Equity Research

April 21, 2008 BSE Sensex: 16481

INDIA

Cement sector
Strapping foundations
Reason for report: Initiating coverage
ACC SELL (Rs799) Ambuja Cement SELL (Rs113) Grasim BUY (Rs2,569) India Cements HOLD (Rs180) J K Cement BUY (Rs150) Shree Cement BUY (Rs1,078) UltraTech Cement BUY (Rs784) The Indian cement industry, which has been in an uptrend since ’04, is caught up in growing concerns of impending overcapacity by FY09, which we believe is overdone. We met with key equipment suppliers to fairly assess incremental supplies likely in the next three years. We estimate that cement demand could surprise by posting a CAGR of over 11% in the next five years. We believe that FY09 would continue to witness supply shortage while FY10 could witness demand-supply parity, based on our analysis of incremental supply and expected robust demand. While the industry would continue to face cost pressures as well as Government intervention, we feel their impact would be largely passed on. However, we rule out aggressive price hikes by cement players and thus prefer stocks with strong volume growth and/or cost savings. We rate Grasim and Shree Cement (SCL) as our top picks. Fears of oversupply unrealistic. With the Street expecting oversupply in FY09E itself, we met up with cement equipment manufacturers for a fair assessment of expected supplies over the next two years. Many projects are running behind schedule, with average period of project execution having risen to 30-36 months from 24 months. This coupled with a 3-4mth ramp-up would ensure that incremental supplies are much lower than market expectations. We expect FY09E and FY10E incremental supplies to be 16mnte and 29mnte respectively. Demand could surprise. We believe that there could be rise in the historical cement-to-GDP at 1.3x, given large-scale investment in infrastructure in the XI Five Year Plan (FYP). This coupled with continued housing demand as well as incremental demand for commercial spaces and special economic zones (SEZs) could drive demand at CAGR of 11.6% over the next five years. Consequently, while we expect supply shortage in FY09, we believe there would be demandsupply parity in FY10E. Hence, we do not envisage pricing pressures till FY10E. Cost pressures to be passed on. The cement industry is likely to face severe cost pressures from rising cost of coal, pet coke, fly ash and freight. However, these would be passed on in a scenario of supply tightness, although we rule out aggressive price hikes due to fear of Government intervention. Our top picks – Grasim and Shree Cement. Based on our belief that price upside for the next two years would offset cost escalations, we prefer stocks that are likely to report robust volume growth and/or cost savings. Grasim and SCL are likely to benefit from capacity additions; this coupled with their inexpensive valuations make them extremely attractive.
Please refer to important disclosures at the end of this report

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Cement sector, April 21, 2008

ICICI Securities

TABLE OF CONTENTS
Investment summary .......................................................................................................3 Oversupply fears exaggerated........................................................................................3 Demand growth of 11-12% achievable ...........................................................................3 Pricing pressure unlikely till FY11E.................................................................................3 Cost escalations to be passed on ...................................................................................4 Attractive valuations ........................................................................................................5 Oversupply fears hyped ..................................................................................................6 Announced capacities likely to be delayed .....................................................................6 Incremental supply overstated ........................................................................................8 12% demand growth achievable.....................................................................................9 Cement demand – High correlation with GDP ................................................................9 Housing to remain largest demand contributor .............................................................10 Infrastructure share to rise ............................................................................................12 Corporate capex............................................................................................................13 SEZs, commercial construction ....................................................................................13 Demand-supply parity likely in FY10 ...........................................................................15 Pricing pressure unlikely, but upside limited too.......................................................16 Government intervention impacts sentiment.................................................................17 Cost pressures a concern, but to be passed on.........................................................19 Power and fuel ..............................................................................................................19 Freight costs..................................................................................................................20 Cost comparison – Key cement companies..................................................................20 Attractive valuations......................................................................................................22 We prefer stocks with volume upside and/or cost savings ...........................................23 Key risks .........................................................................................................................24 Estimates – Incremental supply and demand ...............................................................24 Government pressure ...................................................................................................24 Input cost pressure........................................................................................................24 Index of Tables and Charts ...........................................................................................25

