You are on page 1of 53

India Cement Sector

Feedback from Automobile Dealers Survey

Rising from the ashes

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

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

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

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

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

August 2010

Cement

Sector Report

04 August 2010

Contents

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

Page No.

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

1

Cement

Sector Report

04 August 2010

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

All-India cement demand growth

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

Cement capacity addition and incremental growth

(Mn tonnes) 400 300 200 100 0 FY06 FY07

Cement Capacities incremental gro wth (R)

FY08

FY09

FY10E

Cement capacity utilisation

(%) 105 95 85 75 65

B o tto m in FY02

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

FY11E

B o tto m in FY1 1

1

Cement

Sector Report

04 August 2010

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

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

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

130 120 110 100 90 80 70

May-10

May-10

Apr-10

Apr-10

Jul-10

Mar-10

Mar-10

Jun-10

Source: RCML Research, Company

Source: RCML Research, Company

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

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

ACC

(%)

Ultratech

Further downside capped; ripe time to

JK Lakshmi

Shree

Jun-10

Jul-10

2

Cement

Sector Report

04 August 2010

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

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

Source: RCML Research, CMA

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

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

Andhra Budgetary Allocation 255 211

196

211

131

FY08

FY09

FY10

FY11

3

5–12% in FY12 …FY12 to mark start of cyclical uptrend in cement: 3–4 years of strong demand For FY12. where the cement to GDP ratio is lower than 1.9 FY06 14. a comparison of India GDP growth and cement demand also suggests that demand improves significantly following the year of aberration.2–1. Our analysis of past state elections suggests higher cement dispatch growth during the election years.5 FY06 12.5–12% against our earlier estimate of 10%. With demand estimated at over 10% in FY12. c) a likely demand revival in AP (as per our Infrastructure team).6 FY08 16.Cement demand growth (%) 14 12 10 8 6 4 2 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Fig 9 .Dispatch growth v/s Election year in major states State Andhra Pradesh Tamil Nadu Rajasthan Gujarat West Bengal Source: RCML Research.8 Rajasthan 19% Source: RCML Research. In addition.3 FY07 9.3 FY05 4. we believe the cement sector will enter into a structural upcycle. RCML Research Cement Growth GDP Growth Source: CMA. Gujarat: 2012). CMA Last election 2009 2006 2008 2007 2006 Dispatch growth (%) FY08 12.8–1x for FY11E. We estimate a 2–3% uptick in cement prices for FY12. Higher demand coupled with an expected slowdown in capacity additions over the next 3–4 years will result in better utilisation levels. and d) elections in some states (Tamil Nadu: 2011. CMA Maharashtra 6% Gujurat 7% Fig 8 . we estimate a healthy revival in dispatch growth to 11.1 FY06 16. b) commencement of some major projects in end-FY11 (Delhi Metro Phase III).Cement dispatch growth post the low-growth year (%) 16 14 12 10 8 6 4 2 0 (2) FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: CMA.4 FY07 12.9 FY05 14. Fig 6 .Cement Sector Report 04 August 2010 We expect dispatch growth to recover to 11. RCML Research 4 .3x GDP – we peg this ratio at 0. This will be driven by a) the low base effect of FY11E.State-wise dispatch share in FY10 Others 37% Andhra Pradesh 18% Tamil Nadu 13% Fig 7 .2 FY09 12. thereby fortifying the pricing environment. Uttar Pradesh: 2012. West Bengal: 2011.

Cement Sector Report 04 August 2010 FY12 to see a bulk of the investment. This implies an EPC opportunity of ~Rs 12tn for construction companies.600 1.462 406 361 1.021 1.Percentage of total investment in each year of 11th plan Fig 10 .280 606 * At INR/USD of 45 Share (%) 32 17 16 11 3 1 5 9 0 6 100 % rise over 11th plan 32. This further corroborates our view that demand growth will be significantly higher for cement in FY12 as construction activity intensifies across segments. 65% of this investment is estimated to be in sectors like power.8 97. The private sector is likely to account for 39% of the total spend.586 2. of which a bulk of the investment is likely to be made in FY12 since it is the last year of the plan period (Fig 10.067 230 69 601 1.787 2.589 90 1.500 2. 11). Fig 12 . Plan Documents Source: RCML Research.8 NCE – Non conventional energy MRTS – Mass Rapid Transit System 5 .019 56 324 9.8) 12.595 1. WS) Water supply & Ports Electricity (incl.591 27.600 4. Roads and bridges Telecom FY12E 26% FY08 15% FY09 17% 325 74 Airports 29 Oil & Gas Pipelines Storage FY11E 22% FY10E 20% Source: RCML Research.271 1.542 457 Share (%) 32 14 10 12 2 2 5 17 0 6 100 12th plan est. roads.008 2. Based on the above. roads. especially roads The 11th Five Year Plan envisages a total investment of Rs 20. 8.700* 4. Plan Documents Increased funding for constructionintense segments in 12th plan will fuel cement consumption Further. in the next 4–5 years.800 1.8 (30.451 90 1.402 1.1 17.12th plan spend estimated at Rs 27tn. inland waterways) Airports Water supply & sanitation Telecommunications Storage Oil & gas pipeline Total Spend in US$ bn* Source: Plan Documents. and railways. we believe infrastructure demand for cement would increase to 25–30% of total demand. Fig 11 .0) 25.400 1.1 124. up from the traditional assumption of 20%.200 1. up 33% on growth in power.1 65. being the last plan year Demand driver 1: Increased thrust on infrastructure.124 1.257 2. RCML Research 10th plan actual 3. our infrastructure team expects India to record an investment of Rs 27tn in infrastructure development over the 12th plan period (FY13-FY17).900 804 250 1. railways (Rs bn) Electricity (incl NCE) Roads & bridges Railways (incl MRTS) Irrigation (incl water shed) Ports (incl.Investment in FY12 in the 11th plan (Rs bn) 1.5 (25.5trillion in India’s infrastructure sector. Irrigation (incl.061 201 Share (%) 38 14 11 12 3 1 7 11 1 4 100 11th plan revised 6.117 3.273 20.0 32.000 700 595 800 468 600 266 400 108 200 0 Railways (incl.

25 Storage.548 131. reflecting the growth opportunity in the segment.3 100.6 50. BRO State PWDs Connectivity Union capitals.210 Length (%) 2.0 Fig 13 .Construction intensity (%) 100 80 60 40 20 0 Source: RCML Research. state capitals. Planning Commission 10th plan actual 505 674 92 1.650. 42 Gas. Crisil Roads & Bridges. foreign highways. Of the overall Rs 27tn spend. district centres. 60 Ports. At present.271 Share (%) 39.419 459 2.031 4.0 11th plan revised 909 1. highways.712 2. 50 Airports.6 37.763 2. MoRD – Ministry of Rural Development Fig 16 .1 4 40 14.787 Share (%) 32. 25 33 Electricity. strategic locations State capitals.320. Fig 14 .899 467. Crisil Fig 15 . State PWDs.600 6 . just 6% of the road network carries 80% of India’s total traffic.5 100.0 12th plan (RCML est.8 100 20 100 State PWDs MoRD Traffic (%) 40 Development agency NHAI. 95 Irrigation. 42 Water Supply.1 100. with cement accounting for 20% of the raw material requirement.0 7.7 53.) 857 1. markets. rural roads Production centres.6tn on roads and highways over the 12th plan.9 16.12th plan: Investment trend in road sector Particulars (Rs bn) Centre State Private Total investments Source: RCML Research. railway stations Source: RCML Research. national highways.000 3. other states Main roads. important towns. major ports.2 44.Cement Sector Report 04 August 2010 Roads – a key cement consumer – to garner significant investments Construction intensity is the highest for roads and bridges (at 95%). 31 Source: RCML Research.1 79.Cement as % of raw material (%) 50 40 30 20 10 0 Railways Roads Thermal power plant Urban Infrastructure 15 40 20 12 Hydel power plant 12 Irrigation 8 Airports Share (%) 18.National highways – ~2% of Indian road network but handle ~40% of traffic Road network National Highways State highways Major district roads Rural and other roads Total Length (km) 70. 65 Railways. our infrastructure team estimates expenditure of Rs 4.

Further.Commercial real estate: Expected deliveries (mn sqft) 14 12 10 8 6 4 2 0 Gurgaon Bangalore Chennai Mumbai Noida Kolkatta 2010 2011 2012 Fig 21 . Fig 19 .Private sector likely to account for 44% of road spend* State 37% Private 44% State highways.New launches in major cities City Bangalore Chennai Greater Noida Noida Gurgaon Kolkatta Mumbai Total Launches Source: Propequity.3 13. RCML Research Area (mn sq ft) 2.8 3. which will increase construction activity in the coming years.5 1.0 2.Cement Sector Report 04 August 2010 Fig 17 .6tn in 12th plan Other state spend on roads 3% Rural roads 14% Fig 18 .Residential real estate: Expected deliveries (mn sqft) 70 60 50 40 30 20 10 0 Gurgaon Noida 2010 2011 2012 Bangalore Chennai Mumbai Source: Propequity.Composition of likely spend of Rs 4. RCML Research Source: Propequity. RCML Research Kolkatta 7 .5 23.5 47. major district roads 24% Source: RCML Research National highways 59% Source: RCML Research Centre 19% * Primarily on NHAI projects 47mn sq ft of new real estate launches in key cities in Q1FY11 alone Demand driver 2: New launches and high deliveries in real estate The first quarter of FY11 has seen a flurry of new property launches in key cities (Fig 19).7 0. We believe this would lend a significant fillip to demand for cement as real estate remains the largest cement consumer in India. the expected project deliveries in residential and commercial real estate are pegged at 515mn sq ft and 61mn sq ft respectively over the next three years in major cities.3 *Covers 4–8 projects in each city Launched date Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Completion dates* Jun ’11 to Dec ’13 July ’10 to Dec ’12 July ’12 to Sep ’14 Dec ’12 to Sep ’14 Dec ’12 to May ’13 Dec ’12 to June ’13 Dec ’11 to Dec ’13 Fig 20 .

the shortage of housing stock for rural India stood at 47mn in 2007 and is expected to reach 70mn in 2012. Fig 22 .0 0.200 1. leading to supply pressure during the year.000 800 600 400 200 0 1991 2001 2008 2012 26 220 856 Total population Urbanization rate (R) 1. We expect the continued increase in per capita income and rising urbanisation to boost demand for housing (and hence cement consumption) in the next 3–4 years.155 Urban population (%) 30 1.Growth in pucca and semi-pucca houses mn units 200 150 100 50 0 Rural Housing Stock(in mn) Source: Planning Commission 2007 153 170 2012 CaGR Growth (%) 5.0 3. however.400 1.5mn by 2012.Rate of urbanisation in India (mn) 1. Thereafter.Urban India will drive a near four-fold increase in average national income Rising urbanisation in India will boost demand for housing and hence cement Source: India Urbanization Econometric Model-Mckinsey Global Institute analysis Fig 23 . The total deficit of housing stock in the country will hit 96.Cement Sector Report 04 August 2010 Demand driver 3: Rural housing and increased urbanisation According to the Planning Commission.1 70 85 56 2.6 64 4. incremental capacity addition is likely to be lower (10–15mt in FY12) compared to demand growth. 8 .0 4.0 2.040 28 340 365 1.208 30 31 30 29 28 27 290 26 25 24 23 Fig 24 .0 1.0 2.0 Pucca House Semi-Pucca House Source: National commission on population Only 10–15mt of incremental capacity expected in FY12 versus 40mt in FY11 Supply-side pressures persist but likely to ebb We do expect 35–40mn tonnes (mt) of cement capacity to be added in FY11.

