourth largest cement producer in India with a capacity of 18.3mt and had a 10% market share in FY08. It is also the largest exporter of cement from India. Promoted by Seksaria and Neotia families, Ambuja Cement became one of the most efficient cement producers due to its focus on cost control in energy and logistics by creating supporting infrastructure like CPPs, a captive port, ships, bulk terminals and split-grinding units. The company is now part of the Holcim group.

Strong presence in structurally strong markets

Key events/timeline
1986 1997 2001 2000 2005 2006 Mid 2009 Started with 0.7 million mt capacity in Gujarat. India Enters Eastern Market through acquisition of Modi Cement Acquires DLF Cements in Rajasthan Buys14.5% stakes in ACC from Tatas through its investment vehicle ACIL ACIL restructured as JV with Holcim and increase stake in ACC. Founder promoters sold part of stake to Holcim and Ambuja Cements becomes Holcim Group Company. Clinkerization unit (2.2mt) at Rauri in Himachal Pradesh, grinding unit (1.5mt) in Dadri (UP) , bulk terminal at Cochin and 90MW coal-based plants at Ambuja Nagar, Bhatapara and Maratha cement Clinkerization unit (2.2mt) and grinding augmentation (1mt) at Bhatapara Grinding units at Nalagarh (1.5mt) and Ahmedabad (1.5mt)

2nd half 09 2010

Source: Company Source: Company

Key management personnel
Name Mr. A. L. Kapur David Atkinson Mr. A Kapur Mr. P. B. Kulkarni Mr. N. P. Ghuwalewala Mr. B. L. Taparia Source: Company Position Managing Director Chief Financial Officer Head Marketing and Commercial Director Director Director and Company Secretary

32

Ambuja Cement

Investment Rationale
Acquisition trigger gone, narrowing cost advantages to result in lower premium for company’s assets

Cost advantage over peers narrowing
1400 1200 1000 EBIDTA/TON (Rs) 800 600 400 200 0 FY04
Ambuja Cement ACC

Operating Performance - Ambuja Cement Vs Industry

Though valuations have come down significantly, they are still on the higher side of a bear-case average of 1.5x P/BV Diversified fuel mix, new CPPs to result in lower energy cost

FY08
Ultratech Shree

FY09E
India Cements

FY11E
Industry Average

Source: Centrum Research

Summary Financials
Y/E Dec (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Cash EPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton 7.0 2.9 4.3 1.5 114.5 7.8 2.2 3.9 1.5 99.8 9.4 1.8 5.0 1.6 95.4 10.9 1.6 6.1 1.6 88.5 12.3 1.5 6.1 1.6 86.5 0.2 (0.2) 18.8 0.1 (0.3) 27.0 0.1 (0.2) 55.5 0.0 (0.1) 77.0 0.0 (0.1) 75.8 9.6 11.8 3.4 23.0 8.6 10.2 2.2 30.6 7.2 8.9 2.2 37.3 6.1 8.1 2.2 40.8 5.5 8.2 2.2 43.7 47,410 30,311 11,331 5,690 47,410 53,701 34,699 12,889 6,050 53,701 63,423 47,535 3,324 12,521 63,423 68,864 58,518 3,324 6,979 68,864 73,298 61,607 3,324 8,324 73,298 34,917 8,654 46,613 3,304 56,729 2,887 62,170 2,887 66,604 2,887 18,042 (6,327) (8,889) 2,826 15,525 (1,629) (11,244) 2,652 9,662 (2,749) (4,821) 2,093 11,786 (11,544) (4,121) (3,880) 12,678 (6,273) (4,121) 2,284 14,617 212.1 23.3 13,122 (10.2) 23.3 10,939 (16.6) 17.5 9,360 (14.4) 15.1 8,353 (10.8) 13.2 62,683 140.6 21,331 194.6 34.0 3,261 1132 1,003 17,941 3,384 56,314 16.0 20,451 15.7 36.3 2,363 759 1,935 19,265 9,433 62,347 10.7 17,779 (13.1) 28.5 2,598 321 1,754 16,615 5,676 61,910 (0.7) 15,569 (12.4) 25.1 2,926 202 931 13,372 4,012 63,327 2.3 15,325 (1.6) 24.2 4,183 202 994 11,933 3,580 CY06 CY07 CY08 CY09E CY10E

24.0
37.3 34.4

28.8
54.7 32.2

19.0
33.1 21.2

14.4
16.9 15.7

12.0
12.6 13.0

RoE declining to FY03 levels

Source: Company, Centrum Research

33

Ambuja Cement

Investment Argument
Acquisition triggers gone, narrowing cost advantages to result in lower premium
With Holcim having acquired a near majority stake (45.68%), we believe the lack of acquisition triggers would lead to lowering of premium commanded by Ambuja Cements. Further, the company’s cost advantage over other cement players in terms operating performance (measured by EBIDTA/tonne) has been narrowing. We estimate a decline in the company’s advantage over Industry in EBIDTA/tonne from Rs212 in FY04 to Rs73 in FY11. Gujarat Ambuja is among the most efficient cement manufacturers in India with assets like captive ports, bulk terminals and ships. It was the first company to introduce the concept of bulk transport of cement by sea. It has also pioneered cost-cutting by setting up its own CPPs and split grinding units. This resulted in substantial savings in power & fuel and logistics costs making the company among the lowest-cost cement producers in the country which was the main reason why the stock has commanded a premium over peers. But now with competitors also setting up their own CPPs and split-grinding units, Ambuja Cement’s cost advantages would reduce translating into lower premium of its assets. Exhibit 1: Cost advantage narrowing
1400 1200 1000 EBIDTA/TON (Rs) 800 600 400 200 0 FY04
Ambuja Cement ACC

Operating Performance - Ambuja Cement Vs Industry

FY08
Ultratech Shree

FY09E
India Cements

FY11E
Industry Average

Source: Centrum Research

Valuations still at premium to bear-case average
Though valuations have come down significantly from a peak of 4.1x P/BV in Oct 2007 to 1.61x 8 17 March 2009 and from US$304 to US$88 on EV/tonne over the same period, they are still on the higher side of a bear case average of 1.5x P/BV achieved during FY03. With ROE expected to come decline from 32.2% in CY07 to 15.7% and 13% in CY09E and CY10E, respectively, which compares with ROE of 12% and 13% in FY02 and FY03, we expected the P/BV multiple to decline to 1.5x in CY09E (this was the average multiple commanded by Ambuja Cements in FY03).

34

Ambuja Cement

Exhibit 2: Stock still trading above average FY02-03 P/BV of 1.5x
6.0 5.0 4.0 3.0 2.0 1.0 0.0

Aug-98

Sep-97

Feb-94

Feb-02

Sep-05

Apr-93

Oct-96

Apr-01

Oct-04

Jan-95

Dec-95

Jan-03

Jul-06

Jun-91

Jun-99

Nov-03

Jun-07

May-92

Source: Centrum Research

Expansion to strengthen presence in relatively consolidated markets
The company is adding a total of 4.4mt clinker capacity by end CY09 which along with its associated grinding capacity would take its total capacity to 22.4mt by the end of CY10. It is also setting up a bulk terminal at Kochi (Kerala) to tap the deficit market. Ambuja Cements has a strong presence in relatively consolidated cement markets of northern India, which accounted for 40% of sales in FY08, western region (38%) and eastern region (13%) and derives 7% of its sales from exports. It is India’s largest exporter of cement and commands a 19% of overall cement exports. The two Holcim companies ACC and Ambuja Cements, command a share of 29% 28% and 26% in northern, western and eastern markets, respectively. The company’s expansion in the northern and eastern regions complements ACC’s expansions in the southern and western regions. That way, Holcim would have a uniform presence across country. Ambuja Cements expansion would strengthen its presence in relatively consolidated markets while the bulk terminal at Kochi would allow it access to cement-deficit Kerala market through sea route. Exhibit 3: Expansions to consolidate Holcim’s presence across regions
Holcim's share in Indian cement market ACC (%) North East South West Exports All India 16.5 17.0 7.5 8.1 0.0 12 Ambuja (%) 12 9 1 20 19 10 Holcim (%) 29 26 8 28 19 22 Market size (mt) 57 25 49 32 6 170

Holcim capacity share (mt) ACC FY09 End % Share In Capacity FY11 End % Share In Capacity 23.4 10.88 30.52 10.63 Ambuja 18.2 8.47 22.2 7.74 Holcim 41.6 19.35 52.72 18.37 287 Total 215

Addition of 3mt each in North, South, East and West Source: Company, Centrum Research

Diversified fuel mix, new CPPs to result in lower energy cost
The company’s diversified fuel mix (35% imported coal, 35% domestic linkage coal and 30% others) and benefits of new coal-based CPP would lead to a lower energy cost with power and fuel cost declining 13.6% in CY09 to Rs645/tonne and then rise 2.5% to Rs666/tonne in CY10 on account of higher clinker production post commissioning of new plants . Lower dependence on fixed price domestic linkages makes Ambuja Cements less vulnerable to reduction in fixed price domestic linkages.

35

May-00

Ambuja Cement

May-08

Financial Analysis
Flat revenue growth over CY08-10E
We estimate almost flat 0.8% revenue CAGR over CY08-10 to Rs63.2bn as the 7.3% CAGR in cement volumes would be off-set by the 6% y-o-y decline in domestic realizations and 8.5% y-oydecline in export realizations. EBIDTA would decline 7.2% y-o-y to Rs15.32bn over CY08-10E and PAT would decline 12.6% to Rs8.35bn. EBIDTA/tonne would decline 13.5% to Rs751. ROCE and ROE are expected to decline 7.1pp and 8.2pp to 12% and 13%, respectively, in CY10. Exhibit 4: Flat growth in sales, declining profitability
CY06 Cement sale (mt) Net Sale (Rsmn) EBIDTA (Rsmn) EBIDTA/tonne (Rs) PAT Source: Company, Centrum Research 22.6 62,683 21,331 945 14,617 CY07 16.8 56,314 20,451 1,221 13,122 CY08 17.7 62,347 17,779 1,003 10,939 CY09E 18.6 61,910 15,569 838 9,360 CY10E 20.4 63,327 15,325 751 8,353

Strong balance sheet and cash-flow to finance on going capex
Ambuja Cements is adding 4.4mt clinker unit, 5.5mt grinding capacity, 90MW CPP, a bulk terminal and three ships. The expansions would require a capex of Rs35 bn which would be financed through the internal accruals and income from sale of ACIL’s stake to Holcim. We estimate Ambuja Cement would have a strong balance sheet post these expansions with net cash of Rs3.5bn in CY10.

36

Ambuja Cement

Valuation
Sell with target price of Rs61
At CMP of Rs67, the stock trades at 10.9x CY09E and 12.3x CY10E on a P/E basis, EV/EBIDTA of 6.1x CY09E and 6.1x Cy10E , EV/tonne of US$88.4 for CY09E and US$86.4 for CY10E. On a P/BV basis, it trades at 1.61x CY09E and 1.51x CY10E, which is on the higher side of the 1.5x P/BV valuation commanded by the stock during the period of last down cycle in FY02-03. We recommend Reduce with a one-year price target of Rs61, valuing the stock at P/BV of 1.5x. At our target price, the stock would trade at a P/E of 10.14x CY10E, 5.39x FY10E EV/EBIDTA and EV/tonne of US$82 for CY10.

Exhibit 5: P/BV has declined sharply from peak but still higher than bear case Average 1.5X
(x) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Oct-96 Feb-94 Feb-02 Apr-93 Apr-01 Oct-04 May-92 May-00 Aug-98 May-08 Jan-95 Jan-03 Jun-91 S ep-97 Jun-99 Dec-95 Nov-03 S ep-05 Jun-07 Jul-06

Source: Company, Centrum Research

Exhibit 6: Asset value has declined. Stock to trade in lower narrow band

600 500
USD/Ton

400 300 200 100 0
Jul-91 Jul-95 Jul-01 Jul-05 Jul-07
Ambuja Cement

Jul-93

Jul-97

Jul-99

USD50
Source: Company, Centrum Research

USD150

Ambuja cement

37

Jul-03

Key risks
Upside risks
Better production and price discipline could result in higher-than-expected cement prices. Favourable government intervention towards demand generation as well as tax benefits specific to the sector.