Companies
ACC ................................................................................................................................. 27 Ambuja Cement .............................................................................................................. 39 Grasim ............................................................................................................................. 49 India Cements ................................................................................................................. 63 JK Cement ...................................................................................................................... 75 Shree Cement ................................................................................................................. 87 UltraTech Cement ........................................................................................................... 99
Prices as on April 21, ’08

2

Cement sector, April 21, 2008

ICICI Securities

Investment summary
Oversupply fears exaggerated
Poor performance by the cement sector since December ’07 has been primarily due to reluctance by cement manufacturers to raise cement prices and overall adverse conditions in the market. Inability of cement producers to hike prices along with fears of oversupply likely in FY09 made the future of the cement sector seem bleak. However, price hikes were effected in March ’08 and April ’08 to pass on rise in input costs, although we believe that the expectation of oversupply is highly overdone. As per our meetings with cement equipment manufacturers, FY09E and FY10E incremental supplies are likely to be much lower than stated capacities. Regulatory delays for new projects, capacity constraints by equipment suppliers and lack of availability of civil contractors are key factors for increase in average project execution time to 30-36 months at present from 24 months a couple of years ago. We estimate an incremental supply of 16mnte for FY09E and ~29mnte for FY10E vis-à-vis the stated capacity additions of 31mnte for FY09E and 33mnte for FY10E.

Demand growth of 11-12% achievable
Cement demand is likely to remain quite robust for the next five years mainly driven by housing and infrastructure sectors. Higher disposable income, rising population, changing demographics and reduction in average size of household will aid housing demand. We expect ~584mnte of cement to be consumed by the housing sector over the next five years. Roads, ports, power, urban infrastructure and irrigation are likely to boost infrastructure demand. Historically, cement demand has high correlation with GDP. Over the past 10 years, cement-to-GDP has been 1.3x. However, with planned infrastructure investment in the XI FYP to be more-than-double vis-à-vis X FYP, we expect the ratio to increase. Also, we expect cement demand to post CAGR of 11.6% over the next five years.

Pricing pressure unlikely till FY11E
Cement prices have moved up with rising operating rates. Our assessment of the demand-supply scenario for the next two years suggests that the industry will see supply tightness in both FY09E and FY10E. Consequently, high operating rates would ensure ruling out any possibility of pricing pressure. However, despite the expected supply shortage, we do not envisage aggressive price increases from cement players. With Government intervention at regular intervals since January ’06, cement players have been cautious about attracting Government interest. Consequently, we expect price increases to pass on major impact of rising input costs. We have assumed allIndia average prices to improve ~4% for FY09E and remain flat for FY10E.

3

Cement sector, April 21, 2008 Chart 1: Utilisation versus cement prices
255 235 215 195 (Rs) 155 135 115 95 75 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 175 Capacity Utilisation (RHS)

ICICI Securities

All India Avg Price per bag (LHS)

120 110 100 90 80 70 (%)

Source: CMA, I-Sec Research

Cost escalations to be passed on
Power and fuel constitute a significant 18-22% of cement companies’ revenues. The cement industry is dependant on domestic coal, imported coal and pet coke as the main fuels used in kilns and CPPs. While Coal India (CIL) has raised prices of domestic coal 10-15% on an average since December ’07, prices of international coal have seen sharp rise since September ’08 (~70%, currently higher than September ’07 levels). This coupled with rising bulk freight rates would result in substantial increase in landed cost of imported coal. Companies such as India Cements (ICL), ACL and UTCL would be impacted by imported coal prices. Similarly, pet coke prices have risen in line with crude oil prices, thereby affecting companies such as SCL, Grasim and JK Cement (JKCL). However, cement companies have endeavoured to moderate impact of higher fuel costs by shifting to captive power sources. Freight costs, which constitute 12-18% of cement companies’ revenues, have also been rising with increasing cost of diesel. Cement companies have started setting up split grinding units closer to fly ash sources or to markets to achieve savings in freight as transportation of clinker is cheaper than that of cement. Overall, rising costs of fly ash, coal and pet coke remain a serious concern for cement companies. However, given the anticipated short supply expected in FY09E and FY10E, we expect such cost pressures to be passed on to consumers.