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

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

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

0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E June'10 Fig 39 .Cement Sector Report 04 August 2010 Cement majors to maintain healthy return ratios and low gearing Balance sheet health remains strong Most cement players. in order to ride the cement upcycle.4 1. a majority of these companies are debt-free as they have utilised cash earned during the last bull cycle (FY04-FY09) to clean up their balance sheets by repaying debt. Fig 40 . we believe investors could increase their weight on cement from a 3–4 year perspective.6 0. particularly large caps.4 0. As the extreme pessimism towards the sector begins to dissipate in Q2FY11.2 1. Company 12 . Company Source: RCML Research.Better return ratios compared to last cycle (%) 45 40 35 30 25 20 15 10 5 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Relatively better return ratios then last down cycle FY09 FY10E FY11E Source: Company. RCML Research FY12E Source: Company. RCML Research Valuations attractive Institutional holdings in companies like ACC and Ambuja are near historical lows Under-ownership provides room for upside Our analysis of institutional stock holdings in cement majors suggests under-ownership in companies like ACC and Ambuja Cement (holdings near historical lows).8 1.Comfortable gearing position (x) 1.Institutional holding in Ambuja 60 55 50 45 40 35 30 Dec'01 June'02 Dec'02 June'03 Dec'03 June'04 Dec'04 June'05 Dec'05 June'06 Dec'06 June'07 Dec'07 June'08 Dec'08 June'09 Dec'09 June'01 (%) (%) Source: RCML Research. Further.2 0.0 0. We believe these positives will help cement majors weather the storm of declining demand and weak cement prices in the near term. are likely to report better return ratios in FY11 despite lower near-term profitability. Fig 41 .6 1.Institutional holding in ACC 60 55 50 45 40 35 30 25 Dec'01 June'02 Dec'02 June'03 Dec'03 June'04 Dec'04 June'05 Dec'05 June'06 Dec'06 June'07 Dec'07 June'08 Dec'08 June'09 Dec'09 June'01 June'10 Fig 42 .8 0.

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

2 0.769 21.4 30.407 FY12E 13.8 30.4 FY11E 62.944 6.5 ROE (%) FY11E 18.032 10.278 7.851 42.7 42.1 FY11E 24.4 28.272 70.2 5.170 100 70 Reco Buy Buy Buy Buy Buy Sell Buy MCap (Rs mn) 155.8 Sales (Rs mn) FY10E 80.0 0.828 26.8 8.4 3.6 23.1 0.9 7.1 36.0) (76.6 29.4 4.516 Div Yield (%) 2.415 62.8 119.1 10.340 42.4 224.5 5.0 22.661 174.0 4.7 14.0 17.675 23.0 PAT Margin (%) FY11E 14.6 28.5 14.428 4.8) 4.1 74.102 86.388 20.6 256.1 11.3 FY10E 20.9 2.7 18.904 16.562 Fig 46 .8) FY12E 19.0 72.2 60.0 1.097 FY11E 19.6 153.0 0.997 20.798 858 103 53 Target (Rs) 1.8) (0.719 26.622 14.2 6.643 27.225 28.3 13.9 FY12E 19.1 30.7 1.5 10.4 24.9 1.3 (38.1 17.3 23.853 302.1 ROCE (%) FY11E 17.8 1.7 1.3 P/BV (x) FY11E 2.560 16.6 7.502 1.820 8.0 2.6 0.8 37.4 10.3 2.Key ratios & valuations Company ACC* Ambuja* Birla Corp.2 16. Shree Cem UltraTech India Cem Orient Paper CMP (Rs) 825 117 356 1.6 2.1 11.Cement Sector Report 04 August 2010 Sector valuation matrix Fig 45 .737 1.3 6.4 1.3 FY12E 15.4 11. Debt/Equity Ratio (x) FY10E 0.7 FY11E 0.291 47.2 0.4 4.2 8.5 0.2 22.5 FY10E 29.3 49.9 19.4 7.9 22.0 FY12E 25.Key ratios & valuations Company ACC* Ambuja* Birla Corp.4 75.9 2.6 17.8 0.716 3.5 36.400 1.4 18.7 15.5 29.982 63.3 0.0 0.435 2.0 17.473 3.5 3.4 28.3 4.1 0.576 7.669 7.1) 4.4 20.1 7.4 20. Shree Cements UltraTech Cem India Cem Orient Paper EBITDA Margin (%) FY10E 30.7 8.8 11.3) (34.4 0.225 EV (Rs mn) 150.9 9.2 27.999 15.732 55.3 141.7 FY11E 7.7 0.9 16.0 11.9 34.0 14.0 0.7 4.213 7.9 4.2) 10.578 34.428 Sales Growth (%) FY10E 9.3 19.613 FY11E 11.8 20.1 FY10E 2.691 13.4 1.984 FY12E 91.3 *Y/E Dec EV/EBITDA (x) FY12E 11.514 3.5 18.2 20.562 PAT (Rs mn) FY10E 16.4 5.103 5.4 EBITDA (Rs mn) FY10E 24.4 1.1 39.4 6.6 2.2 (14.683 179.9 23.9 21.7 12.5 0.4 13.321 36. Shree Cements UltraTech Cem India Cem Orient Paper Source: RCML Research P/E (x) FY10E 9.606 19.8 19.884 FY12E 23.8) FY11E (27.7 72.6) (12.1 14.1 39.7 96.2 FY12E 2.7 7.6 FY10E 6.570 36.5 13.345 25.060 145 500 2.9 FY12E 14.4 16.697 792 1.4 FY11E (1.Valuation snapshot Company ACC* Ambuja* Birla Corp.3 12.1 18.4 19.8 5.4 32.0 8.8 8.921 20.3 8.4 12.3 FY12E 74.500 55.2 25.9 3.2 8.2 9.0 FY10E 108 162 57 131 102 83 56 EV/Tonne (US$) FY11E 104 148 57 116 110 80 54 FY12E 97 134 48 97 105 79 49 FY11E 14 .5 6.4 28.2 3.148 13.9 26.7 24.3 17.1 (2.8 1.056 15.8 1.184 5.4 3.5 0.2 2.642 235.4 23.7 198.0 1.4 25.1 19.067 12.425 73.4 4.939 4.8 1.2 2.198 FY11E 79.721 39.2 2.839 FDEPS (Rs) FY10E 85.5 14.092 29.1 9.5 FDEPS Growth (%) FY10E 39.0 FY12E 6.0 6.751 6.614 36.5 18.0 8.1 FY12E 18.108 1.8 4.6 19.5 8.5 29.7 17.3 13.814 149.0 9.6 FY12E 0.5 0.4 0.7 19.8 61.571 172.7 20.7 17.1 9.873 16.8) (11.8 7.8 4.7 0.4 2.5 Fig 47 .4 FY10E 27.827 5.0 21.7 20.8 13.3 16.8) (37.9 16.4 18.0 9.797 18.1 0.2 0.9 21.6 4.4 0.9 8.7 9.6 19.8 9.2 Adj.

000 200.Ambuja Cement: EV/EBITDA band (Rs mn) 355.000 255. RCML Research *Standalone Source: Bloomberg.400 1.UltraTech: EV/EBITDA band* (Rs mn) 500.200 1.000 105.000 100.000 0 Dec-06 Oct-05 Feb-08 Apr-02 Aug-04 Apr-09 11x 8x Feb-09 Jul-09 Jan-10 Jun-03 Jul-10 14x 10x Jul-10 Jul-10 Price 3x 5x 7x 9x 11x Source: Bloomberg.000 0 Nov-06 May-07 Nov-07 Apr-05 Oct-05 Apr-06 Price 2x 4x Source: Bloomberg.800 1.000 250.000 300.200 1. RCML Research Fig 50 .000 155.400 1.000 400.UltraTech: P/E band* (Rs) 1. RCML Research Fig 52 .Cement Sector Report 04 August 2010 Valuation bands Fig 48 .800 1.000 100.000 800 600 400 200 0 Oct-05 Dec-06 Aug-04 Feb-08 Apr-02 Jun-03 Apr-09 Jul-10 Price 4x 8x 12x 14x 18x Fig 49 .600 1.ACC: EV/EBITDA band (Rs mn) 300. RCML Research Source: Bloomberg. RCML Research *Standalone 15 . RCML Research Source: Bloomberg.000 50.000 800 600 400 200 0 Nov-07 Nov-08 Nov-09 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 May-08 May-09 Jun-10 Price 4x 7x 10x 14X 17x Fig 53 .000 55.600 1.000 Nov-04 Apr-06 Sep-07 6x Dec-08 Jun-08 Jan-02 Jun-03 Price 3x 5x 8x Source: Bloomberg.Ambuja Cement: P/E band (Rs) 250 200 150 100 50 0 Nov-04 Apr-06 Sep-07 Feb-09 Jan-02 Jun-03 Jul-10 Price 4x 8x 12x 16x 20x Fig 51 .000 150.000 200.ACC: P/E band (Rs) 1.000 305.000 205.000 5.

000 500 0 Jul-10 Nov-06 Nov-07 Oct-05 Apr-05 Apr-06 Dec-08 Dec-09 May-07 Jun-08 Jun-09 Price 2x 4x 7x 10x 13x Fig 55 . RCML Research Source: Bloomberg.500 2.Shree Cement: EV/EBITDA band (Rs mn) 140.India Cements: P/E band (Rs) 500 400 300 200 100 0 Nov-06 Jul-09 Jul-10 Apr-05 Apr-06 Oct-05 May-07 Dec-07 Dec-08 Jan-10 Jun-08 Price 6x 9x 12x 15x 18x Fig 57 .000 60.000 40.500 1. mainly on account of lower execution of infrastructure and real estate projects.000 20.Cement Sector Report 04 August 2010 Fig 54 .500 3. 16 .000 120.000 0 Nov-06 Apr-05 Oct-05 Apr-06 May-07 Dec-07 Dec-08 Jun-08 Jul-09 Price 8x 4x 10x Source: Bloomberg.000 120.000 100. RCML Research Key risks to our view Protracted weakness in cement demand: A key risk to our call would be a protracted delay in demand revival.000 1.000 0 Nov-06 Nov-07 Oct-05 Apr-05 Apr-06 Dec-08 May-07 Dec-09 6x 12x Jan-10 Jun-08 Jun-09 Jul-10 Jul-10 Price 1x 2x 4x 6x 8x Source: Bloomberg.000 80.000 20.000 60.000 2.000 3. Higher-than-anticipated price decline: Although unlikely.000 100. a sharp worsening of the pricing scenario could prolong the downcycle. leading to subdued stock performance.000 40. RCML Research Fig 56 .Shree Cement: P/E band (Rs) 4.India Cements: EV/EBITDA band (Rs mn) 140. RCML Research Source: Bloomberg.000 80.

5% FY09 214.8% 2.2% 164.7 8.5% 121.7% FY10E 260.7 15.3 9.0 10.0 3.7 10.6 88% 124.0 22.5% 196.0% 214.9 9.0 3.6 12.8% 83% 200.9 11.2 6.4 7.6 181.6 127.1% 301.0 3.7 5.4% 149.6 3.0 13.1% 3.8% 78% 214.2 2.1 17.8% 85% 181.0% 4.9% FY08 191.3% FY12E 309.6 141.4% 3.4% 17 .2% 94% 141.1 2.3% 3.6 12.2% 243.6 20.9 3.8 11. supply and utilisation over FY05-FY12 (mn MT) All India Actual Capacities Cap growth (%) Effective capacities for production Effective Production % growth Effective Cap Utilization (%) Cement Despatches % growth Domestic Consumption % growth Cement Exports Clinker Exports Surplus/(Deficit) as a % of effective cap Source: CMA.9 15.4 202.8 241.6% 1.0% 177.4% 88% 167.3 12.1 7.0% 234.3 8.5 155.6% FY11E 299.5% 97% 154.6% 6.3% 80% 240.6 2.1 3.4 12.2 21.8 8.0 10.0 214.2% 159.2% 276.0 8.0 9.7 168.1 6.6 13.9% 151.9 11.5 5.6 4. RCML Research FY05 144.3% FY07 159.9 FY06 151.2% 191.9% 5.1 135.Demand.1 12.4 7.7 20.6 144.2% 211.Cement Sector Report 04 August 2010 Annexure I: Cement industry demand-supply dynamics Fig 58 .

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

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

8 FY11E 5.7 Capacity additions .6 9.2 45.0 FY12E 0.South (mt) FY10E 23.West (mt) West All India Cap Addition % of total capacity FY10E 1.0 9.0 Capacity additions .5 39.4 39.4 39.1 9.7 9.Cement Sector Report 04 August 2010 Annexure IV: Region-wise capacity additions Fig 71 .1 FY11E 4.6 FY11E 8.8 FY12E 2.6 14.4 FY12E 0.4 43.1 45.6 21.4 27.7 FY11E 5.0 South All India Cap Addition % of total capacity North South East West Central South India most vulnerable as max capacity additions are in this region Source: RCML Research 20 .North (mt) North All India Cap Addition % of total capacity FY10E 12.8 FY11E 15.6 13.4 0.6 FY12E 4.9 39.5 28.East (mt) FY10E 4.5 45.8 45.Capacity additions Capacity additions .5 7.4 0.4 28.6 11.5 2.0 9.9 45.6 39.5 50.5 10.4 39.7 East All India Cap Addition % of total capacity Capacity additions .2 FY12E 2.Central (mt) Central All India Cap Addition % of total capacity FY10E 3.6 Capacity additions .