Downside risks
Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. Competition’s supplies hitting the market ahead our assumed schedule. An increase in international coal prices which increase Ambuja Cements’ costs and impact margins Worsening of exports market (particularly the Middle East) in terms of lower demand and realization getting depressed by new capacity coming up

38

Ambuja Cement

Financials
Exhibit 7: Income Statement
Y/E Dec (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBIT from operations Other non op. income PBT bef. extra-ord. items Extra-ord. income/ (exp) PBT Provision for tax Effective tax rate PAT Adjusted PAT Growth in PAT (%) PAT margin 12,399 19.8 11,719 18.7 10,972 17.5 21,331 34.0 945 3,261 18,070 1,132 16,937 1,003 17,941 475 18,416 3,384 18.4 15,033 14,617 212.1 23.3 CY06 62,683 CY07 56,314 16.0 10,042 17.8 11,175 19.8 8,580 15.2 20,451 36.3 1,221 2,363 18,088 759 17,329 1,935 19,265 7,859 27,124 9,433 34.8 17,691 13,122 (10.2) 23.3 CY08 62,347 10.7 13,257 21.3 12,205 19.6 10,949 17.6 17,779 28.5 1,003 2,598 15,182 321 14,861 1,754 16,615 3,083 19,698 5,676 28.8 14,023 10,939 (16.6) 17.5 CY09E 61,910 (0.7) 11,997 19.4 14,070 22.7 10,961 17.7 15,569 25.1 838 2,926 12,643 202 12,441 931 13,372 13,372 4,012 30.0 9,360 9,360 (14.4) 15.1 CY10E 63,327 2.3 13,596 21.5 15,299 24.2 12,043 19.0 15,325 24.2 751 4,183 11,141 202 10,939 994 11,933 11,933 3,580 30.0 8,353 8,353 (10.8) 13.2 CF from financing Procds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 481 (3,402) (1,202) (4,766) (8,889) 2,826 323 (5,253) (483) (5,831) (11,244) 2,652 12 (434) (497) (3,902) (4,821) 2,093 (202) (3,919) (4,121) (3,880) (202) (3,919) (4,121) 2,284 Extraordinary (Inc) Cash From Op Ex OI CF from investing Capex Investment Cash from investment (475) 18,042 (7,859) 15,525 (3,083) 9,662 11,786 12,678

Exhibit 9: Cash flow
Y/E Dec (Rs mn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC chg Working capital adj. Gross cash from op. Direct taxes paid Cash from operations CY06 18,416 3,261 825 22,503 463 22,965 (4,449) 18,517 CY07 27,124 2,363 (435) 29,052 (1,179) 27,873 (4,489) 23,384 CY08 19,698 2,598 (1,015) 21,281 (2,612) 18,670 (5,924) 12,746 CY09E 13,372 2,926 202 16,500 (702) 15,797 (4,012) 11,786 CY10E 11,933 4,183 202 16,318 (60) 16,258 (3,580) 12,678

(7,564) 1,238 (6,327)

(5,215) 3,586 (1,629)

(16,415) 13,666 (2,749)

(11,544) (11,544)

(6,273) (6,273)

Source: Company, Centrum Research

Source: Company, Centrum Research

Exhibit 10: Key Ratios
Y/E Dec Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value DPS Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales CY06 34.0 28.8 28.6 23.3 140.6 194.6 573.3 CY07 36.3 32.1 34.2 23.3 16.0 15.7 178.8 CY08 28.5 24.4 26.6 17.5 10.7 (13.1) (39.8) CY09E 25.1 20.4 21.6 15.1 (0.7) (12.4) (29.3) CY10E 24.2 17.6 18.8 13.2 2.3 (1.6) (10.8)

Exhibit 8: Balance Sheet
Y/E Dec (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets 8,654 3,839 47,410 45,425 20,533 24,892 5,419 30,311 11,331 4,088 950 3,781 3,887 12,706 7,016 5,690 77 47,410 3,304 3,784 53,701 52,311 22,712 29,599 5,100 34,699 12,889 5,816 1,578 6,426 3,921 17,741 11,691 6,050 62 53,701 2,887 3,808 63,423 57,069 25,142 31,928 15,608 47,535 3,324 9,398 2,480 8,518 6,863 27,259 14,738 12,521 43 63,423 2,887 3,808 68,864 84,086 28,068 56,018 2,500 58,518 3,324 8,887 2,524 4,639 4,499 20,549 13,569 6,979 43 68,864 2,887 3,808 73,298 91,359 32,251 59,107 2,500 61,607 3,324 9,206 2,576 6,923 3,499 22,204 13,880 8,324 43 73,298 CY06 3,034 31,872 34,917 CY07 3,045 43,564 46,613 CY08 3,045 53,680 56,729 CY09E 3,045 59,121 62,170 CY10E 3,045 63,555 66,604

24.0
37.3 34.4 2.5 0.5 5.2 40.9 36.1 9.6 11.8 23.0 3.4 0.2 (0.2) 18.8 7.0 2.9 4.3 1.5 1.6

28.8
54.7 32.2 1.9 (7.1) 9.4 75.8 59.2 8.6 10.2 30.6 2.2 0.1 (0.3) 27.0 7.8 2.2 3.9 1.5 1.8

19.0
33.1 21.2 2.0 3.8 13.1 86.3 77.0 7.2 8.9 37.3 2.2 0.1 (0.2) 55.5 9.4 1.8 5.0 1.6 1.6

14.4
16.9 15.7 1.1 3.5 13.5 80.0 70.0 6.1 8.1 40.8 2.2 0.0 (0.1) 77.0 10.9 1.6 6.1 1.6 1.7

12.0
12.6 13.0 1.1 3.5 13.5 80.0 70.0 5.5 8.2 43.7 2.2 0.0 (0.1) 75.8 12.3 1.5 6.1 1.6 1.6

Source: Company, Centrum Research

Source: Company, Centrum Research

39

Ambuja Cement

INDIA Diversified

Grasim Industries
Initiation 19 March 2009

Hold Target Price: Rs1,474 CMP: Rs1,461* Upside: 1%
*as on 17 March 2009

Perfectly priced
Expansion to consolidate presence in cement sector: Grasim Industries, together with subsidiary UltraTech, is expanding its cement capacity by 13.8mt which would take its total capacity to 48.2mt by FY10E and help it sustain its capacity share of 17.6%, apart from consolidating its position in the northern and southern regions. Efficiency-enhancing measures, backward integration to rationalize costs: The company is setting up CPPs (369MW) across its cement plants, which would reduce its dependence on grid and high-cost DG power. It is also setting up bulk-handling terminals, jetties and splitgrinding units to facilitate access to its markets and rationalize logistics cost. Diversified fuel mix to ease cost pressure: We expect cost pressures on the energy front to ease significantly with softening international coal prices. Currently, Grasim depends on diversified fuel, relying on imported coal and pet coke, domestic coal (linkage) and domestic coal (eauctions) and open market purchases in equal proportions. Pain in VSF business to continue: The VSF business remains challenging, as the decline in prices of substitutes (PSF and cotton) exerts pressure on VSF prices. Fairly valued, Hold: At CMP, the stock trades at 7.2x and 8.6x P/E, 4,5x and 4.6x EV/EBIDTA and 1.06x and 0.98x P/BV for FY10E and FY11E, respectively. We initiate coverage with a Hold rating. Key risks: Upside: Higher-than-expected cement prices and improvement in outlook for textiles. Downside: A rally in energy prices.

Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009 GRASIM IN GRAS.BO 91.7 91.7 133.9/2.6 2,890/824 269,642 10

Shareholding Pattern
Public & Others, 12.4

Foreign, 35.7

Promoters, 25.2

Non Promoter Corp. Hold., 4.4

Institutions, 22.3

As on 31 December 2008

One Year Indexed Stock Performance
140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

GRASIM INDS LTD

Price Performance (%)
1M Grasim 10.2 6M (22.9) 1Yr (44.9)

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar (Rsmn)

Rev 140.7 169.7 178.3 182.8

YoY (%) 37.6 20.6 5.1 2.5

EBITDA 39.7 49.6 43.5 42.0 37.3

EBITDA (%) 28.2 29.2 24.4 22.9 19.6

Adj PAT 19.7 26.2 21.2 18.5 15.6

YoY( %) 89.6 33.4 (19.3) (12.8) (15.8)

Fully DEPS 214.6 286.2 231.0 201.5 169.8

RoE (%) 34.5 33.4 20.8 15.5 11.9

RoCE (%) 21.4 21.1 15.2 12.1 9.5

P/BV 2.0 1.5 1.2 1.1 1.0

P/E (x) 6.8 5.1 6.3 7.2 8.6

EV/EBITDA (x) 4.1 3.6 4.4 4.5 4.6

FY07 FY08 FY09E FY10E FY11E

190.6 4.3 Source: Company, Centrum Research

Shareholding Pattern (%)
Q408 Promoter Foreign Institutions Public & Others Total 25.2 22.23 20.46 32.1 100.0 Q109 25.2 21.17 20.99 32.7 100.0 Q209 25.2 20.1 21.7 33.0 100.0 Q309 25.2 20.6 22.3 31.9 100.0

Company Background
Grasim Industries, the flagship of the Aditya Birla Group, is among India's largest private sector companies. Starting as a textiles manufacturer in 1948, today Grasim's businesses comprise viscose staple fibre (VSF), cement, sponge iron, chemicals and textiles. Its core businesses are VSF and cement, which contribute to over 90% of its revenues and operating profits. In order to focus on its cement and VSF business, the company sold off its sponge iron business Vikram Ispat to Welspun Power and Steel. Grasim, along with its subsidiary UltraTech Cements, is consolidating its presence in cement through capacity expansions and efficiency enhancements. In the VSF segment, the company is focusing on backward integration like captive plantations in Laos and has increased its stake in Canadian JVs for reliable sourcing of wood pulp. It is also focusing on product innovation like introduction of specialty fibres and non-woven VSF products to drive sales.

Pan India presence including subsidiary UltraTech

Key events/timeline
1947-1977 1985 1992-1996 1999 2000-2002 2004 2008 Sep 2008 Q2FY10 Incorporation and expanding presence in textiles and Viscose staple fibre. Foray in Cement with Vikram Cement Plant at Jawad MP. Expanded in 1987 and 1991. Diversification into International Business, Software and Sponge Iron. Demerger of Group Company’s Aditya Birla Nuvo cement and transfer to Grasim Industries . Divestment/Spinning off of non core biz to focus on Cement, VSF and Sponge Iron. Acquisition of L & T cement business. Arrangement with Welspun Power and Steel to sell sponge iron business. 4.4mt capacity addition at Sambhupura Rajasthan. This plant is under ramp up. 4.5mt expansion at Kotputli to be commissioned.

Source: Company Source: Company

Key management personnel Name Mr Kumar Mangalam Birla Mr DD Rathi Mr Shailendra K Jain Mr Saurabh Misra
Source: Company

Position Chairman CFO Director and Business Head (VSF) Business Head (Cement)

41

Grasim

Investment Rationale
Ongoing expansions to consolidate presence in cement and VSF business Efficiency enhancing measures and backward integration to rationalize costs Diversified fuel mix to ease cost pressure Pain in VSF segment to continue despite softening of input costs

Sum of The Part Valuation
Value Cement VSF Investments Investments other than equities Cash Total Value of Firm Less Debt Value of Share Holders Equity inc MI Less Minority Interest Value of Share Holders Equity Value/Share (Rs) 1.5X Price/Book (Minority Interest) Valuation Parameter EV/Ton @US$75/Ton EBIDTA*4 Idea *1, L&T*1 and AV Nuvo *.7 Rsbn 186 18 10 11 10.2 235 68 167 31.7 135 Per Share (Rs) 2,030 200 105 119 111 2,565 745 1,820 346 1,474 1,474

Summary Financials
Y/E March (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Cash EPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales MCAP/Sales Source: Company, Centrum Research FY07 140,695 37.6 39,723 92.1 28.2 6,100 2,286 3,177 34,514 10,922 3,915 19,674 89.6 14.0 29,638 (35,019) 6,699 1,318
65,623 60,256 8,587 134,466 103,165 22,719 8,575 134,467

FY08 169,739 20.6 49,598 24.9 29.2 6,703 2,221 4,623 45,296 14,658 4,565 26,237 33.4 15.5 36,972 (42,316) 4,555 (789)
91,438 67,346 12,760 171,544 149,136 16,607 5,795 171,544

FY09E 178,349 5.1 43,488 (12.3) 24.4 8,422 3,317 2,500 34,249 8,734 4,333 21,183 (19.3) 11.9 31,031 (24,610) (8,115) (1,694)
112,181 67,846 17,093 197,119 171,184 14,607 11,329 197,119

FY10E 182,813 2.5 41,955 (3.5) 22.9 10,268 3,317 2,500 30,870 8,335 4,058 18,477 (12.8) 10.1 35,192 (17,580) (8,653) 8,959
125,822 68,346 21,151 215,319 178,496 14,607 22,217 215,319

FY11E 190,604 4.3 37,333 (11.0) 19.6 11,355 3,317 3,000 25,660 6,928 3,167 15,565 (15.8) 8.2 32,445 (5,760) (8,653) 18,033
136,552 68,846 24,317 229,715 172,900 14,607 42,208 229,715

Expansions and cost savings to result in lesser de-growth in operating profit

21.4 10.2 34.5 214.6 281.1 27.5 715.7 0.6 0.3 16.1 6.8 2.0 4.1 1.3 1.0

21.1 23.5 33.4 286.2 359.3 33.1 997.3 0.5 0.3 21.4 5.1 1.5 3.6 1.1 0.8

15.2 16.5 20.8 231.0 322.9 40.0 1,223.5 0.4 0.3 11.3 6.3 1.2 4.4 1.1 0.8

12.1 12.7 15.5 201.5 313.5 45.0 1,372.3 0.3 0.2 10.3 7.2 1.1 4.5 1.1 0.7

9.5 10.2 11.9 169.8 293.6 45.0 45.0 0.3 0.3 0.1 8.6 1.0 4.6 1.0 0.7

42

Grasim

Investment Argument
Expansion to consolidate presence in cement sector
Grasim, together with subsidiary UltraTech Cements, is expanding its cement capacity by 13.8mt which would take total combined capacity to 48.2mt by FY10E and help it maintain its 17.5% capacity share, apart from consolidating its position in the northern and southern regions. The expansions would be through both green-field and brown-field projects and are expected to enhance the combine’s market share to 20%. The company also is aggressively expanding its ready mix concrete (RMC) capacity by 2.4x to 22.6mn cubic meters. Exhibit 1: AV Birla Group’s share in Indian cement sector
Grasim (%) North East South West Exports All India 13.0 7.1 7.9 9.3 0.0 9.5 AV Birla share in capacity (mt) FY09 End % Share In Capacity FY11 End % Share In Capacity Grasim 20.6 9.6 25.1 8.7 UltraTech 23.1 10.7 25.1 8.7 AV Birla 43.7 20.3 50.2 17.5 All India 215 100.0 287 100 AV Birla Share In Indian Cement Space (FY08 sales) UltraTech(%) AV Birla (%) Market Size (mt) 0.6 13.2 7.5 21.5 40.7 9.9 13.6 20.3 15.4 30.8 40.7 19.4 57 25 49 32 6 170