4

Aug-07

Feb-08

Cement sector, April 21, 2008

ICICI Securities

Attractive valuations
Based on Government intervention that is a regular feature at present, we do not envisage substantial price hikes despite expected shortage in supply. However, we believe that the impact of cost increase would be passed on to consumers. Consequently, we prefer stocks that have volume upside and/or are expected to register cost reduction. Hence, we recommend a BUY on Grasim, UTCL, SCL and JKCL on the back of impressive earnings growth and cheaper valuations. We recommend SELL on ACC and ACL due to expensive valuations and sluggish bottomline growth. Grasim and SCL are our top picks in the sector. Table 1: Relative valuations
CMP EPS (Rs) (Rs) FY09E FY10E ACC 799 73.2 78.4 Grasim 2,574 299.2 361.7 Ambuja Cement 113 9.6 10.8 UltraTech Cement 784 105.3 122.3 India Cements 180 26.2 30.3 JK Cement 150 51.8 60.6 Shree Cement 1,078 175.1 235.4 Source: Company data, I-Sec Research P/E (x) FY09E FY10E 10.9 10.2 8.6 7.1 11.8 10.5 7.4 6.4 6.9 5.9 2.9 2.5 6.2 4.6 EV/E (x) FY09E FY10E 6.7 6.2 5.8 4.6 7.0 6.0 5.4 4.4 5.1 4.3 3.2 2.4 3.1 2.2 EV/ton (US$) 165 130 222 130 129 101 97 Reco Sell Buy Sell Buy Hold Buy Buy

5

Cement sector, April 21, 2008

ICICI Securities

Oversupply fears hyped
Announced capacities likely to be delayed
The Indian cement industry has seen rising prices since ’04 due to slowdown in capacity additions and rising operating rates. Buoyed by higher prices and consequent strong cash accruals, cement players started announcing capacity additions ’05-06 onwards. While total announced capacities are over 100mnte at present, we believe incremental cement supplies are likely to be significantly lower than official company announcements. Based on our interaction with cement equipment manufacturers and cement companies for assessing effect of capacity additions going forward, average project set-up time has increased to 30-36 months from ~24 months a couple of years ago. Further, most announced capacities are likely to be delayed by at least six months mainly due to: • • • • delay in land acquisition and acquiring mining leases, delay in obtaining various regulatory and environmental clearances, increase in lead time for delivery of machinery, with equipment suppliers boasting of full order books at present, and delays due to lack of availability of quality civil contractors that may result in a longer stabilisation period.

There are only few players worldwide that have the capability of supplying key equipment for cement plants. Amongst these, Polysius, KHD Humboldt Wedag and FLSmidth are the main players in India. Further, there are other players such as Loesche and GBER Pfeiffer that specialise in other equipment such as vertical roller mills and gear boxes. Chart 2: Key cement equipment suppliers and market share (excl. China)

Others 16%

Sinoma 24%

FLSmidth 29% KHD Humboldt Wedag 12%
Source: FLSmidt

Polysius 19%

6

Cement sector, April 21, 2008

ICICI Securities

While India saw demand for new capacities ’05 onwards, construction boom in the Middle East resulted in strong cement equipment order inflow from ’03 itself. Besides India and the Middle East, demand for fresh kiln capacity is seen in Asia and North America. Chart 3: Global contracted kiln capacity trend (excl. China)

Source: FLSmidth

Chart 4: Order inflow and backlog trend of key companies
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2004 2005 2006 2007 100 0 300 200 FLS DK Kmn KHD US$mn (RHS) 700 600 500 400

Source: FLSmidth, KHD Humboldt Wedag

With demand for new capacities seeing a sharp rise not just in India, most equipment suppliers are facing capacity constrains for implementing new orders. Consequently, lead time for delivery of key equipment has been increasing and is expected to rise going forward.