Freight rates and Diesel prices Tkm: Tonne km 1.Major cement exports from India (%) 50 40 30 20 10 0 Nepal Kuwait Qatar Iraq Sri Lanka Sudan Others FY09 FY10 Source: CMA.34 1.1) (0.1 0.2 0.26 1.0 (0.70 1. RCML Research Fig 74 .90 0.020 4.70 0.18 1. growth YoY (R) (YoY%) 27 18 9 0 (9) (18) H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 FY06 FY07 FY08 FY09 FY10 Fig 73 .50 Oct-05 Oct-07 Oct-09 Feb-05 Feb-07 Feb-09 Jun-04 Jun-06 Jun-08 Jun-10 E Avg freight rates Avg diesel prices Source: Bloomberg.30 1.Coal linkages in cement (x) 0.020 20 Oct-08 May-03 Dec-09 Apr-02 Jul-05 Aug-06 Sep-07 Jun-04 10. RCML Research Fig 76 .Cement Sector Report 04 August 2010 Annexure V: Key industry parameters Fig 72 .1 0.38 1.1) (0.30 1.2 0. diesel prices (Rs/tkm) 21 . RCML Research Source: CMA. RCML Research Source: CRISIL.14 Apr-02 Sep-03 Feb-05 Jul-06 Dec-07 May-09 Cement/clinker ratio Source: CMA. RCML Research Source: CMA.50 1. RCML Research Avg freight rates.Rail-Road cement transport mix (%) 70 60 50 40 30 20 10 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Rail Road Sea Fig 77 .020 Fig 75 .22 1.020 12.Baltic dry index 14.2) FY05 Coal receipt/ cement produced Coal receipt growth YoY (R) Cement prod.020 6.Industry blending ratio (x) 1.020 2.020 8.10 0.

Cement Sector Report 04 August 2010 Companies 22 .

502 22. Further. We believe these negatives are largely priced in and current valuations are appealing. a presence across India and strong brand equity.174 / 669 158.9 Industry 1 .4) 3.5 1 1 0.9 12. Also. The stock has corrected 30% from its peak over the last four months.5 15.7 3-mth (10.1 6.170. while PAT fell 44% to Rs 2.7 FY12E 11.2 FY12E 24. Volume revival and cost-cutting to drive growth: We estimate subdued dispatch growth of 7% for UTCEM in FY11 with a 6–7% drop in realisations.0) FY12E 172.514 171. Restructuring to command premium: Following the Samruddhi merger.3 FY11E 149. With the merger of Samruddhi Cement. What’s New? Target Rating Estimates CMP Rs 858 TARGET Rs 1.3bn (our estimate: Rs 2.2 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY10E 153.2 6-mth (11. considering UTCEM’s scope for growth. we arrive at a revised March ’11 target price of Rs 1.4 11. Valuing UTCEM at 8x FY12E EV/EBITDA.7 26.170 RATING BUY RISK HIGH BSE 532538 Company data NSE ULTRACEMCO BLOOMBERG UTCEM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 235.0 26. Upgrade to Buy: With most of the negatives priced in and a revival expected in FY12.8 21. with ~50mt of cement capacity. Q2 to be muted: UTCEM’s Q1FY11 results were largely in line with our estimates as net revenues declined by 8. with UTCEM emerging as the largest player by market cap.6 7.9 UltraTech Cement 1 4. which will enhance operational efficiencies in the medium term. Further. The company clocked an EBITDA/t of Rs 792 during the quarter.083 274 45. We believe the company will now command a valuation premium to peers as the markets adapt to its transition into India’s single largest cement play.2 8.4 20.4 FY11E 14. robust 20% market share and strong brand equity.0 23 . UTCEM has become the largest cement player in the country (50mt capacity) with a pan-India presence.3% YoY to Rs 17.0) 60. its cost-cutting initiatives are steadily gaining momentum – the company currently has access to ~504MW of captive power (80% self-sufficient).1 19.5 21. but believe this slowdown has already been discounted by the market.4 17.6 1.571 (2.170 (36% upside).2) 4. UTCEM has envisaged investments to the tune of Rs 13. the company is poised for strong growth in FY12 as an industry-wide volume upcycle (11%+ growth) sets in. UTCEM is set to become the largest cement company in India.1 13.4 18.8 23.092/5.8 13.9 17.697 (37. This apart.115 1-mth (1.3 14.0 17.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 8.6 14.1 11. We believe the stock merits a premium valuation of 8x FY12E EV/EBITDA.8) 16. the stock would trade at a P/E of 15.9bn. Q1 results in line.4 96. the stock is a likely candidate for inclusion in the market indices (Sensex/Nifty) – a potential stock trigger.2 0.562 15.8 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY10E 30. we note that the 30% drop in stock price over the last four months largely factors in the results.170 (rolling forward from our December ’11 target of Rs 955) – an upside of 36%.8 22.7 9.2 16. leading to our target of Rs 1. While we believe its Q2FY11 numbers would be muted on account of the decline in cement prices.975 Stock performance Returns (%) Ultratech Sensex CMP 858 18.UltraTech Cement Ltd Company Update 04 August 2010 UltraTech Cement Ltd Big is beautiful We upgrade UltraTech Cement (UTCEM) from Sell to Buy with a revised March ’11 target of Rs 1.8 74. At our revised target.5bn in other cost areas like logistics infrastructure and material evacuation in FY11.2bn).7) 9. we upgrade the stock from Sell to Buy.9 (37.6x on FY12E.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY10 8.1 1 2. owing to sector-wide concerns of lower demand growth and soft cement prices.814 141.2 28.0 FY11E 23.

066 4.4) 41.3) (44.178 36.6 % Chg YoY (8.246 819 2.0) (60.000 400.841 4. RCML Research 24 .0 (43.3) (1404bps) (44.9 (2.7 18.Quarterly performance* (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.1) 2.0 13.5 (48.2 8. RCML Research * Standalone Source: Bloomberg.898 13.026 259 285 993 3. RCML Research Q1FY11 17.4 % Chg QoQ (6.UltraTech: EV/EBITDA band* (Rs mn) 500.UltraTech: P/E band* (Rs) 1.UltraTech: Premium/discount over Sensex (%) 80 60 40 20 0 (20) (40) (60) (80) Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Jul-10 Jan-10 Jun-08 Jun-09 Fig 82 .007 721 2.400 1.286 21.528 12.000 0 Nov-06 Nov-07 Jul-09 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Jun-08 Jan-10 Jul-10 Jul-10 Price 2x 4x 6x 8x 10x Source: Bloomberg. RCML Research Source: Bloomberg.7 Fig 79 .200 1.000 100.7 33.000 300.094 15.800 1.360 7.8 86.3) (8.057 483 279 1. RCML Research * Standalone Fig 81 .1) 0.600 1.244 2.7 158bps 1.326 22.3) 12.3) Q4FY10 19.7 *Standalone Q1FY10 19.UltraTech Cement Ltd Company Update 04 August 2010 Fig 78 .000 800 600 400 200 0 Nov-06 Nov-07 Jul-09 Jul-10 Apr-05 Apr-06 Oct-05 Jan-10 May-07 Dec-08 Jun-08 Price 4x 7x 10x 14X 17x Fig 80 .168 342 330 936 6.000 200.016 3.1 18.4 (15.5) 8.6 1.067 4.UltraTech v/s Sensex 110 100 90 80 70 Mar-10 Apr-10 May-10 Jun-10 UltraTech Cem Sensex Source: Bloomberg.

5 10.0 8.348 2.0 47.7 13. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY10 1.UltraTech Cement Ltd Company Update 04 August 2010 Consolidated financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY10 153.166 106.329 4.8 0.500) 187 2.500 (16.740 122.7 0.954 15.584 9.052 32.104 8.692 131.4 18.9 2.9 11.006 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 10.2 24.574 15.550 51 (11.8 6.8) 34.954 335.0 0.375 5.991 2.338) (9.0) 6.500 (200) 401 2.553 89.4 FY12E 10.4 8.4 42.364 13.697 16.562 15.8 0.086 (34.975 16.590 3.435 31.8 274.9 26.000) (500) (279) 858 3.1 FY12E 3.514 171.0 FY11E 149.904 31.6 2.949 12.566 4.168 113.1 0.718 4.514 26.392 91.2 1.000 (18.201 1.842 2.167 20.8 22.9 8.489 9.823 (2.8 13.0 17.006 6.3 154.406 (729) (1.0 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) 25 .0 74.940 9.9 (37.079) (5.7 7.0 96.2 0.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.5 126.8 1.854 43.502 20.473 2.4 13 63 51 1.6 2.939 (26.1) 8.853 26.6 14.9 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY10 30.148 FY12E 31.8 0.3 8 39 39 1.747 FY11E 25.692 144.237) 176.741) (6.8 0.952 6.1 11.0 6.355 39.278 177.2 28.9 17.395 (14.622 (18.000) (28.023 4.0 FY12E 172.689 43.7 26.103 41.5 2.227 38.187) 14.6 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.103 20.3 1.0) 274.8 FY11E 10.1 137.502 22.8 21.566 4.484 199.9 20.814 141.473 2.8 23.991 3.167 467.223) (728) 909 702 1.5 0.2 13 58 51 1.409 11.000) 3.082 171.3 6.744 125.147 5.554 10.4 274.1 11.923 188.638 (28.946 163.4 30.7 21.624 25.039) 29.624 29.3 18.624 25.975 390.656 10.619 24.391 4.747 4.571 (2.740 104.6 13.737 20.697 (37.196 30.973 2.414 (20.0 23.4 11.8 2.5 FY11E 2.2 16.582 221.487) 163.4 1.7 14.679) (893) 14.4 17.0 60.988) 199.0 7.523 (17.582 197.5 16.009 25.407 33.4 0.7) 2.907 176.199 19.

057 22.3 7.6 4.1) 4.6 11.427 (42) 6 Company profile UltraTech Cement.836 23.2 1.2 3.5 5. a subsidiary of Grasim.5 16.5 2.7 2.408 10.528 30.094 2.037 1.518 1.6 15.4 Recommendation history Date Event Reco price Tgt price 347 381 536 565 775 824 729 987 1.9 Jun-10 54.026 21.000 800 600 400 Dec-08 Apr-09 Feb-09 Jun-09 200 Hold Sell Buy 16-Dec-08 Sector Report 20-Jan-09 6-Apr-09 21-Jul-09 Results Review Quarterly Preview Results Review 21-Apr-09 Results Review 16-Oct-09 Results Review 16-Nov-09 Company Update 6-Jan-10 18-Jan-10 Quarterly Preview Results Review Oct-09 Dec-09 Aug-09 Feb-10 Apr-10 30-Mar-10 Sector Update 29-Apr-10 Results Review 4-Aug-10 Company Update Aug-10 Jun-10 26 . The company enjoys a market share of ~20% with leadership in the western region and a strong presence in the southern and eastern regions.8 11.168 36.8 5.178 58 35 Q2FY10 15.027 955 1.898 (8.2 Mar-10 54.1 2.4 (21.UltraTech Cement Ltd Company Update 04 August 2010 Quarterly trend * Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) *Standalone Q1FY10 19. Dubai with a 3mt capacity.5 23.7 21.3) (6.170 Reco Buy Buy Hold Hold Hold Hold Hold Hold Hold Sell Sell Buy Stock performance 1.286 (26) 17 Q1FY11 17.140 1.7 4.960 (18) (22) Q4FY10 19.8 11.509 53 (40) Q3FY10 16.200 1.019 858 409 412 412 532 827 906 821 938 995 1. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 54. is set to become the largest cement manufacturer in India with an installed capacity of 49mt.3) 4.0 7. The company also has acquired stake in ETA Star.6 11.700 30.2 22.