Adding 8.9mt in North and 4.9mt in South between FY08 and FY10 Source: Company, Centrum Research

We believe Grasim’s ongoing expansion would enable the company to post a higher-thanaverage volume growth of 12% CAGR over FY09-FY11E on a consolidated basis (16% on standalone basis) vs the industry average of 7.3%, which should help partially offset the expected declined in realizations. Exhibit 2: Expansion to drive volume growth above industry average
Indian Cement Industry Vs AV Birla Group FY05 Sales Volume (mt) AV Birla Group Growth (%) Market share (%) Sales Volume (mt) Growth (%) Source: Company, Centrum Research 20.58 137 28.2 FY06 29.0 5% CAGR 20.05 145 7.5% CAGR 19.98 158 19.26 170 18.75 183 FY07 31.6 FY08 32.8 FY09E 34.3 FY10E 40.2 12% CAGR 20.44 197 7.3% CAGR 20.46 211 FY11E 43.2

Industry

Exhibit 3: Performance of Grasim’s cement division (standalone)
FY02 Capacity (mt) Sale Volume (mt) Capacity Utilization (%) Average Realization (Rs) Cement Sale (Rsbn) Cement EBIDTA EBIDTA/Ton EBIT/Ton 11.4 9.7 85.1 1917 20.70 4.69 492 350 FY03 12.9 11.2 86.4 1690 21.84 3.59 324 198 FY04 13.1 12.0 91.2 1712 24.15 4.47 378 247 FY05 13.1 12.6 96.3 1874 27.98 5.51 443 311 FY06 13.1 14.0 106.6 2046 34.26 8.00 578 455 FY07 13.1 14.5 110.7 2867 48.89 16.23 1126 998 FY08 16.8 15.5 92.4 3192 58.90 18.60 1181 1069 FY09E 21.2 16.5 78.0 3403 68.31 18.23 1074 932 FY10E 25.7 20.1 78.0 3092 77.45 18.33 914 716 FY11E 25.7 22.4 86.9 2873 81.58 15.22 681 470

Source: Company, Centrum Research

43

Grasim

Efficiency-enhancing moves, backward integration to cut costs
We believe Grasim’s moves to boost efficiency in its cement business and backward integration in the VSF business would help in cutting and rationalizing costs. The company is setting up coalbased CPPs across its cement units with a cumulative capacity of 369MW (225MW by UltraTech) over FY09-10E, that would reduce its dependence on grid and high-cost DG power from 60% of requirement at present to 20% by end FY10. Besides the company is also setting up two bulkhandling terminals, one jetty and split grinding unit to facilitate access to the captive market and rationalize logistics cost. In the VSF segment, Grasim is focusing on backward integration through steps like plantation project in Laos, increasing its stake in Canadian JVs AV Cell to 45% and up-gradation of another Canadian JV’s AV Nackawick’s pulp plant to staple grade pulp to ensure captive sourcing of Staple grade wood pulp. Post conversion of AV Nackawick facility to staple grade facility in Q3FY09, 60% of Grasim’s pulp requirement would be met through captive sources.

Diversified fuel mix to ease cost pressure
We believe the cost pressures on energy front would ease significantly with the softening in international coal prices. Currently, Grasim depends on a diversified fuel mix relying on imported coal and pet coke, domestic coal (linkage) and domestic coal (e-auctions) and open market purchases in equal proportions (25% each). With international coal prices and consequently prices of pet coke and domestic coal (e auction) easing, Grasim would see a significant easing of cost pressure on energy front. We estimate Rs145 per tonne savings in power and fuel cost in FY10E.

Pain in VSF business to continue
The outlook for the VSF business remains challenging as the decline in prices of substitutes (PSF and cotton) exerts pressure on VSF prices. With cotton prices declining post a good crop and PSF also easing with the correction in crude prices, premium of VSF prices over PSF and Cotton has significantly widened. We believe there would be a shift in preference of cotton over VSF for blending with PSF and shift towards more PSF in poly-viscose yarn putting further pressure on VSF demand. This coupled with the fall in international VSF prices would keep domestic VSF prices under pressure. We have assumed a price of Rs101/ kg for VSF in FY09 and Rs85/kg in FY10 and FY11 while a utilization level of 65% in FY09 and 75% in FY10 on existing capacity of 334,000tpa. Chinese VSF prices have fallen 45% from their peak of 22.2 yuan/kg (about Rs125/kg) during OctDec 2007 to 12.2Yuan/kg (Rs95/kg) in Dec 2008. The Chinese government has also announced an export subsidy of 15% effective from Oct 2008. This brings down the import parity of Rs80/kg. As against this Grasim has reduced domestic VSF price from Rs107 in Oct-Dec 2007 to Rs93/kg in January 2008 on ex factory basis, which is still at a premium of over 13% over Chinese import parity prices. Further, we expect VSF prices in China, the largest producer and consumer of the fibre, to be subdued over CY09-10 on account of huge capacity expansion underway (60% over CY07 capacity of 1.2mt) and higher cotton crop globally on account of higher acreage devoted to the crop. Exhibit 4: Premium of VSF prices over cotton and PSF has widened
Rs/Kg 120 100 80 60 40 20 0 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 AugAugAugAugAugAugDecDecDecDecDecDecFiber Price Trends

PSF-1.2 d
Source: Company, Centrum Research

VSF Ex-factory (1.5 d)

Cotton-S.6

44

Grasim

Exhibit 5: Performance of VSF division to remain subdued
FY02 Capacity Volume Sold (MT) Capacity Utilization Sale Rs bn EBIDTA Margin 220,775 181,520 82 13.3 3.5 27 FY03 220,775 227,900 103 16.4 5.9 36 FY04 251,850 229,110 91 17.6 5.7 32 FY05 253,675 231,533 91 19.6 6.1 31 FY06 257,325 242,399 94 19.1 5.0 26 FY07 257,325 250,725 97 23.1 7.1 31 FY08 334,325 269,781 81 30.0 11.0 37 FY09E 334,325 215,825 65 22.4 4.8 21.4 FY10E 334,325 248,199 74 20.9 4.6 21.9 FY11E 334,325 268,054 80 22.6 4.9 21.5

Source: Company, Centrum Research

45

Grasim

Financial Analysis
Flat sales growth, cement segment to impact EBIDTA growth
We expect the company to register 3.4% revenue CAGR over FY09-FY11E led by 7% CAGR in cement revenue and 0.5% CAGR in VSF revenue. Operating profit would decline 7.3% over the same period to Rs37.3bn mainly on account of the 7.1% decline in cement segment’s EBIDTA to Rs30.5bn. The VSF segment would likely register flat 0.7% CAGR to Rs4.86 bn. It should be noted that the FY09 results would not comparable with FY10 and FY11 results as the company sold its sponge iron division in FY09.

Profitability, return ratios to decline
However, higher depreciation charges (16% CAGR to Rs11.3bn in FY11E) and 10% CAGR in other income to Rs3bn would result in PBT declining to Rs25.66bn and PAT declining 15.9% to Rs15bn. Lower provisioning of taxes (11% lower) to Rs6.93bn and minority interest (14.3% CAGR degrowth) to Rs15.56. We expect ROCE and ROE would come down by 5.7pp and 8.9pp to 9.5% and 11.9% in FY11E. Exhibit 6: Segmental performance (consolidated)
(Rs bn) Net sales Sales- Cement % of total Sales-VSF % of total EBIDTA EBIDTA- Cement % of total EBIDTA-VSF % of total FY05 92.9 54.9 59.1 19.6 21.1 20.3 9.0 44.3 6.1 30.1 FY06 102.2 68.5 67.0 19.1 18.7 20.7 12.4 60.1 5.0 23.9 FY07 140.7 99.3 70.6 23.1 16.4 39.7 29.3 73.8 7.1 17.9 FY08 169.7 116.2 68.4 30.0 17.7 49.6 36.0 72.6 11.0 22.1 FY09E 178.3 130.8 73.3 22.4 12.5 43.5 35.3 81.2 4.8 11.0 FY10E 182.8 144.6 79.1 20.9 11.4 42.0 35.5 84.6 4.6 10.9 FY11E 190.6 149.7 78.5 22.6 11.9 37.3 30.5 81.6 4.9 13.0

Source: Company, Centrum Research

46

Grasim

Valuation
Valuation at substantial discount to ACC and Ambuja Cements
At CMP, the stock trades at a PE of 7.1x FY10Eand 8.5x FY11E, EV/EBIDTA of 4.4x and 4.5x, P/BV of 1.02x and 0.94x. On asset value, the cement assets would be valued at $61.2/tonne of 48.2mt capacity which is at substantial discount to ACC’s valuations of US$76/tonne and Ambuja Cements US$94/tonne. We initiate coverage with a Hold rating and one-year price target of Rs1,482 valuing Grasim cement assets at US$75/tonne. Exhibit 7: SOTP of Grasim Industries
Value Cement VSF Investments Investments other than equities Cash Total Value of Firm Less Debt Value of Share Holders Equity inc minority interest Less Minority Interest Value of Share Holders Equity Value/Share Source: Company, Centrum Research 1.5X Price/Book (Minority Interest) Valuation Parameter EV/Ton @US$75/Ton EBIDTA*4 Idea *1, L&T*1 and AV Nuvo *.7 Rsbn 186 18 10 11 10.2 235 68 167 31.7 135 Per Share (Rs) 2,030 200 105 119 111 2,565 745 1,820 346 1,474 1,474

Exhibit 8: Price/Book Value
(x)

5 4 3 2 1 0
Apr-01 Apr-03 Apr-05 Apr-07
2.5X

Apr-02

Apr-04

Apr-06

Grasim

1.5X

2X

3.5X

Source: Company, Centrum Research

47

Apr-08

Grasim

Key Risks
Upside risks
Better production and price discipline leading to higher-than-expected cement prices. Further favorable government intervention towards demand generation as well as tax benefits specific to the sector. Upturn in outlook of textile sector leading to revival of VSF demand.

Downside risks
Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. Competition’s supplies hitting the market ahead our assumed schedule. Rally in international coal price. Worsening of Exports market in terms of demand and realization in wake of new capacity coming up.

48

Grasim

Financials
Exhibit 9: Income Statement
Y/E Mar (Rsmn) Revenues Growth in revenues (%) EBITDA EBITDA Margin Depreciation PBIT Interst expenses PBT from operations Other non op. income PBT bef. extra-ord. items Extra-ord income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin FY07 140,695 37.6 39,723 28.2 6,100 33,623 2,286 31,337 3,177 34,514 34,514 10,922 31.6 23,593 3,915 19,678 19,678 14.0 14.0 FY08 169,739 20.6 49,598 29.2 6,703 42,895 2,221 40,674 4,623 45,296 45,296 14,658 32.4 30,639 4,565 26,073 26,073 15.5 15.4 FY09E 178,349 5.1 43,488 24.4 8,422 35,066 3,317 31,749 2,500 34,249 34,249 8,734 25.5 25,516 4,333 21,183 21,183 11.9 11.9 FY10E 182,813 2.5 41,955 22.9 10,268 31,687 3,317 28,370 2,500 30,870 30,870 8,335 27.0 22,535 4,058 18,477 18,477 10.1 10.1 FY11E 190,604 4.3 37,333 19.6 11,355 25,977 3,317 22,660 3,000 25,660 25,660 6,928 27.0 18,732 3,167 15,565 15,565 8.2 8.2

Exhibit 11: Cash flow
Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC change Working capital adjustment Gross cash from op. Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op & EI CF from investing Capex Investment Cash from investment CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) FY07 34,514 6,100 712 41,326 (1,132) 40,194 (10,557) 29,638 29,638 (26,851) (8,168) (35,019) 3,422 11,175 (2,286) (5,612) 6,699 1,318 FY08 45,296 6,703 (382) 51,617 (574) 51,043 (14,072) 36,972 2,980 39,952 (51,181) 5,885 (45,296) 634 7,201 (3,095) (185) 4,555 (789) FY09E 34,249 8,422 3,317 45,988 (7,223) 38,765 (7,734) 31,031 9,180 40,211 (35,790) 2,000 (33,790) (500) (3,317) (4,298) (8,115) (1,694) FY10E 30,870 10,268 3,317 44,455 (1,928) 42,527 (7,335) 35,192 35,192 (17,580) (17,580) (500) (3,317) (4,836) (8,653) 8,959 FY11E 25,660 11,355 3,317 40,333 (1,959) 38,374 (5,928) 32,445 32,445 (5,760) (5,760) (500) (3,317) (4,836) (8,653) 18,033