7

Cement sector, April 21, 2008

ICICI Securities

Incremental supply overstated
We have attempted to estimate incremental supplies for FY09E, FY10E and FY11E based on our interaction with equipment suppliers. It usually takes 3-4 months for a new plant to stabilise, during which output is minimal. Further, for capacities getting commissioned mid year, incremental supply would only be for operational months for that year (adjusted for stabilisation time), which in turn would be significantly lower than the stated capacity. Further, with ~136mnte announced as on date, ~37mnte (including Reliance ADAG Group’s 20mnte) has not been ordered out yet. Chart 5: Expected incremental supplies over the next three years
35 30 25
(mn te)

Stated capacity

Incremental Supply

20 15 10 5 0 FY09E FY10E FY11E

Source: I-Sec Research

Thereby, we estimate that only 16mnte of incremental cement supply is likely in FY09E as against stated capacity of ~32mnte. Similarly, only 28mnte of incremental supplies are likely in FY10E as against stated capacity additions of 33mnte. Further, incremental supply of 29mnte is expected in FY11E. Hence, we believe that the market has considerably over-estimated the incremental supply scenario for the next couple of years.

8

Cement sector, April 21, 2008

ICICI Securities

12% demand growth achievable
Cement demand in India has registered ~8% CAGR for the past ten years. Housing continues to be the main driver, constituting ~60% of overall demand. However, we believe that with Government thrust on infrastructure, the cement sector could see increase in share of overall demand in the next five years. Chart 6: Production and consumption trend
180 160 140 (mn te) 120 100 80 60 40 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Producion Domestic consumption

Source: CMA, I-Sec Research

Cement demand – High correlation with GDP
Cement demand is directly linked to economic activity. Since infrastructure investments and construction activity, which are the main drivers of cement demand, are key components of GDP, cement demand growth has high correlation to GDP growth. Further, housing (both rural and urban), also a determinant of cement demand, depends on agricultural productivity and income levels, which are again a key components of GDP. Based on past 10-year data (FY1998-07) on cement consumption growth versus GDP growth, the cement-to-GDP stands at 1.3x. With planned investment in infrastructure to more-than-double in the XI FYP vis-à-vis X FYP, we may see an improvement in the cement-to-GDP. Consequently, with GDP expected to grow 8.5-9%, we believe cement demand would grow 11-12% till FY12E. We expect housing, infrastructure, corporate capex, commercial construction and SEZs to be key demand drivers going forward.

9

Cement sector, April 21, 2008 Chart 7: GDP versus cement demand growth
17 GDP grow th

ICICI Securities

Cement consumption grow th

12

(%)

7

2

-3 FY98 FY99 FY00 FY02 FY03 FY04 FY05 FY06 FY01 FY07

Source: CMA, Bloomberg

Housing to remain largest demand contributor
Housing constitutes ~60% of total cement demand. Main factors driving housing demand are: • • • • • rise in disposable income levels continued growth in population and change in population profile changing demographics (migration from rural to urban areas) decrease in number of people per household (average size of household) with breakdown of the joint family system into nuclear families fiscal incentives provided by the Government and easy availability of finance

Higher income levels. Strong economic growth helps boost disposable income. This coupled with easy availability of finance enables households to migrate from nonpucca houses to urban pucca housing and results in increase in demand for larger houses, thereby raising average size of dwelling units. Shift in population profile. Based on decline in average age of home purchasers coupled with higher income levels, we believe that the population within the 25-44yr age group is critical to the growth in housing demand. As per the Census of India ’01 report, ~27.7% of India’s population in ’01 that was in the 25-44yr age group is likely to increase to ~32% in ’26, which implies an annual addition of ~6.5mn people to this age bracket.