5 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) CY08 73.2 17.8 25.9 27 . We peg net cash and equivalents at Rs 15bn in CY11.9 27.020 / 681 416.9) 3. Near-term pain largely factored in: With demand slowing down and cement prices declining across the country.1 CY10E 13. At our target price. we anticipate a resurgence in ACC’s dispatch growth and hence profitability.2 6. As with other cement stocks.8 P/E comparison (x) 1 5 1 0 5 0 CY09 CY1 0E CY1 E 1 9. We upgrade our recommendation on ACC from Sell to Buy. We build in volumes of 23mt for CY10. Capacity addition to enhance volume growth in CY11: ACC’s failure to augment capacity in line with peers has suppressed its volume growth over the past year.7 19.537 (6. the stock would trade at a P/E of 14.7 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE CY08 23. We have a conservative EPS estimate of Rs 62.691 (27. rising to 26mt in CY11.060 (rolling forward from our December ’11 target of Rs 844) – a 28% upside from current levels.060 RATING BUY RISK HIGH BSE 500140 Company data NSE ACC BLOOMBERG ACC IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 155.999 19.3 17.3 15. ACC could face pressure on profitability in Q3CY10.102 14.1 14. we believe volumes will see a sharp increase in CY11.1 1 1 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP CY08 13.2 15. ACC’s balance sheet will remain sturdy.4 1.5 39.5 19.6 20.3 11.2) 9.8 CY10E 24. Balance sheet to remain strong: With capex nearing completion in CY10.7 74.3 18. we find valuations cheap with little downside.6 1 .5 17.764 Stock performance Returns (%) ACC Sensex CMP 825 18.8 CY11E 11. While the company will continue to witness near-term stress on profits. we believe these risks are already embedded in valuations and will ease in CY11. Potential merger with Ambuja Cement could provide synergies: While the management has not confirmed any merger announcement in the near term.7 3-mth (8. cement demand improving in CY11 and healthy net cash and equivalents.5 14.4 22.2 CY09 30.7 Industry 0.8 2.067 39. Further.425 (1. For CY11.1) CY09 80.086 4.7 13.7 12. would drive a re-rating of the stock.7 9.4 19.374 187.6 17. Bottom in sight.3 1 2. ACC has underperformed the broader market during the last four months.4 19.683/3. losing 23% from its peak. We see significant synergies for ACC from such a merger. in turn. This.8 16.2) 62.0 29.3) 4. we believe this move is on the cards.115 1-mth (3.1) 11.0 7.2) CY11E 91.3 (27.9 A CC 1 3. linked to lower dispatch growth and depressed prices in South India. Now.2x on CY11E.7 CY09 9. What’s New? Target Rating Estimates CMP Rs 825 TARGET Rs 1.6 CY11E 25.060 (28% upside). which largely factors in the price and volume decline.3 8. translating to a value of Rs 79/sh. with fresh capacity of 6mt coming up by end-CY10 (taking installed capacity to 30mt) together with the expected revival in demand.6 20.9 26.4 (6.2 6-mth (6.8 53.272 9.1) 61. At the current EV/t of US$ 102.3 85.ACC Ltd Company Update 04 August 2010 ACC Ltd On the road to recovery We upgrade ACC from Sell to Buy with a revised March ’11 price target of Rs 1. with the overhang of capacity expansion delays dissolving (new capacity of 6mt being added by end-CY10).2 23.4 16.4 27. we expect the company to register healthy volume growth of 12.4 6. upgrade to Buy: We value the stock at 8x EV/EBITDA on CY11E and arrive at a revised March ’11 target price of Rs 1.5% along with an increase in realisations.3 for CY10 (pared by 4% from earlier numbers).7 18.3 CY10E 79.

9) 9.530 597 141 962 5.025 1.4 19.2) Q1CY10 21.691 62.9 New 79.6 21.717 4.7) 4. RCML Research 28 .018 14.000 250.2) (794bps) (26.800 1.425 24.187 64.9) (0.4 11.1) (4.8) (11.000 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Jul-10 Price 3x 5x 7x 9x 11x Source: Bloomberg. RCML Research Source: Bloomberg.9) 10.400 1.8 (12.4) (224bps) (11.9 % Chg YoY (2.ACC: P/E band (Rs) 1.192 24.0 (24.7 (27.8) 22.974 2.796 6.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research CY10E Old 82.207 14.000 800 600 400 200 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Price 4x 8x 12x 14x 18x Fig 86 .3 25.466 7.1) Fig 85 .107 4.000 150.4) (11.9) (16.677 5.000 100.ACC: EV/EBITDA band (Rs mn) 300.600 1.000 50.4 12.1) (1.4) Fig 84 .01) (4.9) (26.ACC Ltd Company Update 04 August 2010 Fig 83 .435 3.9) (31.8 (11.222 609 127 935 5.000 200.051 29.ACC: Premium/discount over Sensex (%) 80 60 40 20 0 (20) (40) (60) Oct-05 Mar-02 May-03 Dec-06 Feb-08 Apr-09 Jul-04 Jul-10 Fig 88 .3 % Chg (3.768 1.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company. RCML Research Q2CY10 20.813 13.4) (0.200 1.ACC v/s Sensex 110 105 100 95 90 85 80 Mar-10 Apr-10 May-10 Jun-10 ACC Sensex Source: Bloomberg. RCML Research Fig 87 .866 35.347 570 159 784 6.589 27.4 2.6 % Chg QoQ (3. RCML Research Source: Bloomberg.1 Q2CY09 20.

7 6.610 1.1 0.7 22.4 19.294 2.738 4.9 25.511 14.3 1.1 8.8) 3.3 2.037 7.756 102.3 23.751 17.238 31.5 29 .806 2.4 4.9 6.1) 187.0 CY11E 91.639 1.639 4.2 CY10E 10.782 2.594 113.061 (10.1) 19.9 0.350 4.352 16.797 43.176 8.ACC Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E Dec (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) CY08 73.376 51.0 16. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) CY08 9.1 13.9 7.7 CY11E 7.790 3.553 5.9 26.7 16.781 33.3 187.8 24.6 1.126 (12.2) 23.8 25.0 729 2.878 58.844 (13.488 1.8 62.6 20.7 13.3 1.583 21.493) 97.697 16.251 7.5 3.8 61.935 15.8 24.614 5.7 27.0 n.0 1.4 17.379 3.6 25.756 68.a 0.067 39.999 19.1 2.3 15.4) (159) 2.9 57.280 758 17.679 11.253 12.756 (4.842 CY09 19.4 (6.2 15.000) (30) (3.1 1.086 4.339) 2.770 (15.7 23.7 23.4 CY09 7.833 413.756 112.395 9.031 14.918 6.562 (3.2 0.471 5.205 14.067 16.8 85.791 58.1 10 50 93 1.654 14.6 18.8 25.352 320.500 23.3 (27.1 0.960 18.0 Balance sheet Y/E Dec (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.1 0.878 47.3 17.877 30.017 (1.511 262.8 74.790 5.102 7.102 14.0 29.328 16.475 6.626 124 (2.6 20.959 156 (54) 19.250 (3.160 97.536 Financial ratios Y/E Dec Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover CY09 10.7 18.4 0.210 (3.2 1.972 17.4 23.453 (27.124) (12.000) (30) (4.974 4.000) (13.865 75.1 3.842 3.5 0.861 (13.282 60.3 0.1 0.645 103.5 19.7 17.0 CY10E 79.746 9.1 10 293 488 1.653 5.7 2.357 34.1 11.425 (1.253 10.9 CY08 CY09 CY10E CY11E Economic Value Added (EVA) analysis Y/E Dec WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) CY08 10.000) (10.3 74.654 14.920 66.958) 442 (22.399 49.411 22.217 5.5 39.371 13.878 64.029 (3.253 12.762) 2.6) 3.5 CY11E 10.3 0.272 9.462 CY10E 15.1 15 50 87 1.780) 4.4 27.8 13.277 81.3 CY10E 3.359) (2.993) (4.031 355.536 2.391) 7.7 19.864 327 11.1 9.5 14.537 (6.7) 733 2.3 Cash flow statement Y/E Dec (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq CY08 14.263 41.4 19.878 73.833 15.421 21.889) 12.1 0.385 19.5 489 11.317 5.669 1.1 23.294 CY11E 18.462 2.408 9.763) 113.8 0.2 69.829 5.7 187.868) 14 1.2) 187.613) 103.654 14.3 843 2.825 72.952 20608 6608 32.669) 19 849 (4.6 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.332 (9.820 1.162) 3.388 (21.0 CY09 80.955 9.933 6.944 6.345 20.691 11.154) (7.2 49.1) 20.691 (27.2 30.358) 81.825 77.8 21.919 5.2 12 52 101 1.140 5.362 4.5 11.

ACC Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q2CY09 20.4 Recommendation history Date Event Reco price Tgt price 514 530 653 854 794 746 857 919 825 430 416 595 796 801 704 819 844 1.7) (35.2 13.2 13.4 2.0 114.2 84.866 85.2 Q3CY09 19.4) 6.0 20.694 9.2 1.9 112.356 53.000 900 800 700 600 500 400 16-Dec-08 Company Update 5-Feb-09 24-Jul-09 6-Oct-09 4-Feb-10 4-Aug-10 Results Review Results Review Quarterly Preview Results Review Company Update 22-Apr-09 Results Review Sell Buy Dec-08 Oct-09 Dec-09 Apr-09 Aug-09 Apr-10 29-Oct-09 Results Review 22-Apr-10 Results Review Aug-10 Feb-09 Feb-10 Jun-09 Jun-10 30 .4 3.3 168. Capacities are spread across north (26%).3 26.018 2.222 29.2 Mar-10 46.8 Jun-10 46.813 14.5 23.4 C CY11E 67.6 Company profile Holcim owned ACC is the country’s largest cement player with a total capacity of 26mt.207 (2.8 Q2CY10 20.5 79. The company intends to scale up its capacity to 30mt by CY10E.4 CY09 70.8 163. It currently enjoys a market share of ~12% with a strong pan-India presence.3 157.5 106.0 20.8) Q1CY10 21.347 35.1 (5.051 0.6 89.1 19. central (20%).6 163. south (29%) and west (5%) India.4 29.3 9.2 11.3 98.060 Reco Sell Sell Sell Sell Sell Sell Sell Sell Buy Stock performance 1.6 4.9 4.215 1.2 20.2) (11.7 CY08 69. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 46.3 4.5 21.589 (26.9) (3.3 7.9) 5.530 27.7 (10.4) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity CY07 71.297 22.4 6.1 21.6 20.4) 4.4 CY10E 66.1 20.1 33.9 (2.4 117.1 19.6 19.0 152.3 25.8 18.2 20.679 33.1 44.9 113.797 (6.0 107. east (20%).5) Q4CY09 19.

However. ACEM is the only company in our cement universe poised for earnings growth in CY10 – we expect strong volume growth during the year.769 13.4 14. any such development will drive valuations for ACEM going forward.5 18.4 16.403 (12. What’s New? Target Rating Estimates CMP Rs 117 TARGET Rs 145 RATING BUY RISK HIGH BSE 500425 Company data NSE AMBUJACEM BLOOMBERG ACEM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 179.9 19.643/3.8 12. Timely expansion: ACEM is likely to report volume growth of 10% in CY10.1 13.4 10.4 CY10E 13.8 10.5 (12. and benefits from a superior geographic mix (no operations in the vulnerable southern region).6 19. ahead of its peers. as both clinker units in Himachal Pradesh and Chhattisgarh were commissioned in Q1CY10.7 31 . we believe Q3CY10 would be a trough quarter for the company in terms of EBITDA/t. Our revised target offers a 23% upside from current levels.2 17. with a recovery setting in thereafter.225 17.3 CY11E 11. Only company to report earnings growth in CY10: In order to factor in the impact of soft cement realisations.8 19.4 19.8 18.Ambuja Cement Ltd Company Update 04 August 2010 Ambuja Cement Ltd Ahead of peers We upgrade Ambuja Cement (ACEM) from Hold to Buy with a revised March ’11 target price of Rs 145 (23% upside). We upgrade ACEM from Hold to Buy. This along with cost reduction in terms of lower clinker purchases is likely to benefit the company and support earnings growth ahead of peers.2 6-mth 13.4 1 2.522 53.8 9.0 6. we have downgraded our earnings estimates for CY10 by 4% .4 18.2 8.6 9.0 11.1) 7.2 20.2 CY09 26.115 1-mth 4.8 P/E comparison (x) 20 1 5 1 0 5 0 CY09 CY1 0E CY1 E 1 1 4.2 23.1) CY09 70.7 3-mth (2.7 CY10E 73.9 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE CY08 28. Q3CY10 a trough quarter: ACEM is likely to see a subdued Q3CY10 as volumes weaken and prices decline across the country.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP CY08 15.4 1 1 0.3 22.6) 4.0 CY09 14. considering timely capacity expansion and lower costs on clinker purchase.8 19. we believe ACEM will continue to weather the storm and remain ahead of peers in terms of earnings growth.6 1.4 17.203 9.0 15. lower costs on account of clinker expansion.827 17.0 23.8 18.1 18.184 6.4 22.2 19.8 18. this still translates to 10% earnings growth for ACEM in CY10. Upgrade to Buy: We have valued the stock at an EV/EBITDA multiple of 8x on CY11E to arrive at a March ’11 target price of Rs 145 (rolling forward from our December ’10 target of Rs 125).428 10.8 21.900.1 CY11E 29.4 23.0 6.8 19.2 CY11E 86.6 CY10E 28.1 9. Merger with ACC a potential stock trigger: While the merger with ACC has not been confirmed by the management.9 A mbuja Cement 1 3.0 3.893 1.5 8.8 8.675 4.7 Industry 1 .520 Stock performance Returns (%) Ambuja Sensex CMP 117 18. Although near-term weak fundamentals in the northern and western regions are likely to affect the company in Q3CY10.9 10.9 126/82 1.9 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) CY08 62. However.1 20.