Source: Company, Centrum Research

Source: Company, Centrum Research

Exhibit 12: Key Ratios Exhibit 10: Balance Sheet
Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Cap. Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets 134,467 171,544 197,119 215,319 229,715 FY07 917 64,706 65,623 8,587 48,730 11,526 134,466 143,718 60,125 83,593 19,572 103,165 22,719 13,581 8,252 3,692 7,479 33,004 24,429 8,575 FY08 917 90,462 91,379 12,760 55,771 11,575 171,544 157,198 63,397 93,801 55,335 149,136 16,607 17,443 10,185 2,903 12,047 42,578 36,783 5,795 FY09E 917 111,205 112,121 17,093 55,271 12,575 197,119 200,475 67,319 133,156 38,028 171,184 14,607 18,079 11,238 1,207 13,054 43,578 32,249 11,329 FY10E 917 124,846 125,763 21,151 54,771 13,575 215,319 236,265 77,587 158,678 19,818 178,496 14,607 18,532 12,521 10,167 14,054 55,273 33,057 22,217 FY11E 917 135,576 136,492 24,317 54,271 14,575 229,715 253,845 88,942 164,902 7,998 172,900 14,607 19,321 14,099 28,199 15,054 76,674 34,465 42,208 Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales FY07 28.2 26.2 24.5 14.0 37.6 92.1 89.6 21.4 23.7 34.5 1.0 (7.2) 21.4 63.4 34.7 214.6 281.1 27.5 715.7 0.6 0.3 16.1 6.8 2.0 4.1 1.3 1.0 FY08 29.2 28.0 26.7 15.5 20.6 24.9 33.4 21.1 23.5 33.4 1.0 (20.2) 21.9 79.1 37.0 286.2 359.3 33.1 997.3 0.5 0.3 21.4 5.1 1.5 3.6 1.1 0.8 FY09E 24.4 21.1 19.2 11.9 5.1 (12.3) (19.3) 15.2 16.5 20.8 0.9 (6.5) 23.0 66.0 36.5 231.0 322.9 40.0 1,223.5 0.4 0.3 11.3 6.3 1.2 4.4 1.1 0.8 FY10E 22.9 18.7 16.9 10.1 2.5 (3.5) (12.8) 12.1 12.7 15.5 0.8 (4.5) 25.0 66.0 36.5 201.5 313.5 45.0 1,372.3 0.3 0.2 10.3 7.2 1.1 4.5 1.1 0.7 FY11E 19.6 15.2 13.5 8.2 4.3 (11.0) (15.8) 9.5 10.2 11.9 0.8 (2.5) 27.0 66.0 36.5 169.8 293.6 45.0 1,489.3 0.3 0.1 8.7 8.6 1.0 4.6 1.0 0.7

Source: Company, Centrum Research

Source: Company, Centrum Research

49

Grasim

INDIA Cement

UltraTech Cement
Initiation 19 March 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009 UTCEM IN ULTC.BO 124.5 124.5 59.6/1.2 885/245 108,811 10

Accumulate Target Price: 527 CMP: 480 Upside: 9.8%
*as on 17 March 2009

Ensconced safely
High exposure to consolidated markets to ensure stability in realisations: We believe UltraTech’s high exposure to consolidated markets would ensure stability in realizations and earnings. The company derived cumulatively 60% of sales in FY08 from the consolidated western (40.5%) and eastern (19.6%) markets. Expansion to boost growth and efficiency: UltraTech is expected to register volume growth from its 4.9mt capex and cost savings from CPPs. It has undertaken a capex of Rs46.2bn (Rs22bn already incurred) over FY08-11 towards boosting capacity and setting up CPPs (225MW) across its plants. Adequate cashflow to fund capex: We believe its robust cashflows of Rs38bn over FY09-11E would be more than adequate to fund the remaining Rs24.7bn capex through internal accruals. We expect the company’s net debtequity ratio at 0.14x in FY11E.

Shareholding Pattern
Public & Others, 15.7 Foreign, 2.9 Institutions, 9.2

Non Promoter Corp. Hold., 17.4

Promoters, 54.8

Softening in international coal prices to result in significant costs savings: With international coal prices softening and more CPPs getting commissioned, we estimate UltraTech’s energy cost per tonne to decline 22% and 5.5% to Rs705 and Rs666, respectively, in FY10E and FY11E. Accumulate at discount valuations: UltraTech trades at a substantial discount to ACC, despite its superior earnings matrix The stock trades at a P/E of 6.6x and 8.2x, P/BV of 1.4x and 1.2x , EV/EBIDTA of 4.4x and 4.5x and EV/tonne of US$66.7 and US$57 for FY10E and FY11E, respectively. We recommend Accumulate with one-year price target of Rs527. Key risks: Upside: Higher-than-expected cement prices. Downside: Worsening export market and rally in energy prices.

As on 31 December 2008

One Year Indexed Stock Performance
140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

ULTRATECH CEMENT

Price Performance (%)
1M UltraTech 16.7 6M (9.9) 1Yr (41.8)

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar (Rsmn) FY07 FY08 FY09E FY10E FY11E

Rev 49.7 56.2 62.5 67.2 68.1

YoY (%) 46.8 13.2 11.1 7.5 1.4

EBITDA 14.3 17.3 17.1 17.2 15.2

EBITDA (%) 28.8 30.8 27.3 25.5 22.4

Adj PAT 7.8 10.1 9.6 9.1 7.2

YoY % 248.7 28.7 (5.1) (5.5) (20.0)

Fully DEPS 63.1 81.1 77.0 72.7 58.2

RoE (%) 55.9 45.2 30.5 22.8 15.4

RoCE (%) 24.2 23.8 18.6 15.3 11.5

P/BV 3.4 2.2 1.7 1.4 1.2

P/E (x) 7.6 5.9 6.2 6.6 8.2

EV/EBITDA (x) 5.3 4.6 4.9 4.4 4.5

Source: Company, Centrum, Reseach

Shareholding Pattern (%)
Q408 Promoter Foreign Institutions Public & Others Total 54.4 6.7 8.8 30.1 100.0 Q109 54.4 5.8 8.73 31.1 100.0 Q209 54.4 5.9 8.7 31.1 100.0 Q309 54.8 2.2 9.2 33.9 100.0

Company Background
UltraTech Cements, a 54% subsidiary of Grasim Industries, was created through an arrangement of hiving off of L&T cements business into a separate company and its acquisition by Grasim through stake sale by L&T sales and open offer. UltraTech is India’s second largest cement company after ACC with a capacity of 18.2mt. It is also the largest exporter of cement clinker from India. The company has recently expanded its capacity by 4.9mt in the southern region and putting up coal-based CPPs (225MW) and 35MW waste heat recovery systems at various locations to curtail it power and fuel cost.

High exposure to western and eastern markets

Key events/timelines
2004 Sept 2008 Demerger of L&T Cement Business into separate company, (Cemco) .Grasim acquires majority control purchasing L&T stake and through open offer. 4.9mt cement capacity, 50MW power plant at Tadpatri in Andhta Pradesh with split-grinding unit at Ginigera in Karnataka. These plants are under final stage of commissioning and ramp up Completion of 175MW CPPs across plants and modernization and upgradation of manufacturing units Grinding and jetty capacity expansion at Pipavav /Jafrabad and bulk terminal in Mumbai

2009

2010

Source: Company Source: Company

Key management personnel
Name Mr Kumar Mangalam Birla Mr S Misra Mr K C Birla Mr S K Maheshwari Mr O P Puranmalka Source: Company Position Chairman Managing Director Executive President & Chief Financial Officer Chief Manufacturing Officer Chief Marketing Officer

51

Ultratech Cement

Investment Rationale
High exposure to consolidated markets to ensure price stability Ongoing expansion to enhance growth and boost efficiency Strong cash flow to finance ongoing capex Softening international coal prices to result in significant cost savings

Significant savings in power & fuel costs
(Rs per MT) 1000 900 800 731 700 600 500 400 FY06 FY07 FY08 FY09E FY10E FY11E 644 665 705 666 895

Summary Financials
Y/E Mar (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton Source: Company, Centrum Research FY07 49,684 46.8 14,316 149.1 28.8 2,287 868 592 11,753 3,887 17.5 7,849 248.7 15.8 11,208 (10,466) (406) 335 17,682 15,786 53 39,142 32,429 4,592 2,121 39,142 24.2
26.6

Source: Company, Centrum Estimates FY08 56,238 13.2 17,308 20.9 30.8 2,396 757 998 15,153 5,038 14.6 10,101 28.7 18.0 13,809 (14,419) 769 158 27,026 17,405 57 49,942 48,089 1,467 387 49,942 23.8
25.8

FY09E 62,504 11.1 17,080 (1.3) 27.3 3,252 1,420 800 13,208 3,626 9,582 (5.1) 15.3 12,079 (13,500) 1,956 535 35,733 21,655 57 63,900 58,336 1,467 4,097 63,900 18.6
19.4

FY10E 67,196 7.5 17,157 0.5 25.5 3,992 1,560 880 12,485 3,431 9,054 (5.5) 13.5 15,281 (6,690) (6,080) 2,512 43,768 18,155 57 69,434 61,034 1,467 6,933 69,434 15.3
16.1

FY11E 68,125 1.4 15,249 (11.1) 22.4 4,497 1,360 1,040 10,433 3,190 7,243 (20.0) 10.6 13,689 (4,470) (5,880) 3,340 49,991 14,655 57 73,157 61,008 1,467 10,683 73,157 11.5
12.3

Volume expansion and savings from power to help sustain operating profit

55.9 63.1 142.0 0.9 0.8 16.5 7.5 3.3 5.2 1.5

45.2 81.1 217.1 0.6 0.6 22.9 5.9 2.2 4.6 1.4

30.5 77.0 287.0 0.6 0.6 12.0 6.2 1.7 4.9 1.3 72.9

22.8 72.7 351.6 0.4 0.3 11.0 6.5 1.4 4.4 1.2 69.6

15.4 58.2 401.6 0.3 0.1 11.2 8.2 1.2 4.5 1.1 59.3

52

Ultratech Cement

Investment Argument
Exposure to consolidated markets to ensure stability in realisations
UltraTech’s has high exposure to consolidated markets of the western region (40.5% of sales in FY08) and eastern region (19.6%). The northern region (1.88%), Southern region (21.4%) and exports (16.6%) account for the remaining sales. We believe this high exposure (60% of sales) to structurally strong markets would ensure stability in realizations. Exhibit 1: Western market - A structurally strong market with declining dependence on exports
Key statistics of western region Effective Capacity (mt) Consumption (mt) Exports (mt) % of consumption Net Transfer From other Zones (mt) % of consumption Capacity Utilization (%) Source: Company, Centrum Research 28.9 25.9 6.9 26.6 5.7 22 93.6 28.9 28.3 7.8 27.6 6.1 21 104 28.9 32.2 5.1 15.9 6.9 21 106 31.4 34.8 5.1 14.7 8.9 25 99 35.3 37.6 5.1 13.6 10.9 29 90 42.7 40.6 4.1 10.1 10.9 27 79

Ongoing expansions to boost growth and efficiency
The company’s ongoing cement expansion (4.9mt) and addition of 225MW coal-based CPPs would result in volume growth and boost efficiency. While the expansion of its Tadpatri plant in Andhra Pradesh would allow UltraTech to post a volume growth of 8% over FY09-11, commissioning of new CPPs would increase its dependence on coal-based CPPs from 22% in FY08 to 57% in FY09E and further to 88% and 98%, respectively, in FY10E and FY11E. The company has undertaken an Rs46.2bn capex (Rs22bn already incurred) over FY09-11 towards adding a 4.9mt cement unit to its Tadpatri plant, strengthening the company’s presence in the south and 2mt split-grinding augmentation in western region. The capex would also involve setting-up CPPs (cumulative capacity 225MW), 25MW waste heat recovery systems, expansion of jetties and port terminals and modernizing its RMC plants. Exhibit 2: UltraTech’s expansion projects
Projects 4.9mt cement capex and 50 MW CPP 175MW CPP 2mt split-grinding, jetty expansion and bulk terminals RMC Modernization/Upgradation Source: Company, Centrum Research Place Tadpatri, AP Various Places Gujarat Various Places Various Places Timeline Q3FY09 FY08-FY10 FY10-11 FY09-10 FY09-11 Status Commissioned 92MW commissioned at GCW Underway Underway Underway

The AV Birla Group’s current expansion plans focuses on attaining a balanced presence in all the four zones with UltraTech’s 4.9mt expansions at Tadpatri (southern region) and 2mt augmentation of grinding capacity (western) complementing Grasim’s 8.9mt expansion in the northern region. Exhibit 3: AV Birla Group’s share in Indian cement sector
North East South West Exports All India Grasim (%) 13 7 8 9 0 9 UltraTech (%) 1 13 8 22 41 10 AV Birla (%) 14 20 15 31 41 19.4 Market size (mtpa)) 57 25 49 32 6 170

AV Birla Group’s share in capacity Grasim Ultratech FY09 End 20.6 23.1 % Share In Capacity 9.6 10.7 FY11 End 25.1 25.1 % Share In Capacity 8.75 8.75 Adding 8.9mt in North and 4.9mt in South between FY08 and FY10 Source: Company, Centrum Research AV Birla 43.7 20.3 50.2 17.49 All India 215 100.0 287 100

53

Ultratech Cement

Strong cash flow to finance ongoing capex
We estimate robust cash-flows of Rs38bn over FY09-11 would allow the company to finance the remaining Rs24.7bn capex through internal accruals. The company’s debt-equity ratio is expected to rise from 0.16x at present to 0.3x in FY11E with the company’s net debt-equity ratio at 0.14x in FY11E.

Softening in international coal prices to result in significant costs savings
With international coal prices softening and lower power costs from CPPs, we estimate UltraTech’s energy cost per tonne would decline 22% YoY in FY10E to Rs705 and 5.5% YoY to Rs666 in FY11E. The CPPs would allow the company to lower its dependence on high-cost grid power. The company would also significantly benefit from the recent softening in international coal/pet coke prices on account of its diversified fuel mix as it uses equal proportions of imported international coal/ pet coke, linkage coal from Coal India (CIL) and coal sourced through e-auctions in equal proportions. International coal prices have declined from a peak of US$200 in July 2008 to US$61. We have assumed CIF prices of coal at US$85 per tonne in FY10E and FY11E and exchange rate of Rs51.5/US$. We estimate savings of Rs228/tonne in energy cost over FY09-11 would offset the decline of average realization to a great extent resulting in an EBIDTA per tonne of Rs851 and Rs732 in FY10E and FY11E, respectively, against FY09E EBIDTA/tonne of Rs961.

54

Ultratech Cement

Financial Analysis
4.4% sales CAGR over FY09-11E, but profitability to decline
Despite the 7.1% decline in average realizations over CY09-11E, we believe the 8.1% volume CAGR to 20.8mt would lead to 4.4% sales CAGR to Rs68.1bn. However, operating profit and net profit would decline by 5.5% to Rs15.2bn and 13.1% to Rs7.2bn. EBIDTA would decline 5.5% to Rs15.2bn on 6.6% decline in energy cost and 11.2% rise in logistics costs and 10% increase in other expenses. Higher depreciation (up 17.5% to Rs4.5bn) offset by other income (14% CAGR to Rs1.04bn) and lower tax (down 6.2%) would result in PAT declining 13%. Exhibit 4: UltraTech’s operating performance
FY07 Cement volume (mt) Average Realization (Rs /MT) YoY (%) Net Sales (Rs mn) YoY (%) Energy/ton (Rs) YoY (%) Freight/ton (Rs) YoY (%) Other Expenses/ton (Rs) YoY (%) EBIDTA (Rs mn) YoY (%) EBIDTA/tonne (Rs) yoy (%) Depreciation (Rs mn) Depreciation/Ton (Rs) PBIT (Rs mn) PBIT/Ton (Rs) Interest (Rs mn) OI (Rs mn) PBT (Rs mn) Tax (Rs mn) PAT (Rs mn) ROCE (%) ROE (%) Source: Company, Centrum Research 17.1 2,887 28.2 49,684 46.8 665 3.3 519 0.2 335 4.1 14,316 301.9 837 301.9 2,287 134 12,030 703 868 592 11,753 3,887 7,867 24.2 55.9 FY08 17.2 3,161 9.5 56,238 13.2 731 9.9 542 4.4 441 31.8 17,308 20.9 1,004 20.0 2,396 139 14,912 865 757 998 15,153 5,038 10,115 23.8 45.2 FY09E 17.8 3,365 6.5 62,504 11.1 895 22.4 593 9.4 534 20.9 17,080 (1.3) 961 (4.3) 3,252 183 13,828 778 1,420 800 13,208 3,626 9,582 18.6 30.5 FY10E 20.1 3,064 (8.9) 67,196 7.5 705 (21.2) 614 3.5 587 10.0 17,157 0.5 852 (11.4) 3,992 198 13,165 653 1,560 880 12,485 3,431 9,054 15.3 22.8 FY11E 20.8 2,908 (5.1) 68,125 1.4 666 (5.5) 634 3.3 606 3.2 15,249 (11.1) 733 (14.0) 4,497 216 10,753 517 1,360 1,040 10,433 3,190 7,243 11.5 15.4

55

Ultratech Cement

Valuation Analysis
Stock trading at substantial discount to ACC despite superior earnings matrix At CMP, the stock trades at a P/E of 6.6x FY10E and 8.2x FY11E, 1.4x and 1.2x on P/BV, 4.4x and 4.5x EV/EBIDTA and EV/tonne of US$67 and US$57, respectively. This is a substantial discount to ACC valuations 11.5x CY09E and 18x CY10E on P/E, 5.9x and 7.9x on EV/EBIDTA, 2x and 1.9x on P/BV and EV/tonne of US$76 and US$71.6, respectively. Given similar scale and exposure of the two companies and UltraTech’s superior earnings matrix (EBIDTA/tonne of Rs852 and Rs733 for FY10E and FY11E, respectively, vs ACC’s Rs724 and Rs505 in CY09E and CY10E, respectively), we believe UltraTech should trade at a premium to ACC. We initiate coverage with an Accumulate rating and price target of Rs527 valuing the stock at P/BV of 1.5x FY10E (at par with ACC’s target valuation of 1.5x CY09 P/BV).

Exhibit 5: P/BV multiple to decline
(x)

7 6 5 4 3 2 1 0 Nov-06 Nov-07 Nov-04 Nov-05 May-05 May-06 May-07 May-08 Nov-08
Dec-08

Feb-05

Aug-05

Aug-06

Aug-04

Aug-07

Ultratech
Source: Company, Centrum Research

2x

4x

5x

6x

Exhibit 6: Asset value has declined
USD/Ton
200 180 160 140 120 100 80 60 40 20 0

Dec-06

Dec-04

Dec-05

Aug-04

Aug-06

Dec-07

Apr-05

Apr-06

Ultratech

50X

80X

130X

130X

180

Source: Company, Centrum Research

56

Aug-08

Aug-05

Apr-07

Aug-07

Apr-08

Aug-08

Ultratech Cement

Feb-09

Feb-06

Feb-07

Feb-08

Key Risks
Upside risks
Better production and price discipline resulting in higher-than-expected cement prices. Further favorable government intervention towards demand generation as well as tax benefits specific to the sector.

Downside risks
Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. A rally in international coal price. Worsening of exports market in terms of demand and realization in wake of new capacity coming up.

57

Ultratech Cement

Financials
Exhibit 6: Income Statement
Y/E Mar (Rsmn) Revenues Growth in reven. (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBT from op. Other non op. incom. PBT bef. extra-ord.itm Extra-ord. inc./ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minor.int. Adjusted PAT Growth in PAT (%) PAT margin FY07 49,684 46.8 11,392 22.9 8,880 18 7,548 15.2 14,316 28.8 837 2,287 12,030 868 11,161 592 11,753 11,753 3,887 33.1 7,867 17.5 7,849 7,849 248.7 15.8 FY08 56,238 13.2 12,542 22.3 9,345 16.6 9,200 16.4 17,308 30.8 1,004 2,396 14,912 757 14,155 998 15,153 15,153 5,038 33.2 10,115 14.6 10,101 10,101 28.7 18.0 FY09E 62,504 11.1 15,902 25.4 10,544 16.9 10,436 16.7 17,080 27.3 961 3,252 13,828 1,420 12,408 800 13,208 13,208 3,626 27.5 9,582 9,582 9,582 (5.1) 15.3 FY10E 67,196 7.5 14,208 21.1 12,369 18.4 12,209 18.2 17,157 25.5 852 3,992 13,165 1,560 11,605 880 12,485 12,485 3,431 27.5 9,054 9,054 9,054 (5.5) 13.5 FY11E 68,125 1.4 13,869 20.4 13,200 19.4 12,806 18.8 15,249 22.4 733 4,497 10,753 1,360 9,393 1,040 10,433 10,433 3,190 30.6 7,243 7,243 7,243 (20.0) 10.6

Exhibit 8: Cash flow
Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest exp./other OP prof.bef. WC chg. Working capital adj. Gross cash from op. Direct taxes paid Cash from op. Extraordinary (Inc) Cash From Op Ex OI CF from investing Capex Investment Cash from investment CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) FY07 11,753 2,287 639 14,679 738 15,418 (4,210) 11,208 11,208 FY08 15,153 2,396 423 17,973 674 18,646 (4,837) 13,809 13,809 FY09E 13,208 3,252 1,420 17,880 (3,175) 14,705 (2,626) 12,079 12,079 FY10E 12,485 3,992 1,560 18,037 (325) 17,712 (2,431) 15,281 15,281 FY11E 10,433 4,497 1,360 16,289 (410) 15,879 (2,190) 13,689 13,689

(7,628) (2,838) (10,466)

(17,921) 3,502 (14,419)

(13,500) (13,500)

(6,690) (6,690)

(4,470) (4,470)

1,310 (892) (824) (406) 335

1,667 (890) (8) 769 158

4,250 (1,420) (874) 1,956 535

(3,500) (1,560) (1,020) (6,080) 2,512

(3,500) (1,360) (1,020) (5,880) 3,340

Source: Company, Centrum Research

Exhibit 9: Key Ratios
Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) FY07 28.8 24.2 23.7 15.8 46.8 149.1 248.7 24.2 26.6 55.9 1.4 (10.3) 12.6 54.9 32.0 63.1 81.4 4.0 142.0 0.9 0.8 16.5 7.6 3.4 5.3 1.5 1.2 FY08 30.8 26.5 26.9 18.0 13.2 20.9 28.7 23.8 25.8 45.2 1.3 (29.4) 13.0 82.0 39.7 81.1 100.4 5.0 217.1 0.6 0.6 22.9 5.9 2.2 4.6 1.4 1.1 FY09E 27.3 22.1 21.1 15.3 11.1 (1.3) (5.1) 18.6 19.4 30.5 1.1 (10.9) 13.1 64.0 40.0 77.0 103.1 6.0 287.0 0.6 0.6 12.0 6.2 1.7 4.9 1.4 1.0 70.9 FY10E 25.5 19.6 18.6 13.5 7.5 0.5 (5.5) 15.3 16.1 22.8 1.0 (11.1) 13.3 65.0 40.6 72.7 104.8 7.0 351.6 0.4 0.3 11.0 6.6 1.4 4.4 1.2 0.9 66.7 FY11E 22.4 15.8 15.3 10.6 1.4 (11.1) (20.0) 11.5 12.3 15.4 1.0 (11.4) 13.7 66.9 41.8 58.2 94.3 7.0 401.6 0.3 0.1 11.2 8.2 1.2 4.5 1.1 0.9 56.9

Source: Company, Centrum Research

Exhibit 7: Balance Sheet
Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets FY07 1,245 16,437 17,682 53 15,786 5,621 39,142 48,199 22,742 25,458 6,972 32,429 4,592 4,412 1,739 1,001 2,543 9,695 7,574 2,121 39,142 FY08 1,245 25,781 27,026 57 17,405 5,454 49,942 50,050 24,795 25,255 22,834 48,089 1,467 6,197 2,026 1,143 3,830 13,196 12,809 387 49,942 FY09E 1,245 34,489 35,733 57 21,655 6,454 63,900 72,884 28,047 44,836 13,500 58,336 1,467 6,946 2,272 1,678 4,316 15,211 11,115 4,097 63,900 FY10E 1,245 42,523 43,768 57 18,155 7,454 69,434 86,384 32,039 54,344 6,690 61,034 1,467 7,587 2,481 4,189 4,816 19,074 12,140 6,933 69,434 FY11E 1,245 48,746 49,991 57 14,655 8,454 73,157 93,074 36,536 56,538 4,470 61,008 1,467 7,916 2,589 7,529 5,316 23,350 12,667 10,683 73,157

Source: Company, Centrum Research

Source: Company, Centrum Research

58

Ultratech Cement

INDIA Cement

India Cements
Initiation 19 March 2009

Sell Target Price: Rs82 CMP: Rs98* Downside: 15%
*as on 17 March 2009

In southern quagmire
Southern market to witness steep correction in prices: The southern region, which accounted for 92% of India Cements’ FY08 sales, is adding 44mt capacity during FY09-11. This would reduce utilization levels from 99% in FY08 to 90% in FY09 and further to 73% and 71% in FY10 and FY11, respectively, leading to a steep fall in prices due to the high degree of fragmentation in the region. Delays in project expansion to impact volume growth: India Cements’ ongoing expansions have seen significant delays, resulting in flat despatches despite 11.6% YoY higher consumption in the southern zone during 9MFY09. Going forward, the company may find it challenging to increase volumes on account of the huge capacity build-up. Benefits of fall in cost of imported coal partly offset by foray into shipping: India Cements is unlikely to enjoy the full benefit of fall in international coal (70% dependence) prices, as this would be partly offset by its foray into shipping. IPL franchise marginal significant for valuations: Despite the success of Indian Premier League (IPL), the market would value India Cements primarily on its core earnings even though there could be a possible upside of Rs9 per share, based on the valuation of recent stake sale in Rajasthan Royals. Expensive valuations: At CMP, the stock trades at a P/E of 6.9x and 9.8x, EV/EBIDTA of 4.4x and 5.1x, P/BV of 0.85x and 0.8x, FY10E and FY11E, respectively. . Its assets are available at US$58 and US$55 per tonne on FY10E and FY11E capacity. This is at a significant premium to comparable peer Shree Cement. Sell with price target of Rs82: We rate the stock a Sell, valuing its cement assets at US$50/tonne on EV/tonne and 0.65x FY10E P/BV and IPL franchise at Rs9/share.

Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDmn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009 ICMN IN ICEM.BO 282.4 282.4 27.6/536.2 203/69 10,10,146 10

Shareholding Pattern
Public & Others, 7.2

Foreign, 34.5 Promoters, 28.0

Non Promoter Corp. Hold., 11.9 Govt Holding, 0.0

Institutions, 18.4

As on 31 December 2008

One Year Indexed Stock Performance
140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

INDIA CEMENTS

Price Performance (%)
1M India C. (3.7) 6M (25.6) 1Yr (42.0)

Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640

Key risks: Upside: India Cements’ participation in M&A as an acquisition target. Downside: A rally in international coal prices.