897 1.1 % Chg YoY 10.7 (3.227 546 108 767 5.000 55.42 13.675 28.000 155.Ambuja v/s Sensex 106 103 100 97 94 91 88 85 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Ambuja Cem Sensex 0 (10) (20) (30) (40) (50) (60) Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Source: Bloomberg.000 305.476 4.9 % Chg QoQ 2.7) 15.032 667 81 1.000 255. RCML Research Fig 93 .019 9.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research CY10E Old 74.000 105.2 New 73.000 5.8 % Chg (1.Ambuja: Premium/discount over Sensex 20 10 (%) Fig 94 .9 5.675 6.618 1.8 5.000 Jan-02 Jun-03 Nov-04 Apr-06 Sep-07 Feb-09 Jul-10 Source: Bloomberg.5) (183bps) (11.1 18.5) Fig 90 .7 14.421 31.Ambuja: EV/EBITDA band (Rs mn) 405.001 5.428 8.9) 30.07 14.3 (24.5 42.6 25.5) 55.788 29. RCML Research Price 3x 5x 8x 11x 14x Jun-03 Nov-04 Apr-06 Sep-07 Feb-09 Jul-10 Source: Bloomberg.732 1.4 (4.5) (65bps) (4.474 13.000 205.797 692 52 704 4.6 Q2CY09 18. RCML Research 32 .5 (11.5 349bps 20.677 4.Ambuja: P/E band (Rs) 250 200 150 100 50 0 Jan-02 Price 4x 8x 12x 16x 20x Fig 92 .902 13.5 Q1CY10 19.1) 22.444 6.8 20.705 3.912 29.2) (4.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.3 2.5 2.486 3.0 2.000 355. RCML Research Source: Bloomberg.246 26.476 14.Ambuja Cement Ltd Company Update 04 August 2010 Fig 89 .2) Fig 91 . RCML Research Q2CY10 20.6 (3.

808) 43 74.448 7.699 5.045 53.4 CY11E 86.633 7.403 (12.0 11 62 59 2.8 0.769 13.213 20.225) 6.351 85.5 18.4 14.353 37.518 2.260 7.900) (203) 288 8.524.361) (3.337 3.8 18.9 70.7 33 .622 (3.213 1.8 3.852) (2.428 10.0) 320 2.576 5.218 31.0 17.676 34.2 2.832 2.1 19.4 CY10E 73.024 3.0 6.909) 28 103.581 CY11E 20.627 (9.3 22.230 10.4 0.876 30.805 73.9 0.125 8.4 17.6 28.725 7.241 35.9 1.533 11.802 1.448 6.033 5.853) (20) (17.978 8.083 11.1 21.203 9.8 18.000) (1.9 1.034 9.524.7 166 2.2 20.0 23.184 6.0 0.2 0.712 22.7 79 2.537 2.215 (5.Ambuja Cement Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E Dec (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) CY08 62.756 12.608 (3.1 18.659 64.5 (12.4 Balance sheet Y/E Dec (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.4 23.657 3.422) 12 (327) (3.386 65.8 54.050 82.9 224 2.7 2.849 32.919 20.1) 2.725 10.9 10.448 7.983 9.1 0.2 3.524.806 1.9 19.4 12.9 1.897 25.902) (511) (5.324 57.5 CY11E 10.7 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.246 9.8 18.1 2.038 (6.282) 5.8 2.3 0.894 48.909) 28 91.1 20.9 257.262) 10.827 (18.616 5.000) (9.0 0.1 15 70 51 2.484) 10.2 26.675 4.983 58.270 62.4 19.0 12 61 58 2.709 83.1 0.470 5.1 19.706 2.386 68.189 (13.670 1.858) 27 83.488 22.598 14.400 103.000) (3.746 (709) 20. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) CY08 8.2 3.9 2.838 1.4 4.410 17.225 17.894 7.000) (9.6 13.1) 1.425 (14.669 7.4 2.050 70.2 23.725 74.000) (3.6 70.1 10 57 63 1.154 2.585 409 (11.835 2.4 19.8 2.4 CY11E 12.295 15.792 15.233 3.2 2.8 105.1 1.3 15.270 96.9 8.827 15.323 4.3 1.1 20.784 10.050 61.944 12.000) (4.069 35.3 13.522.820 (16.703 6.000 (5.264 657 3.778 9.4 8.0 6.8) 2.8 58.2 CY09 70.780 12.7 CY10E 10.741 1.518 CY09 15.2 17.337 Financial ratios Y/E Dec Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover CY09 10.9 0.264 1.778 42.0 15.970 15.8 72.024 5.807 CY10E 16.855 91.5 9.415) 4.109 16.0 25.4 2.645 6.581 3.0 Cash flow statement Y/E Dec (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq CY08 16.330) 8.4 22.9 8.0 1.223 1.353 8.051 (7.277 19.8 10.398 3.9 46.230 4.4 CY10E 6.890 3.2 1.428 13.318) (2.1 18.184 12.134 2.270 104.234) 74 (637) (3.680 56.1 29.8 1.2 19.5 28.3 CY09 8.648 (4.522 6.9 11.558 18.083 14.657 3.6 1.7 CY08 CY09 CY10E CY11E Economic Value Added (EVA) analysis Y/E Dec WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) CY08 10.827 17.8 10.4 2.4 7.

7 12.1 CY10E 68.802 12.6 114.0 (13.5 31.2 20.6 31.4 CY11E 69. The company boasts of strong brand loyalty with a domestic market share of ~9.4) Q1CY10 19.6 112.2 16.4 26.476 10.7 Recommendation history Date Event Reco price Tgt price 67 72 79 97 88 99 101 119 120 118 49 49 68 87 82 88 99 113 125 145 Reco Sell Sell Sell Sell Sell Sell Hold Hold Hold Buy Stock performance 130 110 90 70 Dec-08 Apr-09 Feb-09 Jun-09 50 Sell Hold Buy 16-Dec-08 Company Update 6-Feb-09 24-Jul-09 Results Review Results Review 22-Apr-09 Results Review 29-Oct-09 Results Review 23-Dec-09 Company Update 5-Feb-10 Results Review 30-Mar-10 Sector Update 23-Apr-10 Results Review 4-Aug-10 Company Update Oct-09 Dec-09 Aug-09 Feb-10 Apr-10 Aug-10 Jun-10 34 .4 27.6 22.474 17.5 131.4 106.5 88.9 23.8 2.8 Jun-10 46.8 CY08 68.9 126.3 9.1 9.1 23.3 16.9 Company profile Holcim-owned Ambuja Cement will increase its capacity to 25mt in CY10 from an installed capacity of 18.032 3.110 16.3 4. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 46.710 9.8 91.174 (17.9 6.Ambuja Cement Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q2CY09 18.008 22.9 4.5 Mar-10 46.7 137.0) Q3CY09 16.7 (0.4 Q2CY10 20.227 31.7 111.6 16. It has a presence across India. west (43%) and east (22%) India.4 27.0 23.8 83. Capacities are spread across north (35%).4 112.5 9.5 130.6 2.7 101.5%. except in the southern region.4 6.8) 4.2 89.421 24.0 103.1 CY09 67.0) 4.0 19.9 10.0 3.797 26.8 19.9 22.1 (12.2 2.5 (11.912 20.7) Q4CY09 17.1) (22.5) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity CY07 67.246 4.0 123.902 7.5mt in CY08.7 (9.379 27.

400 (33% upside).7 19. which mitigate the cyclicality in the cement business. six months before schedule.2 28.260 for SRCM in FY11 (drop of Rs 240/t YoY) to factor in higher costs and lower realisations.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 10.7 27.400 (rolling forward from our earlier December ’11 target of Rs 2. SRCM’s strategy of selling surplus power amidst a downturn in the cement cycle will bear rich dividends.3 FY10 42.6 49.4 FY10 36.9 17.614 9.1 29. Further.3 20. we expect power revenues of Rs 14.9 FY11E 34.9 9. The recent stock correction by 25% from the peak largely factors in the subdued cement environment in H1FY11. Further.1 6.2bn and Rs 14. We maintain our Buy rating on the stock.2 19.115 1-mth (8. up from Rs 5bn in FY11E.798 TARGET Rs 2.732 Stock performance Returns (%) Shree Cement Sensex CMP 1.300). Capacity expansion on track: The company has recently commissioned two grinding units of 1.5bn.4 30.642 29. We believe the trend will continue as the company is largely cushioned by power sales.5bn from the sale of power in FY11 and FY12 respectively.400 RATING BUY RISK HIGH BSE 500387 Company data NSE SHREECEM BLOOMBERG SRCM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 62.7 103.6 FY11E 39.2) 3.4% respectively.4 21.321 36. Faster ramp-up of power capacity to boost FY12 revenues: SRCM is expected to commission a 300MW power unit by June ’11.2 6-mth (10.1 4. Accordingly.4x).3 7.357 35 34. Earnings estimates revised.542/1.087 103.2 FY11E 9.3) 4. we build in revenues of Rs 5. What’s New? Target Rating Estimates CMP Rs 1.5 0.828 28. Despite the expected decline in cement margins.3 20.904 (11.921 29. With 450MW of surplus power likely to come into play as merchant power in FY12.2) 9.7 FY12E 7. We see limited downside to valuations and a higher potential upside than peers once the upcycle commences.7 24.8) 198. maintain Buy: To factor in lower cement prices and increasing pet coke costs. equipped with a power portfolio that enables it to counter cyclicality in the cement business.8 64.7 6.2 (11. We believe the recent 25% correction in stock price largely factors in the subdued environment in cement.0 6. Although we believe lower dispatch growth (6% as per our estimates) and a decline in realisations (down 6%) will impact the company in FY11.1 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 26.6 224.1 29.2 256. we arrive at a revised March ’11 target price of Rs 2.0 9. Assigning an EV/EBITDA multiple of 5x on FY12E (P/E of 9.3 23.7 4.3 13.340 39.1 12. and the risk-reward ratio is now turning favourable. We have assumed a blended EBITDA/t of Rs 1.4 174.0 22. Most efficient cement player: SRCM continues to be the most efficient cement player in the industry with the highest EBITDA margins in the sector (at 34% in FY11E).2 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 35.0 Shree Cement 1 2.8mt.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 8.798 18.9 16.7 FY10 8.7 8.7 28. which will take its total capacity to 13.0 10. we anticipate a smart rebound in dispatches and hence profitability in FY12. we have reduced our earnings estimates for FY11 and FY12 by 13% and 3.7 Industry 1 0.6 2.0 9.1 26.372 25.5mt in Q2FY11.Shree Cement Ltd Company Update 04 August 2010 Shree Cement Ltd Cement and Power – a potent mix Shree Cement (SRCM) is currently the best play among diversified cement stocks.0 35 .5 FY12E 37. we believe SRCM will continue to be the most efficient player in the industry.1 7.7 28.8) FY12E 55.7 3-mth (16.4 25. it is setting up another 1. We thus reiterate our Buy rating on the stock with a revised March ’11 target of Rs 2.5mt grinding unit along with a 1mt clinker plant.0 18.2mt and 1.642/1.4 3.