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar(Rsmn) FY07 FY08 FY09E FY10E

Rev 22.6 30.4 34.6 34.0

YoY (%) 46.3 35.0 13.6 (1.7)

EBITDA 7.3 10.8 10.4 9.3 7.6

EBITDA (%) 32.6 35.5 30.2 27.2 22.0

Adj PAT 4.8 6.5 4.8 4.0 2.8

YoY % 791.4 36.2 (26.5) (16.4) (29.8)

Fully DEPS 18.4 23.1 17.0 14.2 10.0

RoE (%) 41.9 32.4 17.3 13.0 8.5

RoCE (%) 20.9 18.9 12.3 9.4 6.8

P/BV 1.8 1.1 0.9 0.9 0.8

P/E (x) 5.3 4.2 5.8 6.9 9.8

EV/EBITDA (x) 5.9 3.7 4.0 4.4 5.0

FY11E 34.7 1.9 Source: Company, Centrum Research

Shareholding Pattern (%)
Q408 Promoter Foreign Institutions Public & Others Total 28.1 31.4 16.9 23.6 100.0 Q109 28.1 28.5 17.8 25.7 100.0 Q209 28.1 30.5 17.7 23.7 100.0 Q309 28.0 28.5 18.4 25.1 100.0

Company Background
India Cements is a major player in south India with 19% market share in FY08. It commenced operation in 1949 with the commissioning of its first cement plant at Sankarnagar in Tamil Nadu, which has an installed capacity of 100,000tpa. With the acquisition of Coromandel Cement’s plant the company grew to become the largest cement player in the south in 1990 with 2.6mt capacity. Currently, it has a capacity of 9.1mt. It is adding another 3.7mt capacity through de-bottlenecking and brown-field expansions and also expects to set up a 1.5mt greenfield plant in Rajasthan to diversify its presence in the northern market.

Presence in southern India
Key events/timelines
1949 1969 1971 1990 1996 1997 1998 1998 1999 2007 100,000tpa plant at Sankar Nagar Sankarnagar capacity expanded to 0.9mt Addition of 0.6mt at Sankari Durg Acquisition of Coromondel Cement (1mtpa) Set up green-field cement plant at Dalavoi, Tamil Nadu (0.9mt) Acquired cement plant of Visaka Cement Industries (0.9mt) Acquired Yerraguntla cement plant (Andhra Pradesh) of Cement Corporation of India (0.4mt) Acquired Raasi Cements, Nalgonda Andhra Pradesh (1.8mt) Acquired Nalgonda Cement Plant (Andhra Pradesh) of Sri Vishnu Cement (1mt) later sold to Zuari industries (2001) Merged Visaka Cement Industries with itself

Source: Company Source: Company

Key management personnel
Name Mr N Srinivasan Mr N Ramachandran Source: Company Position Vice Chairman & Managing Director Executive Director

60

India Cement

Investment Rationale
Southern region to witness steep fall in cement prices fall due to fragmentation and huge capacity build up. Delay in India Cements’ expansion to impact volume growth. Benefit from fall in cost of imported coal partly offset by foray into shipping. IPL success would have a marginal significance for valuation.

Cement prices in south higher than all-India average
300 250 Rs/50 kg bag 200 150 100 50 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Cement Prices All india Vs Southern Zone

South

All India

Source: Company, Centrum Research

Summary Financials
Y/E March (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS CPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton Source: Company, Centrum Research FY07 22,552 46.3 7,345 181.5 32.6 1,026 1,498 101 4,922 131 4,790 791.4 21.2 6,937 (2,396) (2,224) 1,811 14,266 20,588 35,283 21,566 551 12,835 35,283 20.9 22.2 41.9 18.4 22.3 1.0 54.8 1.5 1.3 4.9 5.3 1.8 5.9 1.9 FY08 30,443 35.0 10,795 47.0 35.5 1,279 1,099 511 8,929 2,071 6,524 36.2 21.4 10,650 (10,173) 1,959 1,955 25,968 18,115 46,340 33,151 1,293 11,659 46,340 18.9 20.3 32.4 23.1 27.7 2.0 92.1 0.8 0.6 10.1 4.2 1.1 3.7 1.4 FY09E 34,577 13.6 10,443 (3.3) 30.2 1,914 1,004 466 7,992 2,737 4,798 (26.5) 13.9 7,636 (6,000) (1,646) (788) 29,489 18,428 50,174 37,237 1,293 11,406 50,174 12.3 12.5 17.3 17.0 23.7 3.0 104.3 0.7 0.5 10.7 5.8 0.9 4.0 1.3 66.0 FY10E 34,004 (1.7) 9,252 (11.4) 27.2 2,239 1,004 407 6,417 2,218 4,010 (16.4) 11.8 7,251 (4,000) (2,326) 925 32,366 18,428 53,051 38,998 1,293 12,522 53,051 9.4 10.0 13.0 14.2 22.1 4.0 114.5 0.6 0.5 9.5 6.9 0.9 4.4 1.3 57.8 FY11E 34,656 1.9 7,619 (17.7) 22.0 2,464 1,004 476 4,628 1,627 2,814 (29.8) 8.1 6,228 (2,000) (2,326) 1,902 34,044 18,428 54,729 38,535 1,293 14,664 54,729 6.8 7.1 8.5 10.0 18.7 4.0 120.5 0.6 0.4 7.9 9.8 0.8 5.0 1.2 55.3

Margin to decline on softening cement prices Adj PAT to decline close to 30% in FY11E

61

India Cement

Investment Argument
Key southern market to witness steep correction in prices
The southern region is India Cements’ main market accounting for 92% of sales in FY08 (Tamil Nadu – 33.8%, Andhra Pradesh - 23.4%, Kerala - 15.7% and Karnataka - 16.9%). The region is adding 44mt additional capacity during FY09-11. This would bring down utilization levels from 99% in FY08 to 90% in FY09 and further to 73% and 71% in FY10 and FY11 leading to a steep fall in prices due to high degree of fragmentation in the region. We have assumed cement prices in the southern region would fall by Rs25/bag in FY10E and by a further Rs15/bag in FY11E from the current level of Rs259/bag Exhibit 1: Utilization levels in southern region to decline
Southern zone (mt) Capacity at Beginning of year Operative Capacity Capacity Addition Add On Capacity Effective Capacity Production Consumption Growth assumption (%) Exports Transfer to other Zone Transfer from other Zone Net Transfer From other Zone Capacity Utilization (%) Source: CMA, Centrum Research FY06 49.0 47.5 2.4 2.0 49.5 45.4 39.4 24.9 1.1 6.0 1.1 (4.9) 91.7 FY07 51.4 49.9 2.5 1.8 51.6 50.2 44.8 13.8 0.3 6.2 1.2 (5.1) 97.2 FY08 53.9 52.4 8.7 2.6 54.9 54.2 49.2 9.7 0.1 6.2 1.2 (5.0) 98.6 FY09E 62.6 60.6 16.4 6.5 67.1 60.6 54.6 11.0 0.1 7.2 1.2 (6.0) 90.3 FY10E 79.0 77.0 22.0 12.9 89.9 66.0 58.9 8.0 0.1 8.2 1.2 (7.0) 73.4 FY11E 100.1 98.6 5.5 0.5 99.0 70.7 63.6 8.0 0.1 8.2 1.2 (7.0) 71.4

Exhibit 2: New capacities would disrupt demand-supply balance
Expansion that could disrupt demand supply Balance in South Capacity (mt) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Madras Cements Dalmia Cements Sagar Cements Ultratech Cements Kesoram Industries ACC-Wadi(N) Chettinad Dalmia Cements JK Cements Deccan Cements NCL Andhra Cements India cements Orient Paper Total Source: CMA, Centrum Research 2 2 2 4.9 1.65 3 2 3 3 1.2 1.5 1.5 1.2 0.6 29.6 Start Time Q4FY09 Q4FY09 Q3FY09 Q3FY09 Q1FY10 Q3FY10 Q3FY10 Q3FY10 Q3FY10 Q2FY10 Q3FY10 Q2FY10 Q2FY10 Q2FY10 Status Under Ramp Up Under Ramp Up Under Ramp Up Under Ramp Up Expected Start April 2009 Under commissioning Under commissioning Under commissioning Under commissioning Under commissioning Under commissioning Under commissioning Under commissioning Under commissioning

62

India Cement

Delays in expansion projects to impact volume growth India Cements’ ongoing expansion projects have seen significant delays resulting in flat despatches vs consumption growth of 11.6% in southern zone during 9MFY09. Going ahead, the company would find it very challenging to increase volumes on account of the huge capacity build-up. Exhibit 3: India Cements’ despatches vs industry growth
India Cements Vs Industry Growth (mt) Consumption -India Consumption -Southern Zone Cement's Sale by India Cements Source: Company, Centrum Research 9MFY09 128.5 40.2 6.8 9MFY08 118.1 36.0 6.8 Growth YoY (%) 8.8 11.6 0.9

Foray into shipping to offset fall in imported coal prices We believe the savings from the decline in international coal prices (India Cements depends on imported coal for 70% of its energy requirements) would be offset by the company’s foray into shipping as sea freight have fallen steeply. India Cements incurred a capex of Rs2.36bn in FY08 to acquire two second-hand ships of about 38,000dwt and 41,000dwt primarily to hedge against rising freight cost on coal. However, the landed cost of Indonesian coal (CIF Chennai) has come down significantly from a peak of US$140/tonne in Aug 2008 to US$85/tonne at present on account of steep fall in coal prices and sea freight. Hence, India Cements would not be able to take benefits of falling sea freight on account of its investments in ships. Marginal value from IPL Despite the success of Indian Premier League (IPL), the market would value India Cements primarily on its core earnings even though there could be a possible upside of Rs9 per share based on the valuation of recent stake sale in Rajasthan Royals. India Cement forayed into Indian Premier League by acquiring franchise rights for 10 years for Chennai team for US$91mn.

63

India Cement

Financial Analysis
Flat growth in sales, operating profit and PAT to decline
On account of increased competition and sharp correction in cement realizations in the southern region, we expect India Cements to post flat growth in sales over FY09-11E (1.7% decline in FY10 and 1.9% growth in FY11). Operating profit and adjusted PAT are expected to decline 15% and 24% over the same period. ROCE and ROE would show a contraction of 540bp and 890bp to 6.8% and 8.5% respectively over FY09-11E. Exhibit 4: Lackluster performance over FY09-11E
FY07 Cement Volume (MNMT) YoY (%) Cement Realization (Rs/MT) YoY (%) Net Sales (Rs mn) EBIDTA (Rs mn) EBIDTA/TON (Rs) Source: Centrum Research 8.4 12.7 2,667 30.3 22,552 46.0 7,345 871 FY08 9.2 9.4 3,282 23.0 30,443 35.0 10,795 1,170 FY09 9.4 2.2 3,530 7.6 34,577 13.6 10,443 1,107 FY10E 10.5 11.3 3,171 (10.2) 34,004 (1.7) 9,252 881 FY11E 11.5 9.5 2,952 (6.9) 34,656 1.9 7,619 663

64

India Cement

Valuation Analysis
Expensive valuations At CMP, the stock trades at a P/E of 6.9x FY10E and 9.8x FY11E, 4.4x and 5x on EV/EBIDTA, and 0.85x and 0.8x on P/BV. Its assets are available at US$57.8 and US$55 .3 per tonne of its FY10E and FY11E capacity. The stock trades at a significant premium to Shree Cement, a comparable peer with similar scale, superior earning matrix and presence in relatively consolidated northern market. Shree Cement trades at P/E of 7.1x FY10E and 7.1x FY11E (3 x and 2.8x on P/CEPS), 2.7x and 1.9x EV/EBIDTA, and 1.6x and 1.4 x P/BV. Sell with price target of Rs82 We believe the premium is unjustified given the imminent scenario of over capacity building up in the southern zone. We recommend Sell with a price target of Rs82 valuing the cement assets at FY10E EV/tonne of US$50 and 0.65x P/BV and IPL franchise at Rs9 per share based on based on the valuation of recent stake sale in Rajasthan Royals. Exhibit 5: Sharp decline in P/BV - to hover at these levels
(x)
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

Apr-00

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Ind ia Cement

2X

2.5X

3.5X

1.5X

Source: Company, Centrum Research

Exhibit 6: Asset value declining – further downside likely
USD/Ton
250 200 150 100 50 0
Apr-02 Apr-04 Apr-00 Apr-05 Apr-01 Apr-03 Apr-06 Apr-07 Apr-08
20 0x

India Cement

50 x

10 0x

15 0x

Source: Company, Centrum Research

65

Apr-08

Apr-01

India Cement

Risks
Upside risks
India cements participating in M&A as an acquisition target. Super-earning and /or value unlocking from divestment of IPL franchise. Cement prices holding to higher level for a period more than envisaged by us.

Downside risks
Rally in International Coal price. Capacity buildup and fragmentation of south Indian cement industry ahead of our estimates.

66

India Cement

Financials
Exhibit 7: Income Statement
Y/E Mar (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBT from operations Other non op. income PBT bef. extra-ord. items Extra-ord. income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin 4,790 4,790 791.4 21.2 6,377 6,524 36.2 21.4 4,638 4,872 (25.3) 14.1 4,163 3,974 (18.4) 11.7 2,971 2,784 (29.9) 8.0 FY07 22,552 46.3 5,488 24.3 3,588 15.9 2,735 12.1 7,345 32.6 871 1,026 6,318 1,498 4,820 101 4,922 4,922 131 2.7 4,790 FY08 30,443 35.0 6,906 22.7 4,600 15.1 3,436 11.3 10,795 35.5 1,170 1,279 9,516 1,099 8,418 511 8,929 (481) 8,448 2,071 24.5 6,377 FY09E 34,663 13.9 8,601 24.8 4,995 14.4 4,692 13.5 10,485 30.2 1,108 1,914 8,571 1,004 7,568 466 8,034 (645) 7,389 2,751 37.2 4,638 FY10E 34,004 (1.9) 8,344 24.5 5,544 16.3 4,630 13.6 9,186 27.0 875 2,239 6,947 1,004 5,943 419 6,362 6,362 2,200 34.6 4,163 FY11E 34,656 1.9 9,138 26.4 6,072 17.5 5,010 14.5 7,565 21.8 658 2,464 5,101 1,004 4,097 486 4,583 4,583 1,612 35.2 2,971 CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 1,252 (584) (2,893) (2,224) 1,811 5,833 (1,917) (1,958) 1,959 1,955 37 313 (1,004) (992) (1,646) (788) (1,004) (1,323) (2,326) 925 (1,004) (1,323) (2,326) 1,902 Extraordinary Inc (Exp) Cash From Op Inc EO CF from investing Capex Investment Cash from investment (507) 6,431 (481) 10,169 (779) 6,857 7,251 6,228

Exhibit 9: Cash flow
Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC chg. Working capital adj. Gross cash from op. Direct taxes paid Cash from operations FY07 4,920 1,026 1,493 7,439 (375) 7,064 (127) 6,937 FY08 8,928 1,279 1,048 11,255 357 11,613 (963) 10,650 FY09E 7,992 1,914 1,004 10,909 (536) 10,374 (2,737) 7,636 FY10E 6,417 2,239 1,004 9,660 (191) 9,469 (2,218) 7,251 FY11E 4,628 2,464 1,004 8,096 (240) 7,855 (1,627) 6,228

(1,392) (1,004) (2,396)

(9,182) (991) (10,173)

(6,000) (6,000)

(4,000) (4,000)

(2,000) (2,000)

Source: Company, Centrum Research

Exhibit 10: Key Ratios
Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) FY07 32.6 28.0 21.8 21.2 46.3 181.5 791.4 20.9 22.2 41.9 0.9 12.1 42.1 70.2 40.2 18.4 22.3 1.0 54.8 1.5 1.3 4.9 5.3 1.8 5.9 1.9 1.1 FY08 35.5 31.3 29.3 21.4 35.0 47.0 36.2 18.9 20.3 32.4 0.9 5.1 37.3 74.3 42.0 23.1 27.7 2.0 92.1 0.8 0.6 10.1 4.2 1.1 3.7 1.4 0.9 FY09E 30.2 24.7 23.1 13.9 13.6 (3.3) (26.5) 12.3 12.5 17.3 0.8 6.3 38.5 74.8 42.6 17.0 23.7 3.0 104.3 0.7 0.5 10.7 5.8 0.9 4.0 1.3 0.8 66.0 FY10E 27.2 20.6 18.9 11.8 (1.7) (11.4) (16.4) 9.4 10.0 13.0 0.8 4.5 38.5 76.6 42.6 14.2 22.1 4.0 114.5 0.6 0.5 9.5 6.9 0.9 4.4 1.3 0.8 57.8 FY11E 22.0 14.9 13.4 8.1 1.9 (17.7) (29.8) 6.8 7.1 8.5 0.7 7.0 38.5 74.2 42.6 10.0 18.7 4.0 120.5 0.6 0.4 7.9 9.8 0.8 5.0 1.2 0.8 55.3

Source: Company, Centrum Research

Exhibit 8: Balance Sheet
Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets 20,588 430 35,283 30,741 10,602 20,139 1,428 21,566 551 2,485 2,602 2,302 9,786 17,175 4,340 12,835 331 35,283 18,115 2,257 46,340 39,844 12,442 27,402 5,749 33,151 1,293 3,506 3,111 4,256 10,621 21,494 9,835 11,659 238 46,340 18,428 2,257 50,174 46,844 14,356 32,488 4,749 37,237 1,293 4,034 3,650 3,468 10,621 21,773 10,366 11,406 238 50,174 18,428 2,257 53,051 52,844 16,595 36,249 2,749 38,998 1,293 3,967 3,589 4,393 10,621 22,570 10,048 12,522 238 53,051 18,428 2,257 54,729 55,844 19,058 36,786 1,749 38,535 1,293 4,043 3,658 6,295 10,621 24,617 9,953 14,664 238 54,729 FY07 2,604 11,662 14,266 FY08 2,819 23,150 25,968 FY09E 2,826 26,663 29,489 FY10E 2,826 29,540 32,366 FY11E 2,826 31,218 34,044

Source: Company, Centrum Research

Source: Company, Centrum Research

67

India Cement

INDIA Cement

Initiation

xx Month Year

Shree Cement
Initiation 19 March 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDmn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009 SHCM IN SRCM.BO 34.8 34.8 21.0/407.8 1,165/320 113,07 10

Buy Target Price: Rs823 CMP: Rs603* Upside: 36%
*as on 17 March 2009

Best bet
Strong foothold in relatively consolidated market: Shree Cement is a key player in the relatively consolidated northern zone with 11% market share (FY08), which will likely benefit the company from price stability in an oversupply scenario. Significant cost savings on energy front: We expect the company to register significant savings in energy costs with easing pet coke prices. Shree Cement is totally dependant on pet coke, where prices nearly halved from a peak of Rs8,000/tonne in August 2008. Foray into merchant power sale and judicious investments in captive power plants to sustain high earnings: The company forayed into merchant power in Q2FY09 and expects to add 85MW captive power, primarily meant for merchant power sale, given the likely overcapacity scenario in cement. We view this as judicious allocation of capital, which would allow it to sustain its cash earnings over FY09-11. Strong balance sheet to aid organic and inorganic growth: Strong balance sheet with net debt-equity ratio of 0.3x in FY10E and robust cash flow from operations of Rs6.7bn give the company enough leeway for further expansion, either through new capacity additions and acquisitions. Buy with target price of Rs823: On our target price, the stock presents an upside of 36% from current level, valuing the stock at US$55/tonne and 2.2x FY10E P/BV. The stock currently trades at 7.1x and 7.1x a P/E (P/CEPS of 2.9x and 2.8x), 2.7x and 1.9x EV/EBIDTA, 1.63x and 1.37x P/BV, and US$40 and US$28 EV/ tonne for FY10E and FY11E, respectively. Valuations look attractive on an understated ROCE of 14.4% and 14.2% and ROE of 24.6% and 22.4% for FY10E and FY11E, respectively. Key risks: Upside: Favorable government intervention like reducing duties and improved demand. Downside: Higher-than-expected decline in cement prices and higher pet coke prices.

Shareholding Pattern
Public & Others, 5.7 Foreign, 15.2

Institutions, 10.0

Non Promoter Corp. Hold., 5.4

Promoters, 63.8

As on 31 December 2008

One Year Indexed Stock Performance
140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

SHREE CEMENT

Price Performance (%)
1M Shree C. 12.7 6M 7.3 1Yr (41.1)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Rajan Kumar Rajan.kumar@centrum.co.in 91 22 4215 9640

Y/E Mar(Rsmn) FY07 FY08 FY09E FY10E

Rev 14.1 21.1 26.1 24.1

YoY (%) 102.3 50.1 23.9 (7.9)

EBITDA 5.9 8.6 8.8 8.1 8.4

EBITDA (%) 42.1 40.9 33.5 33.9 32.2

Adj PAT 1.6 2.9 5.0 3.0 3.0

YoY % 899.6 81.3 72.7 (40.2) (0.3)

Fully DEPS 45.6 82.6 142.7 85.4 85.2

RoE (%) 42.3 51.1 58.2 25.6 21.1

RoCE (%) 15.2 18.9 25.5 14.8 13.4

P/BV 4.2 3.1 2.0 1.6 1.4

P/E (x) 13.2 7.3 4.2 7.1 7.1

EV/EBITDA (x) 4.4 3.1 2.4 2.7 1.9

FY11E 26.0 8.0 Source: Company, Centrum Research

Shareholding Pattern (%)
Q408 Promoter Foreign Institutions Public & Others Total 63.7 7.7 7.2 21.5 100.0 Q109 63.7 6.9 7.7 21.7 100.0 Q209 63.7 4.9 9.6 21.8 100.0 Q309 63.8 4.2 10.0 22.1 100.0

Company Background
Promoted by Kolkata-based Bangur family, Shree Cement commenced operations in 1986, with a capacity of 0.6mtpa at Beawar, Rajasthan. This was subsequently enhanced to 2.6mtpa by Dec 2001. The company’s focus on aggressive marketing and initiatives on cost-cutting made it a key player in the northern market and amongst the most cost-efficient players in industry. It was among the first cement manufacturer to install coal-based CPP and switch to pet coke, a by product of petroleum refineries, as the main fuel for its kiln, which led to significant reduction in its energy cost. Shree Cement has demonstrated an aggressive track record of executing projects ahead of schedule and managed to tap opportunities created by the commodity cycle through timely capacity enhancements. It increased its capacity by over 3x during FY05-08 mainly through internal accruals. The company is currently expanding its clinker capacity by 1mt, setting up an 85MW CPP and 3mt split-grinding unit.

Presence across northern India

Key events/timelines
1986 2001 FY05-08 March - June 2009 March 2010 March 2010
Source: Company

Started operations with 0.6mt cement unit at Beawar Capacity enhanced to 2.6mt Expanded capacity from 2.6mt to 9.1mt through addition of clinker lines 3 to 6 and 3mt Kush Kera grinding unit Commissioning of 1mt clinker unit line VII Addition of additional 85MW power plant -35 MW waste heat recovery plant and 50MW coal /pet coke based plant Addition of 3mn grinding capacity at Suratgarh and Roorkee

Source: Centrum Research

Key management personnel Name Mr BG Bangur Mr HM Bangur Mr MK Singhi
Source: Company

Position Executive Chairman Managing Director Executive Director

69

Shree Cement

Investment Rationale
Strong foothold in relatively consolidated northern market Significant easing of cost pressure as pet coke prices decline Capacity enhancements, investment in CPP to help sustain high earnings

Energy costs have eased
Rs/Ton 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E 316 459 426 556 489 506 506 709 Rs/Ton 800 700 600 500 400 300 200 100 0

Shree cements energy cost

Average pet coke price

Source: Company, Centrum Research

Summary Financials
Y/E Mar (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS CPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton Source: Company, Centrum Research FY07 14,055 102.3 5,922 171.6 42.1 4,331 104 212 1,700 124 1,588 899.6 11.3 4,395 (6,425) 5,162 3,345 4,546 9,314 13,822 8,427 500 4,895 13,822 15.2 17.3 42.3 45.6 169.9 6.0 144.6 1.8 1.2 57.1 13.2 4.2 4.4 1.9 FY08 21,091 50.1 8,624 45.6 40.9 4,788 497 733 4,072 1,079 2,879 81.3 13.6 7,030 (9,002) 3,517 1,157 6,728 13,307 19,851 7,779 5,910 6,161 19,850 18.9 31.5 51.1 82.6 220.1 8.0 193.1 2.0 0.4 17.3 7.3 3.1 3.1 1.4 FY09E 26,139 23.9 8,755 1.5 33.5 2,074 761 877 6,797 1,514 4,971 72.7 19.0 5,401 (3,620) (373) 246 10,361 13,307 23,483 9,326 5,910 8,248 23,483 25.5 47.5 58.2 142.7 202.3 12.0 297.4 1.3 0.2 11.5 4.2 2.0 2.4 0.9 44.8 FY10E 24,069 (7.9) 8,149 (6.9) 33.9 4,111 944 976 4,069 1,095 2,975 (40.2) 12.4 6,714 (7,900) (457) (1,643) 12,847 13,307 25,969 13,114 5,910 6,945 25,969 14.8 20.8 25.6 85.4 203.5 12.0 368.8 1.0 0.3 8.6 7.1 1.6 2.7 1.0 37.0 FY11E 25,986 8.0 8,361 2.6 32.2 4,505 944 1,145 4,057 1,091 2,966 (0.3) 11.4 7,226 (500) (288) 6,439 15,324 13,307 28,446 9,110 5,910 13,427 28,446 13.4 19.8 21.1 85.2 214.5 12.0 439.7 0.9 (0.2) 8.9 7.1 1.4 1.9 0.7 24.6

Earnings from merchant power sales to help sustain operating profit

RoE and RoCE understated on account of aggressive depreciation

70

Shree Cement

Investment Argument
Strong foothold in northern zone
Shree Cement is a key player in northern market with 11% share (FY08 sales). The company derives its sales from Rajasthan, Haryana, UP and Delhi and commands Number 1 position in the Rajasthan, Haryana and Delhi markets. With current capacity of 9.1mt, the company is expected to command a 12% market share in the northern market by FY09 end. The high level of consolidation in the northern zone would ensure better price stability in an oversupply scenario. At the same time, some of the Shree Cement’s market, particularly Punjab, would benefit from the re-imposition of CVD on imported cement which led to stoppage of import from Pakistan. Exhibit 1: Shree Cement is a major player in northern region
State Punjab Rajasthan Haryana Delhi Uttar Pradesh Northern zone Source: Company, Centrum Research Contribution to total sales (%) 8.63 36.12 26.27 9.99 12.48 100.00 Market share (%) 8.33 22.16 23.91 17.47 4.85 11.00