Shree Cement v/s Sensex 110 105 100 95 90 85 80 Apr-10 May-10 Jun-10 Jul-10 Shree Cement Sensex Source: Bloomberg.682 37.000 80.0) (13.9 9.390 35.000 500 0 Nov-06 Nov-07 Jul-10 Apr-05 Apr-06 Oct-05 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Price 2x 4x 7x 10x 13x Fig 97 . RCML Research Source: Bloomberg.2 (17bps) (3.000 100.000 3.000 60.000 40.3 6.000 1.8 New 36321 34.0 7.Shree Cement: Premium/discount to Sensex (%) 450 360 270 180 90 0 (90) Jul-10 Apr-02 Apr-03 Apr-04 May-05 May-06 May-07 Jun-08 Jun-09 Fig 99 .4) Fig 96 .2 FY12E New 55.Shree Cement: P/E band (Rs) 4.938 227.Shree Cement Ltd Company Update 04 August 2010 Fig 95 .Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research FY11E Old 40. RCML Research Source: Bloomberg.4) (3.1 % Chg 1.2 % Chg (10.000 20. RCML Research 36 .500 1.500 2.Shree Cement: EV/EBITDA band (Rs mn) 140.240 265.340 37.000 120.000 0 Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Jul-10 Price 1x 2x 4x 6x 8x Source: Bloomberg.0) Old 54.7 8.921 256.904 198.000 2. RCML Research Fig 98 .07) (75bps) (13.500 3.

6 49.500 251 61.328 348 34.8 1.500) (730) (326) (314) 8.593 3.3 FY10 8.497 7.353 1.761 (1.8 64.057 1.5 37.448 22.0 1.7 599 758 9.723 FY10 12.851 53.746 1.9 16.6 FY11E 8.602 354 3.0 25.2 0.008.4 24.4 10.118 1.2 8.8 198 (11.328 348 25.097 (408) 3.3 42.752 12.903 347.7 28.353 751.032 33.904 6.0 23.7 103.901 7.054 7.2 2.544 4.0 1.8 1.704 9.7 9.1 2.7 FY11E 10.9 16.7 (1.988 (11.000) (2.0 0.085 FY12E 18.2 1.493 8.000) 5.043 4.0 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 10.230 20.8 4.848 16.364 16.395 20.448 53.904 (11.614 9.426 34.2 18.500) (7.8) 34.000) (13.269 4.593 562.4 34.656 5.8 225 28.5 7 35 45 4.4 30.2 34.592 10.6 9 31 49 4.1 29.962 348 11.085 1.500) (10.1 13.310 8.3 20.820 11.7 19.9 34.510 17.828 28.6 4.0 FY10 36.0 1.177 1.348 17.3 15.451 94.2 26.855 13.921 29.6 34.399 796 1.448 37.8) 8.0 1.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.918 19.6 2.1 7.6 8.118 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 10.8 174.340 39.065 354 2.789 104 33.291 60.655 (1.677 8.545 7.1 26.505 10.448 44.2 3.4 0.0 3.0 10.275 15.085 2.8 7 30 50 5.465 (490) 12 11.058 348 19.9 17.152 2.2 2.668 3.586 28.177 8.0 8.777 (309) 6.2 1.500 251 51.9 3.225 4.6 9.8) 1.0 39.087 103.179 51.348 15.7 20.7 1.903 2.268 1.353 3.642 29.253 19.921 8.399 FY11E 12.081) 48 4.2 (309) 5.1 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 7.1 1.0 27.8 7.0 19.115 3.000) (326) 10.268 (13.602 45.465 (5.177 11.242 (10.4 1.990) 1.775 61.449 19.0 0.9 10.2 1.559 17.536 1.067) 6.081 1.0 FY12E 55.000 251 45.5 6.321 36.Shree Cement Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 26.4 FY12E 18.2 0.2 8.0 FY11E 39.100 33.2) 5.081 6.9 5.0 9.3 36.4 6.799 354 1.693 19.741 866 252 19.4 21.500) (2.831 415 219 8. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 4.2 37 .859 (7.660) (8.443 8.3 20.559 6.9 FY12E 10.885 14.831 26.780 7.578 (11.723 2.7 28.2 744 829 7.443 10.1 35.184 354 2.723 583 1.0 22.033 18.7 10.330) (3.7 33.067) 7.214 (702) (270) 11.8 256 29.443 10.3 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.3 5.4 1.2 9 33 52 4.

9 Mar-10 65.439 494.025 2.255 46.4 184.0 90.2 3.300 2.3 10.7 1.3 (0.5 Q2FY10 8. It has a total captive power capacity of 116MW.2 FY12E 80.1mt.5 4.0 21.1 9.400 Reco Hold Hold Buy Buy Buy Buy Buy Buy Buy Buy Buy Stock performance 2.0 (2.2 14.7 312.6 15.967 2.800 1.0 3.990 1.9 81.300 800 Dec-08 Apr-09 Feb-09 Aug-09 Jun-09 300 Hold Buy 16-Dec-08 Company Update 29-Jan-09 22-Jun-09 27-Jul-09 9-Nov-09 6-Jan-10 22-Jan-10 Results Review Monthly Update Results Review Company Update Quarterly Preview Results Review 29-Apr-09 Results Review Oct-09 Dec-09 Feb-10 Apr-10 29-Oct-09 Results Review 21-May-10 Results Review 04-Aug-10 Company Update Aug-10 Jun-10 38 .088 45.353 38.7) 3.8 49..0 64.156 1.660 30.229 50.4 9.1 2.6 (42.895 169.7 211.967 1.5 100.798 485 525 893 1.5 29.9 FY09 80.4 FY11E 83.0) (84.7 FY10 80.1 18.4 91.5 106.574 1.0 8.2 (3.674 29.0 101.9 88.916 162.967 1.1 9. Its plants are located in Beawar and Ras (Rajasthan).087 1.5 16.0) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 73.539 1.2) Q4FY10 9.8 Jun-10 65.6 98.2 Recommendation history Date Event Reco price Tgt price 460 498 775 1.9 19.8 9. Shree Cement is among the top 10 cement producers in India with an installed capacity of 9.6 15.1 19.062 24.1 28.3 357.5 267 (89.3 101.7 26.4 2.306 41.3 Company profile Promoted by BG Bangur.2 50.9 98.428 2.645 2.4 250.8 30.440 17.300 1.996 43.5) 4.8 8.8 101.9 Q1FY10 9. meeting more than 95% of its total power requirement.0 20. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 65.340 1.Shree Cement Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q4FY09 8. The company continues to maintain its leadership position in northern India.7) Q3FY10 8.347 35.165 2.0 2.

5 11.2 18. the company is planning to add ~52MW of power generation plants in FY12.5 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 23.0 4. Best mid cap play. enhancing cost savings in the medium term.7 39 .8) FY12E 28.4 FY11E 23.4 FY12E 4.6 20.5mt in FY11.8 21. including 22MW of waste heat recovery.4 72.721 10.9 FY10 32.120 in Q1FY11.7 (14.576 72.115 1-mth (1.570 20.8 FY11E 5.2 26.9) FY10 21.5 16.6 22. Strong balance sheet: In FY10.0 23.415/593 77 36.8mt in Rajasthan and West Bengal will sustain volume growth in FY13.This will take the company’s total capacity to 7.820 22.751 (14.9 5. We view BCORP as the best play in our mid cap cement universe and reiterate Buy with a revised March ’11 target of Rs 500 (39% upside).3 23. is a key positive for the company as its expansion plans over the next 2–3 years can be entirely met out of internal accruals.5mt.8 8. another 1. we believe it is best placed to tap into the approaching cement upcycle given timely capacity expansion and high operational efficiencies.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 4.2 19.0) 4.5 23. any decline will be an opportunity to accumulate the stock.4 423 / 267 24.8 24. Expansion will drive volume growth: BCORP plans to expand capacity by 3.1) 9.4 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 17.5x EV/EBITDA on FY12E and arrived at a revised March ’11 target price of Rs 500 (from our earlier December ’11 target of Rs 465).7 Industry 1 0.732 21. we believe. We believe the stock is the best mid cap play in the pure cement space and reiterate our Buy recommendation.4 18.0 (22.5 28.5 FY12E 27.9 6.1 4. What’s New? Target Rating Estimates CMP Rs 360 TARGET Rs 500 RATING BUY RISK HIGH BSE 500335 Company data NSE BIRLACORPN BLOOMBERG BCORP IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 27.235 (22.1 25.9 6. High operational efficiencies: BCORP has been an efficient player in the industry as it sells a higher percentage of blended cement (75–80% of volumes) and has a lower lead distance to market (less than 400km).8) 3.1 20. A presence in high-growth markets in Central and East India – which together account for 70–75% of its revenue mix – will benefit the company amid the current subdued demand environment.5 5.9 36. BCORP has reported one of the highest EBITDA/t numbers among mid cap cement players. Although the company will feel the heat from lower prices and volumes in Q2FY11.4 19.4 FY11E 25.3 FY10 4. of which 1. BCORP had net cash and equivalents of Rs 7.2 6-mth (2.8) 61. at Rs 1.9 23.907 3.386 Stock performance Returns (%) Birla Corp Sensex CMP 360 18.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 8.7bn.5 75. Further. This.9 3.6 3.3 1.7mt will be commissioned in Q2FY11.1 28.1 5.4 72.7 6.6x on FY12E.Birla Corporation Ltd Company Update 04 August 2010 Birla Corporation Ltd Best mid cap play We remain positive on Birla Corp (BCORP) given the company’s presence in high-growth regions and its deleveraged balance sheet.7 B irla Co rp 1 2.8 4. Though the company would have a subdued Q2FY11 in terms of volumes and realisations.7 30.7 3-mth (8. maintain Buy: We have valued the company at 4.7 15. which translate to Rs 100/sh.9) 42. Our revised target offers a 39% upside from current levels and represents a P/E of 6. This will augment its existing ~90MW of captive power.8 3.9 9. Further.

000 0 (10.8 17.0) (23.5 (1. RCML Research Source: Bloomberg.647 285 139 140 1.000 40.102 1.000 50.183 28.3 Q1FY10 4.0) 133.0) Q4FY10 6.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.554 35.6) (11.284 1.736 400 86 143 1.000) Price 1x 3x 5x 7x Price 2x 700 600 500 400 300 200 100 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Source: Bloomberg.Birla Corp: Premium/discount over Sensex (%) 150 100 50 0 (50) (100) Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Fig 104 .Birla Corp: P/E band (Rs) Fig 102 . RCML Research Apr-10 40 .2 30.Birla Corp: EV/EBITDA band 5x 7x 9x (Rs mn) 60.0) (19bps) (14.2) (45.2 % Chg YoY 17.1 5 (20.749 4.8 % Chg QoQ (4.000 20. RCML Research Fig 103 .020 4.5) (4.000 10.148 1.Birla Corporation Ltd Company Update 04 August 2010 Fig 100 .904 3.3) (5. RCML Research Q1FY11 5.9) (716bps) (24.3 (6.375 28.000 30.7) (13.0) Fig 101 .6 15. RCML Research Source: Bloomberg.7) (14.907 532 1.756 519 60 133 2.3) (11.8) 61. Sensex Source: Bloomberg.8 20.1) (28.082 528 1.Birla Corp v/s Sensex 105 100 95 90 85 Apr-10 May-10 Jun-10 Jul-10 Birla Corp.653 470 1.