Significant cost savings on energy front
We expect the company to register significant savings in energy costs on account of steep fall in pet coke prices. We estimate power and fuel cost per ton to decline by Rs205/tonne in FY09E and Rs506/tonne in FY10E. Shree Cement is totally dependant on pet coke, a by-product from petroleum refineries, whose prices have declined from a peak of Rs8,000/tonne in Aug 2008 to Rs4,000/tonne at present. Shree Cement was among the first cement manufacturers to substitute coal with pet coke, which made it amongst the lowest cost producers of cement. However, the company faced significant cost pressure during FY09 when pet coke prices surged to Rs8,000/tonne as price of international coal and crude rose. However, with both crude and coal prices falling, the price of pet coke has plunged to Rs4,000/tonne. Exhibit 2: Energy costs have eased
Rs/Ton 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E 316 459 426 556 489 506 506 709 Rs/Ton 800 700 600 500 400 300 200 100 0

Shree cements energy cost
Source: Company, Centrum Research

Average pet coke price

71

Shree Cement

Foray in merchant power sale, investments CPP to sustain high earnings
With ensuing overcapacity in cement sector, the company added another revenue stream in Q2FY09 through sale of surplus power from its captive power plants on merchant basis. The company is setting up another 85MW CPP which would be utilized primarily for merchant sale of power. Given the power deficit in the country, we view company’s foray into merchant power as an excellent tactical move and judicious allocation of capital as incremental earnings from power would sustain its cash earning over FY09-11E, despite overcapacity scenario in cement industry. Shree Cement has been a prime beneficiary of the cement up-cycle of 2005-09 when it tripled its cement capacity to 9.1mt through strong project execution capability. It is adding another 1mt clinker capacity by Q1FY10 and augmenting grinding capacity by 3mt by setting up grinding units at Suratgarh in Rajasthan and Roorkee in Uttaranchal. Exhibit 3: Shree Cement’s expansion plans
Project VII clinker line Grinding Units Up-gradation of line I & II Power Plant Waste Heat Recovery system TOTAL Source: Company 50 mw 35 mw 10,900 Capacity 1 million 3 million Capex (Rs mn) 2,500 3,200 1,200 4,000 Timeline Q4/FY09/Q1FY10 FY10/Early FY11 FY10/Early FY11 FY10 End

The projects would require a capex of Rs10.9bn over FY09-11E and we estimate the company would be able to finance these projects through internal accruals and end up with a net cash of Rs2.5bn by FY11.

Strong cash flow and balance sheet to allow organic, inorganic growth
A strong balance sheet with net debt (cash)/equity of 0.3 and -0.16 in FY10E and FY11E, and a net free cash flow of Rs 5.5 bn in over FY10-11 gives Shree Cement enough leeway for further expansions either through new capacity additions and acquisitions.

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Shree Cement

Financial Analysis
Revenue from merchant power sales to keep earnings intact
We expect revenue and EBIDTA to decline 8% and 6%, respectively, in FY10E as the cement space faces an overcapacity scenario. However, in FY11E, we expect 8% growth in revenue and 3% EBIDTA growth on account of significant contribution from the sale of merchant power (12% contribution to revenue and 24% to operating profit). Exhibit 4: Merchant power sales to prop earnings
FY06 Cement Volume Cement-Revenue % contribution Realization Power Revenue % contribution Total revenue EBIDT Cement % contribution EBIDT-Power % contribution Operating Profit Per /ton-Cement Per /ton-Including profit from power sale Source: Company, Centrum Research 2,180 681 681 5,922 1,225 1,225 8,624 1,305 1,305 6,948 14,055 21,091 3.2 6,948 100.0 2,169 FY07 4.8 14,055 100.0 2,908 FY08 6.6 21,091 100.0 3,192 FY09E 8.2 25,541 97.7 3,098 597 2.3 26,139 8,435 96.3 320 3.7 8,755 1,023 1,062 FY10E 8.2 23,273 96.7 2,833 796 3.3 24,069 7,751 95.1 397 4.9 8,149 944 992 FY11E 8.7 22,737 87.5 2,614 3,249 12.5 25,986 6,367 76.2 1994 23.8 8,361 732 961

Cash earnings to remain robust over FY09-11E
Due to reporting of depreciation on WDV and accelerated depreciation on new asset, reported profit might look depressed (48% YoY decline in FY10 and 1% increase in FY11). Therefore, we believe cash earnings would be right criteria for looking at the company’s profitability. We expect Shree Cement’s cash earnings to register a modest growth of 3.3% and 5.1% in FY10 and FY11, respectively to Rs209/share and Rs220/share after the 8% de-growth in FY09.

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Shree Cement

Valuation
Compelling valuations
At CMP, the stock trades at compelling EV/tonne of US$35.9 and US$22.5 for FY10E and FY11E capacity of 10.1mt, despite superior earnings of EBIDTA/tonne of Rs950 and Rs730/tonne in FY10E and FY11E, respectively. On P/BV, it trades at 1.56x FY10E and 1.33x FY11E. On P/E multiple, the stock trades at 7.1x FY10E and 7.1x FY11E, which makes it look fairly valued. But given the company’s policy of following WDV method of depreciation and accelerated depreciation on newly commissioned assets, reported earning would look depressed. Therefore, we find P/CEPS and EV/EBIDTA as a better earnings matrix for the company. The stock trades at P/CEPS of 2.9x FY10E and 2.8x FY11E and EV/EBIDTA of 2.7x and 1.9x, which are at steep discount to peers.

Buy with price target of Rs823
We initiate coverage with a Buy rating and target price of Rs823, valuing the stock at P/BV of 2.2x FY10E and EV /tonne of US$55 on FY10 E. Exhibit 5: Shree Cement’s valuation
Value of Cement assets @ US$55/ton Additional Power Asset of 85MW Total Add Investments Cash EV of Shree Cement Less - Debt Fair value of Equity Target Price (Rs) Source: Centrum Research 28,608 4,000 32,608 5,910 3,277 41,796 13,122 28,673 823

Exhibit 6: P/BV multiple
(x)
10 9 8 7 6 5 4 3 2 1 0

Apr-03

Apr-04

Apr-06

Apr-07

Apr-08
Apr-08

Apr-02

Oct-03

Oct-04

Oct-07

Apr-01

Apr-05

Source: Company, Centrum Research

Exhibit 7: Asset value too low compare to robust earning
USD/Ton
200 180 160 140 120 100 80 60 40 20 0
Oct-01 Oct-02 Oct-03 Oct-04 Oct-06 Apr-01 Apr-03 Apr-05 Apr-07 Apr-02 Apr-04 Apr-06 Oct-08 Oct-05 Oct-07

EV/Ton Band of Shree Cement

EV/Ton $

30x

80x

130x

180x

Source: Company, Centrum Research

74

Oct-08

Oct-01

Oct-02

Oct-05

Oct-06

Shree Cement

Key Risks
Upside risks
Better production and price discipline resulting in higher than expected cement prices. Favourable government intervention towards demand generation as well as tax benefits specific to the sector.

Downside risks
Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. Some supplies hitting the market ahead our assumed schedule. Rally in international coal/crude prices leading to increase in pet coke prices.

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Shree Cement

Financials
Exhibit 8: Income Statement
Y/E Mar (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBT from operations Other non op. income PBT bef. extra-ord. items Extra-ord. income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin Cash Profit Growth in Cash Profit (%) PAT margin 1,588 899.6 11.3 5,918 229.1 42.1 2,879 81.3 13.6 7,666 29.5 36.3 4,971 72.7 19.0 7,045 (8.1) 27.0 2,975 (40.2) 12.4 7,086 0.6 29.4 2,966 (0.3) 11.4 7,470 5.4 28.7 FY07 14,055 102.3 2,345 16.7 2,243 16.0 1,343 9.6 5,922 42.1 1,225 4,331 1,592 104 1,488 212 1,700 195 1,894 124 6.6 1,770 FY08 21,091 50.1 3,672 17.4 3,598 17.1 1,850 8.8 8,624 40.9 1,305 4,788 3,837 497 3,339 733 4,072 (389) 3,683 1,079 29.3 2,604 FY09E 26,139 23.9 5,849 22.4 4,407 16.9 2,524 9.7 8,755 33.5 1,062 2,074 6,681 761 5,920 877 6,797 (1,161) 5,636 1,514 26.9 4,122 FY10E 24,069 (7.9) 4,157 17.3 4,220 17.5 2,588 10.8 8,149 33.9 992 4,111 4,037 944 3,093 976 4,069 4,069 1,095 26.9 2,975 FY11E 25,986 8.0 4,401 16.9 4,468 17.2 2,740 10.5 8,361 32.2 732 4,505 3,856 944 2,912 1,145 4,057 4,057 1,091 26.9 2,966 CF from financing Procds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 5,586 13 (437) 5,162 3,345 3,993 (476) 3,517 1,157 (0) 116 (489) (373) 246 32 (489) (457) (1,643) 0 201 (489) (288) 6,439 Extraordinary (Inc) Cash From Op Ex OI CF from investing Capex Investment Cash from investment 212 4,608 (389) 6,641 (1,161) 4,240 6,714 7,226

Exhibit 10: Cash flow
Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC chg. Working capital adj. Gross cash from op. Direct taxes paid Cash from operations FY07 1,894 4,331 (316) 5,909 (380) 5,529 (1,133) 4,395 FY08 3,683 4,788 334 8,804 (539) 8,265 (1,235) 7,030 FY09E 5,636 2,074 1,045 8,755 (1,841) 6,915 (1,514) 5,401 FY10E 4,069 4,111 (32) 8,149 (340) 7,809 (1,095) 6,714 FY11E 4,057 4,505 (201) 8,361 (43) 8,318 (1,091) 7,226

(5,974) (452) (6,425)

(4,234) (4,768) (9,002)

(3,620) (3,620)

(7,900) (7,900)

(500) (500)

Source: Company, Centrum Research

Exhibit 11: Key Ratios
Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Cash Earning Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity FY07 42.1 11.3 12.1 11.3 102.3 171.6 899.6 229.1 15.2 17.3 42.3 1.0 (34.0) 8.5 83.0 40.5 45.6 169.9 144.6 1.8 1.2 57.1 13.2 4.2 4.4 1.9 1.5 FY08 40.9 18.2 19.3 13.6 50.1 45.6 81.3 29.5 18.9 31.5 51.1 1.1 (19.2) 12.0 61.8 30.6 82.6 220.1 193.1 2.0 0.4 17.3 7.3 3.1 3.1 1.4 1.0 FY09E 33.5 25.6 26.0 19.0 23.9 1.5 72.7 (8.1) 25.5 47.5 58.2 1.1 (10.4) 12.0 62.4 40.0 142.7 202.3 297.4 1.3 0.2 11.5 4.2 2.0 2.4 0.9 0.8 44.8 FY10E 33.9 16.8 16.9 12.4 (7.9) (6.9) (40.2) 0.6 14.8 20.8 25.6 0.9 (4.4) 12.0 61.4 45.0 85.4 203.5 368.8 1.0 0.3 8.6 7.1 1.6 2.7 1.0 0.9 40.2 FY11E 32.2 14.8 15.6 11.4 8.0 2.6 (0.3) 5.4 13.4 19.8 21.1 0.9 (4.4) 12.0 61.4 45.0 85.2 214.5 439.7 0.9 (0.2) 8.9 7.1 1.4 1.9 0.7 0.8 27.9

Source: Company, Centrum Research

Exhibit 9: Balance Sheet
Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Cap. Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & prov. Net current assets Misc. Expenditure Total Assets 9,314 (38) 13,822 16,081 11,092 4,990 3,438 8,427 500 1,561 263 3,533 2,384 7,741 2,846 4,895 13,822 13,307 (185) 19,851 21,873 14,273 7,600 180 7,779 5,910 1,766 494 4,674 4,026 10,960 4,799 6,161 19,851 13,307 (185) 23,483 24,673 16,347 8,326 1,000 9,326 5,910 2,865 859 4,920 4,026 12,671 4,423 8,248 23,483 13,307 (185) 25,969 33,073 20,459 12,614 500 13,114 5,910 2,967 791 3,277 4,026 11,062 4,117 6,945 25,969 13,307 (185) 28,446 33,573 24,963 8,610 500 9,110 5,910 3,204 854 9,716 4,026 17,800 4,374 13,427 28,446 FY07 348 4,197 4,546 FY08 348 6,380 6,728 FY09E 348 10,013 10,361 FY10E 348 12,499 12,847 FY11E 348 14,975 15,324

Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$)

Source: Company, Centrum Research

Source: Company, Centrum Research

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Shree Cement

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Shree Cement

Sanjeev Patni Research
Harendra Kumar Dhananjay Sinha Niraj Shah Mahantesh Sabarad Madanagopal R Abhishek Anand Anand Dama Ankit Kedia Himani Singh Nitin Padmanabhan Piyush Choudhary Pranshu Mittal Rajan Kumar Rupesh Sankhe Saikiran Pulavarthi Siddhartha Khemka Sriram Rathi Adhidev Chattopadhyay Janhavi Prabhu Jatin Damania Vijay Nara

Head - Institutional Equities

sanjeev.patni@centrum.co.in

91-22-4215 9699

Head - Research Economist Sr Analyst Sr Analyst Sr Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Associate Associate Associate Associate

Strategy Economy & Strategy Metals & Mining, Pipes Automobiles/Auto Ancillaries Power Media, Education Financial Services Media Hospitality, Healthcare Technology Telecom Sugar, Retail Cement Real Estate, Infrastructure Financial Services Logistics Pharmaceuticals Real Estate Sugar, Retail Metals & Mining, Pipes Automobiles/Auto Ancillaries

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Sales
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Centrum Securities LLC, USA
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Key to Centrum Investment Rankings
Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%

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Shree Cement

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