7 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 1.0 42.8 24.319 3.479 2.9) 5.3 1.Birla Corporation Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 17.1 7.3 28.350) 4.569 8.0 FY11E 23.7 (14.235 3.987 3.116 1.000 (809) 33.4 4.800) (5.509 FY12E 6.071 28.542 6.889 2.271 3.631 27.5 6.7 30.036 26.319 232.576 72.955 (5.121 286.2 1.479 1.499 70.8 4.5) 168 1.523 13.121 4.419 (772) 19.245 365.6 15.4 0.3 0.368 (631) 196 3.8) 6.4 0.420 5.531 15.824 (31.968 11.408 3.6 16.245 5.9 36.9 23.5 7.609 3.393 221 2.8 44.1 20.3 3.9 24.8 0.1 4.066 1.6 20.877 19.6 26.8) 77.7 FY12E 2.8 4.1 0.837 1.1 1.927 2.0 1.7 FY10 3.4 6.9 17.5 13.4 5.6 22.2 27.158 8.9 1.5 2.0 61.1 FY11E 1.299 5.8 21.6 0.1 1.2 5 53 73 2.4 5 55 83 1.6 19.7 0.367 770 21.311 22.161 10.0 FY12E 28.0 6.378 12.2) 434 3.1 28.884) 1.130 25.5 19.4 4.721 10.000 (5.3 8.513 5.997 30.800) (5.300 6.0 72.489 (15.425 20.929 1.0 270 1.056 1.5 77.117 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 10.8 18.402 39.133 (430) (894) 4.0 4 59 83 1.0 75.425 14.393 FY11E 5.296 672 2.808 (2.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.1 926 7.800) (1.9 32.0 4 60 87 2.056 65.367 770 26.000 (824) 39.365 1.0 FY10 21.5 0.9 3.670 (246) 611 4.122 33.4 18.912 29.258 (29.235 (22.8 160 1.831 5.606 6.732 21.7 1. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 3.600 1.4 72.0 23.406 3.6 FY12E 10.109 (254) (838) 46 (360) 2.5 23.3 23.0 (22.275 1.092 770 17.425 28.4 25.5 1.000) 1.035 (1.149 (6.820 22.176 31.378 19.5 6.383 7.570 20.3 23.8 32.693) 1.9 FY11E 10.4 5.241 4.2 0.2 0.7 5.1 25.333 1.7 556 6.117 472 3.000) (541) 608 2.883 3.725) (314) (1.065 12.4 77.372 11.2 1.410 422 123 5.555) (8.820 5.278 (795) 29.5 22.197 FY10 6.7 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 10.197 200 1.576 5.613 2.9 3.4 1.751 (14.746 135 (733) 6.4 32.9) 659 5.1 0.509 325 2.650 665 7.660 31.764 770 12.9) 77.8 1.8 41 .751 4.7) 221 761 4.5 27.8 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 3.609 166.907 3.148 (12.100 17.

9) (14.589 23.9 11.7 1.736 28.3 50.2 FY09 74.4 146.2 (4.2 23.124 38.1) 1.6 79.6 22.1 32.1 1.1 21.1 76.5mt by the end of FY11.5 10.3 5.5 Company profile Birla Corp.647 28.4 92. has an installed capacity of 5.2 5.935 38.1 114.554 69.3 Mar-10 63.626 29.2 3.9 20.8 1.0 155.9 36.5 1.2 FY11E 68.6 1.1 (26.375 51.4 5.183 (23.1 23.9 (14.5) 1.4 Recommendation history Date Event Reco price Tgt price 116 137 205 296 301 345 355 403 360 127 144 197 365 365 373 427 465 500 Reco Hold Hold Hold Buy Buy Buy Buy Buy Buy Stock performance 450 350 250 150 Dec-08 Oct-09 Dec-09 Apr-09 Feb-09 Aug-09 Feb-10 Apr-10 Aug-10 Jun-09 Jun-10 50 Hold Buy 16-Dec-08 Company Update 28-Jan-09 8-May-09 28-Jul-09 6-Jan-10 2-Feb-10 Results Review Results Review Results Review Quarterly Preview Results Review 23-Oct-09 Results Review 26-Apr-10 Results Review 04-Aug-10 Company Update 42 .904 23.9 24.3 Q2FY10 5.1 1.9 19.1 198.6 10.1) Q4FY10 6.6 119.057 35.1 30.0 169.3 Q1FY11 5.9 23.7 FY12E 68.8mt spread across four cement units located in Madhya Pradesh.756 35.7 103. Rajasthan and West Bengal.8 1.2 158.5 7.5 104.020 5.8 28. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Sep-09 62. a part of M P Birla group.9 Dec-09 62.2 FY10E 73.7mt to 7. Brownfield expansion at existing locations will increase the company’s cement capacity by 1.Birla Corporation Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q1FY10 4.1) Q3FY10 5.7 20.3 1.1 88.0) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 72.3 117.2 71.521 154.749 17.6 126.7 (2.6 11.

7 16.7 3-mth (7.1 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 15.0 23.9 12.1 FY11E 17. We maintain Buy with a target price of Rs 70 (30% upside).613 (34.407 (12. Thus. The company is building a water reservoir which is likely to commence in August ’10.9 1.9 FY10 16.7 FY10 6.198 7.8 5. The company reported an EBIT/t of Rs 723 for Q1FY11 – much ahead of its regional counterparts as efficiency gains came into play.Orient Paper & Industries Ltd Company Update 04 August 2010 Orient Paper & Industries Ltd Best operational efficiencies in the south A high volume growth trajectory coupled with operational efficiencies make Orient Paper & Industries (OPI) the best bet among south-based cement mid caps.4 2.497 Stock performance Returns (%) Orient Paper Sensex CMP 53 18.4 (34.3 29.6 Orient P aper & Industries 1 2.1 5.3 16.115 1-mth (4.4 4.8) 8.3 (12.6mt to 5mt. OPI’s other businesses such as the electrical division are expected to do well.6 7.8) 7.3 5. it recorded a net EBIT loss of Rs 233mn in the paper business.0 FY12E 5.475 21. Q2FY11 tough for cement biz.3 14. Maintain Buy: We have trimmed our earnings estimates by 6. the company is trading at US$ 49 which is attractive.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 9.7 9. The stock has corrected 25% from its peak in the last four months and we see little downside from current levels.5 14. Based on an EV/EBITDA of 5x on FY12E. as realisations take a severe hit.0 13. while the paper business has hit a bottom and should perform better in H2FY11.9 10.2 43 .6 5. Mixed bag in Q1FY11: OPI has reported a strong cement EBIT/t of Rs 723 in Q1FY11 – much higher than its south-based peers on the back of operational efficiencies.8 66 / 43 294.7 Industry 1 0. What’s New? Target Rating Estimates CMP Rs 53 TARGET Rs 70 RATING BUY RISK HIGH BSE 502420 Company data NSE ORIENTPPR BLOOMBERG OPI IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 10.1 FY12E 18.6 FY10 19.839 30.3 2. which continued to suffer from non-availability of water during the quarter.4 13. We therefore recommend buying on dips.0 12.2 6-mth 16.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 4.5 30.0 22.9) 3.0 8.0 9.8) FY12E 19. However. we arrive at our March ’11 target price of Rs 70 (P/E of 7.7 FY11E 7.984 4.1 15.7 10.225 / 221 193 66.5 3.5 19. revival seen in Q3: OPI is likely to face challenges in terms of lower cement EBITDA/t in Q2FY11.0 16.3 8.4 43.6 14.2% owing to the losses in the paper business.3 4.7 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 26. Valuations are inexpensive on an EV/t basis (US$ 49/t) considering the company’s recent cement capacity expansion from 3.428 14. The overall EBITDA margin dropped 231bps YoY to 16. we anticipate a strong overall performance from the company in Q3FY11.5x oneyear forward). and hence we expect losses to be addressed in H2FY11.9 6.4 1.7 9.4 1.3 7. On EV/t.6) 4. we expect cement prices to bottom out in Q2FY11 and volumes to remain firm (up 50% YoY in Q1FY11).8) FY11E 16.5% for FY11.3 9.083 16.2 27. to build in losses from the paper division and lower cement prices. However.

535 6.0 (65) 321 (22.6) 17.3 % Chg (4.8) Fig 106 .4 0.0 % Chg QoQ (8.4 % Chg YoY (7.1 1.863 68 385 571 1.233 30.8) (3.000 5.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research FY11E Old 17.Orient Paper: P/E band (Rs) 140 120 100 80 60 40 20 0 Jul-05 Apr-04 Apr-09 Jul-10 Oct-06 Jan-08 Price 3x 5x 7x 9x Fig 108 .Orient Paper: EV/EBITDA band (Rs mn) 25.3) (2.000 20.4) (83.671 2.383 1.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.711 17. RCML Research Fig 109 .5) Fig 107 .642 8. RCML Research Q1FY11 8.8) (170bps) (63.3) (1867bps) (91.807 7.Orient Paper & Industries Ltd Company Update 04 August 2010 Fig 105 .259 129 369 616 403 143 297 13.000 10.407 7.Orient Paper: Premium/discount over Sensex (%) 20 0 (20) (40) (60) (80) (100) Nov-07 Apr-05 Jul-06 Mar-09 Jul-10 Fig 110 .4 Q1FY10 9.514 7.9) (20. RCML Research Source: Bloomberg.9 (80.1) (22bps) (6.7) 4.2) (63.3) (96.000 15.3) Q4FY10 9.5) (6.001 285 298 599 389 24 108 11. RCML Research Source: Bloomberg.2 1.0 4.976 743 1.000 0 Apr-05 Jul-06 Nov-07 Mar-09 Jul-10 \ Price 2x 3x 4x 5x Source: Bloomberg.5) 121. RCML Research 44 .8 New 16.8) (91.0 1.6 (19.Orient Paper v/s Sensex 110 105 100 95 90 85 May-10 Apr-10 Jun-10 Jul-10 Orient Paper Sensex Source: Bloomberg.7) (6.984 17.806 1.

9) 682 2.763 16.839 1.8 40.475 21.Orient Paper & Industries Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 15.336 574 (521) 2.9 2.258 310 2.503 1.0 23.796 7.7 4.5 FY11E 16.182 1.428 14.4 2.7 1.4 0.733 11.613 (34.0 1.198 7.133 10.9 7.1 5.547 (28.4 1.0 22.0 39.407 1.571 1.9 12.5 56.9 9.928 15.2 52.8) 192.7 1.4 FY11E 965 1.4 3.533 11.202 (13.5 30.884 (6.3 347 3.6) FY12E 11.2 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 1.7 1.984 4.407 (12.0 40.845 6.4 (34.7 9.5 FY10 16.096 2.407 1.9 13.5 10.5 34.845 (1.2 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 11.365 11.1 7.9 12.234 (800) (800) (0) (338) 1.260 870.3 (12.159 568 (1.592 53.546 43 (355) 2.7 1.4 14.0 1.915 1.103) 18.5 16.8 FY10 464 1.3 14.1 1.0 3.9 2.6) 334 232 2.4 3.5 33.5 FY12E 19.097 1.9 8.100 30.623 203 6.9) 345 159 2.4 3.6 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 2.9 1.0 13.346 808 5.097 (21.855 29.503 3.327 (1.839 30.7 1.7 10.970 (165) (70) 72 332 FY10 2.5 27.6 3.083 16.915 33.089 (18) (435) 1.2 49.5 707 2.522 13.173 472 16.1 7.9 45 .0 1.0 6.9 36.2 1.9 0.186 632 (491) 2.9 1.100 693 33.1 7.837 2.1 18.297 18.135 29 203 10.810 (77) (0.2 1.361 748 31.0 1.0 8.9 4.0 13.319 6.3 0.9 1.135 29 203 8.1 15.0 192.8) 1.636 (800) (800) (0) (338) 498 965 FY12E 2.5 1.3 0.581 14.938 (1.2 0.916) (380) (0) (2.993 765 4.173 472 18. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 332 1.028 92 8.9 5.5 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.058) 5 2.026) (32) (5.8 (486) 1.8 4.4 0.623 1.103) 16.6 36.081 2.745 906 33.836 15.257 339 2.2 207 201 3.135 29 203 7.7 192.864 8.989 (486) 2.9 5.3 16.562 23.575 1.389 (5.4 17.103) 16.7 6.7 16.4 38.6 FY11E 11.837 45.9 26.6 0.2) 550 2.3 1.1 1.8) 1.047 793 5.6 0.081 40.061 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 11.6 1.7 385 275 2.061 2.5 19.861 1.613 1.6 14.2 60.5 13.1 17.296) 4 512 (338) (74) 135 467 FY11E 2.9 FY12E 2.833 16.5 14.3 11.869 1.587 (502) 29 13.844 1.8 5.7 1.6 19.173 472 17.4 43.8) 192.5 29.592 2.

7 135.0 24. Madhya Pradesh.2 29.7 108.479 17.7 30.2 81.8 19.2 99.2 171.9 31.1 405 (10. Its paper plant is in Amlai.1 547 0. Andhra Pradesh and Jalgaon.0 Jun-10 33.416 27.3 194.0 96.0 209.2 342 0.6 226.7 109. West Bengal and Faridabad.2 14.2) (37.1 1.7) Q2FY10 3.0 95.9 (19. while the electrical appliances units are in Kolkata.2 198.453 7.2) 19. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 33.3 16.8 23.6 31.2 2.6 31.7 184.1 61.9 FY12E 67.5 (37.0 103. Maharashtra.2 FY09 69.1 Q3FY10 3.0 4.5) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 65.9) (25.6) Q4FY10 5.6 Q1FY11 4. The company’s cement plants are located in Devapur.5 43.5 FY11E 67.2 301 (39.4) 717 16. paper and electrical appliances.9 3.2 100.7 15.8 673 18. Cement is the major revenue contributor (~62% in FY09) followed by electrical appliances and paper (~21% & 17% respectively).3 711 20.3 48.4 33.6 340 (26.7 Recommendation history Date Event Reco price Tgt price 21 19 55 52 46 50 56 53 53 39 31 66 62 52 49 70 70 70 Reco Buy Buy Buy Buy Hold Hold Buy Buy Buy Stock performance 65 55 45 35 25 Dec-08 Oct-09 Dec-09 Apr-09 Feb-09 Aug-09 Feb-10 Apr-10 Aug-10 Jun-09 Jun-10 15 Hold Buy 16-Dec-08 Company Update 27-Jan-09 12-Jun-09 28-Jul-09 14-Jan-10 30-Jul-10 Results Review Results Review Results Review Results Review Results Review 27-Oct-09 Results Review 05-May-10 Results Review 04-Aug-10 Company Update 46 .532 0.8 Mar-10 33.Orient Paper & Industries Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q1FY10 3. Haryana.7 3.9 22.2 FY10 68.3 (26.047 19.4 Company profile Promoted by the C K Birla group.3 92. Orient Paper & Industries is a diversified player engaged in the manufacturing of cement.5 3.701 7.1) 641 18.4 13.

7 119.5 2. The stock has dropped 23% in the last four months and we believe the bad run will continue.7 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 33.5) 9. Thus. leading to a net loss in that quarter. which has its business concentrated in the south.1 7.5) 2.2 6-mth (13. the benefits of lower power expenses would accrue from FY12 onwards. However.9 FY10 9.115 1-mth (3.9) 17.219 (23.108 (40.6 FY1 0 FY1 E 1 FY1 2E Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 5.595 10.8) 792 (74. We believe the weak performance would spill over into the next quarter as well.4 6. We expect the company’s EBITDA/t to touch a low of Rs 175–225/t in Q2FY11.4 9.4 5.5 FY12E 18.9 21.8 (31. The company has clocked an EBITDA/t of Rs 385 during the quarter – one of the lowest in the industry. We value the company at an EV/t of US$ 60 and arrive at a target price of Rs 100 after including the IPL value of Rs 30/sh. Based on the value of US$ 330mn and after deducting ICEM’s outstanding dues and assigning a 25% discount.4 4. Dismal Q1FY11 results: ICEM has reported dismal Q1FY11 results with a decline in topline and PAT by 7.9 4. we arrive at a value of Rs 30/sh.5) 11.5 1.5 47 . We thus maintain a Sell on ICEM.4 FY11E 39.0 (38.9 1 8.8 3.6) FY12E 42. Earnings downgraded.3 13. lower cement prices and higher coal costs will continue to crimp profitability.6% and 91. the commissioning of a new cement plant in Rajasthan during the second quarter could lead to better volumes from H2FY11 onwards.6 (76.7 3-mth (16.1 3.873 9.8) 3. maintain Sell: In order to factor in lower cement prices.5 6.7 9.9 11.7 1 0.4 5.3 FY10 20.9 8.3 3. Concentration in South India a drag on profits: The decline in cement prices has been particularly severe in South India – ICEM.606 16.9 2. We believe the stock will continue to underperform and therefore maintain our Sell recommendation.4 8.2 Industry 9.9 1 2.2 17. with realisations taking a severe hit.5) FY10 36.9 38. likely to be operational in Q4FY11 and Q3FY12 respectively.3 FY12E 13. CPP benefits in FY12: ICEM is setting up two captive power plants of 50MW each in Andhra Pradesh and Tamil Nadu.4 9.9 FY11E 12. While volume growth could improve following capacity expansion in the new market of Rajasthan.3) FY11E 36.India Cements Ltd Company Update 04 August 2010 India Cements Ltd Outlook remains bleak India Cements (ICEM) continues to bear the brunt of weak cement prices in the southern market.8 2.0 5. we have cut our earnings estimate by 62% and 23% for FY11 and FY12 respectively.9 156 / 97 945.6 5.9 15.3% YoY respectively.8 12. taking the second highest offer as a benchmark. What’s New? Target Rating Estimates CMP Rs 104 TARGET Rs 100 RATING SELL RISK HIGH BSE 530005 Company data NSE INDIACEM BLOOMBERG ICEM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 29.8 5.4 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 27. leading to severely crunched margins.5 15. IPL franchise valued at Rs 30/sh: We have valued the company’s IPL cricket franchise based on the latest bids for the Pune/Kochi team. The company has clocked one of the lowest EBITDA/t figures in the industry in Q1FY11 and will likely register a feeble performance in Q2FY11 as well.2 1.032 / 629 282 74.161 Stock performance Returns (%) India Cement Sensex CMP 104 18.1 5. is unlikely to recover from the slump in profitability in the near term.560 (0.737 119.1 4.7) 4.0 9.8 P/E comparison (x) 50 40 30 20 1 0 0 India Cements 39.

3 FY12E New 42.2) (63.4 % Chg YoY (7.3) (96.737 5. RCML Research Q1FY11 8.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.000 60. RCML Research Source: Bloomberg.7 % Chg 0.136 6.863 68 385 571 1.0 4.642 8.6 % Chg (10.535 6.2 2.6) Old 42.8) (91.560 12.India Cements Ltd Company Update 04 August 2010 Fig 111 .233 30.2 (474bps) (23.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research FY11E Old 40.9) (20.000 40.India Cements: Premium/discount over BSE (%) 140 105 70 35 0 (35) (70) Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 Jul-10 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Fig 116 .0 (65) 321 (22. RCML Research 48 .6 (19.001 285 298 599 389 24 108 11.1 1.0) Fig 113 .4 Q1FY10 9.9 (80.3) (2.700 17.807 7.2) (550bps) (61.3) (1.000 80.383 1.4 1.867bps) (92.0) (23.517 18.000 120.000 0 Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Jul-10 Jul-10 Price 4x 6x 8x 10x 12x Source: Bloomberg.8) (3. RCML Research Fig 115 .6 2.8) Fig 112 .7 New 36.India Cements: EV/EBITDA band (Rs mn) 140.337 7.6) (61.976 743 1.806 1.0) Q4FY10 9.4 0.7) 4.8) (170bps) (63.606 13.000 100.6) 17.0 % Chg QoQ (8.1 792 2.000 20. RCML Research Source: Bloomberg.671 2.India Cements: P/E band (Rs) 500 400 300 200 100 0 Nov-06 Nov-07 Jul-10 Apr-05 Apr-06 Oct-05 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Price 6x 9x 12x 15x 18x Fig 114 .India Cements v/s Sensex 110 100 90 80 70 Apr-10 May-10 Jun-10 India Cement Sensex Source: Bloomberg.259 129 369 616 403 143 297 13.7) (6.5) 121.4) (83.

863) 28 981 (659) (3.6) FY11E 11.331 (1.219 (23.2) 1.049 257 24.4 9.346 1.6 0.346 750 27.0 FY11E 36.951 48.2 2.773 1.442 1.993 (61.5) 3.0 1.7) Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 1.322 (897) 5.4 9.327 3.896 3.1 4.7 119.5 1.9 3.068 FY12E 4.772 (6.9 8.478 18.099 21.0 6.2 5.070 38.989) (4.590 53.991 134.896 3.355 1.806 4.070 38.289 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 11.186 7.878 (661) (314) 538 FY11E 3.196 (683) (1.595 10.425 7.5) 307.000) (400) (718) 1.7 1.693) 75.000 (2.068 4.1 5.991 3.5 0.008 1.9 FY12E 2.187 450 20.000) 6.246 (3.161 29.314 67.793) 77.0 2.594 830 2.5 2.7 0.0) 1.5 3.070 39.0 0.2 1.040 (2.6 (76.346 788 27.6 0.286 41.9 4.5 1.7) 2.3 20.206) 6.507 4.6 1.7 5.5 63.067) 298 (5.331 5.4 11.000 (2.679 571 3.786 5.083 9.9 0.5 15.7 (795) 4.000) (2.630 686 1.727 128.502 139 (302) 4.4 6.8) 1.053 18.5 5.278 2.5 6.4 2.831 1.8 7.102 39.220 2.8 (31.716 28.7 0.866) 591 (2.234 854 19.9) 282.880 2.339 (2.3) 2.8 0.430 77.India Cements Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 33.896 3.566) (5.3 42 51 92 2.277 4.3 68.737 119.140 70.5 0.6 FY10 538 4.140 68.540 3.0 (38.0 FY10 36.5 36 53 103 2.108 (9. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 852 3.296 4.277 148.404) 852 FY10 6.259 3.9 21.765 2.000) (5.339 1.556) 136 67.275) (7.5 39.5 0.401 18.1 4.873 9.9 5.0 11.538) (324) (9.142 (30.289 4.490 36.140 57.061 1.425 146.4 68.131 47.131 47.1) 2.136 38.360 41.959 (2.9 0.7 18.5 0.0 5.9 56.9) FY12E 11.348 (22.7 0.3 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 6.8 1.659 3.727 7.853 4.5 47 50 63 3.9 12.3) 2.3 13.3 13.5) 282.824 33.449 79.029 (2.5 792 792 (74.8) 4.445 3.705 13.436 4.737 1.4 0.2 9.6 0.5 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 11.9 2.378 42.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.208 (5.122 1.7 40 47 41 3.951) 2.4 307.606 16.6) 2.4 0.033 7.2 3.2 0.435 (40.108 (40.5 12.357 75.893) 79.0 FY12E 42.560 (0.9 15.4 0.4 8.5 7.961) (1.818 35.6 0.8 1.099) 530 1.010 (552) (4.3 9.381 (13.4 FY11E 1.9 436 3.426 1.4 17.234 131 (3.473 (20.052 7.2 0.345 5.105) (8.2) 49 .8 27.

894 4.642 8.1 1.863 30.2 32 19.4 Q2FY10 9.8 93.7) 1.2 32.3 2.233 (24.1 23.6 24.4 Q1FY11 8.3 1.0 FY11E 75.2) Q4FY10 9.4 15.4 16.1 Q3FY10 8.2 Jun-10 25.807 (7.977 30.4 13.0 FY10 61.7 99.9 51.7 185.2 20.1 6.8 23.4 108 (91. The company has a cement capacity of 14mt and will be expanding in north India with a 1.6) 12.5% across the country.8 31.8 2.259 13.001 11.6 1.4 Mar-10 25.5 4. In a branding effort.9 52.8 FY09 71.5 232 (69.6 3. commanding a market share of ~17% (south) and ~5.4 98.India Cements Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q1FY10 9.6) (8.9 FY12E 79.6 5.0 1.1 Company profile India Cements remains the largest cement player in South India.5 52.641 14.535 13.5 47.165 13.8) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 76.8 (12.2) (83.3 8.4 32.1 185.2 187.5 11.4 22. the company has acquired franchise rights of an India Premier League team for US$ 91mn to be paid over 10 years.1 297 (72.7) 1.8) 13.3) (63.9 7.382 (15.5 184.3 56.3 195.5mt plant in Basawa (Rajasthan).7) 28.9 54.0 21. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 27.4 74.8 Recommendation history Date Event Reco price Tgt price 100 106 95 131 139 114 113 126 131 125 104 102 94 94 124 124 102 91 91 116 110 100 Reco Sell Sell Sell Sell Sell Sell Sell Sell Sell Sell Sell Stock performance 160 150 140 130 120 110 100 90 Sell 16-Dec-08 Company Update 28-Jan-09 1-Jul-09 22-Jul-09 25-Jan-10 Results Review Results Review Results Review Results Review 23-Mar-09 Company Update Dec-08 Oct-09 Dec-09 Apr-09 Feb-09 Aug-09 Feb-10 Apr-10 29-Oct-09 Results Review 08-Mar-10 Company Update 30-Mar-10 Sector Update 03-May-10 Results Review 04-Aug-10 Company Update Aug-10 Jun-09 Jun-10 50 .

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