10

Cement sector, April 21, 2008

ICICI Securities

Chart 8: Share of the 25-44yr age group in total population
1,600 1,400 1,200 (mn) 30 1,000 29 800 600 2001 2006 2011 2016 2021 2026 28 27 (%) Total Population % share of 25-44 age group (RHS) 33 32 31

Source: Census of India ’01, I-Sec Research

Nuclear families and urbanisation. The joint family system in India has been gradually moving towards nuclear families. Migration of population towards urban areas due to better job opportunities coupled with rapid urban infrastructure development would effect the decline in average size of an Indian household. Hence, with the ever-growing population, expected reduction in the size of an average Indian household, outlook for housing demand remains extremely positive. Fiscal incentives to continue boosting cement demand. Fiscal incentives granted by the Central Government have provided boost to housing demand. Fiscal benefits, existent since the FY00 Budget, give tax incentives on both interest payments and principal repayments on mortgage loans, thereby reducing effective cost of financing and stimulating housing demand. Table 2: Housing demand projection
Estimated housing stock (mn) Housing stock (bn sqft) Average size (sqft) Incremental demand (bn sqft) Cement demand (mnte) Source: CRISIL, I-Sec Research 2008 133.8 90.3 675 4.2 105.9 2009 138.3 94.8 685 4.4 111.2 2010 142.9 99.4 696 4.7 116.6 2011 147.8 104.3 706 4.9 122.4 2012 152.8 109.5 717 5.1 128.4

As per CRISIL, housing stock is expected to post 3.4% CAGR over the next five years. Further, housing stock in terms of area in square feet is expected to rise at a higher 4.9% CAGR over the same period, given the expected increase in average size of dwelling units. Hence, we expect ~584mnte of cement to be consumed by the housing sector over the next five years.

11

Cement sector, April 21, 2008

ICICI Securities

Infrastructure share to rise
The Planning Commission has projected Rs20,271bn investment in infrastructure for the XI FYP, 2.3x higher than infrastructure investment anticipated in X FYP. Main sectors that would drive cement demand are roads, power, ports, airports, irrigation and urban infrastructure. Chart 9: Infrastructure spending in X & XI FYPs
25,000 Pow er Irrigation Airports Roads Urban Infrastructure Others Railw ays Ports

20,000

(Rs bn)

15,000

10,000

5,000

0 Xth Plan
Source: Planning Commission

XIth plan

Road Projects. Various road projects under the National Highway Development Programme (NHDP) that include phases II-VII are expected to generate cement demand of ~42.5mnte till end XI FYP. Table 3: Road projects under NHDP
Length (km) 7,142 1,342 12,109 20,000 6,500 1,000 Not yet decided Cement consumption* (mnte) 6.65 0.96 14.98 12.75 4.14 3.00 42.5

Project NHDP – Phase II Port connectivity Phase III Phase IV Phase V Phase VI

Phase VII Total *Cement demand, assuming 25% of roads made of concrete Source: National Highway Authority of India (NHAI), Committee on Infrastructure, I-Sec Research

Description NSEW Corridor Connects major ports Connecting state capital & places of economic and tourist importance to phases I & II Upgradation of existing highways to twolane Six-laning of the Golden Quadrilateral (GQ) and high-density corridor Expressways Ring roads, bypasses and flyovers and selected stretches

Completion 27% 44% 3% -

Additionally, various State Governments too have undertaken road projects including repair and upgradation of existing roads. Total investment in such projects is expected to be ~Rs1,000bn, with ~18mnte demand expected over the next five years. Further, investments of ~Rs790bn in rural roads are likely to generate further 14mnte demand. Overall, we expect ~75mnte demand from Central, state and rural road projects over the next five years.

12

Cement sector, April 21, 2008

ICICI Securities

Power projects. The XI FYP envisages total capacity addition of ~78,577MW, of which 16,500MW would be hydro projects where cement consumption is significantly higher than other projects. We expect ~46mnte of cement consumption for power generation projects over the next five years. Table 4: Demand from power projects
Capacity Construction Demand (MW) component (%) (mnte) Thermal coal 54,355 20 14.3 Thermal gas 4,289 10 0.4 Hydro 16,553 70 29.4 Nuclear 3,380 30 2.3 Total 78,577 46.4 Source: Central Electricity Authority (CEA), National Institute For Construction Management & Research (NICMAR), I-Sec Research

Based on investments projected in the XI FYP, we estimate total cement requirement of 248mnte over the next five years. Further, we expect share of cement demand from infrastructure to rise to ~23% in the XI FYP from ~17% of total demand in the X FYP. Table 5: Demand from infrastructure
X FYP XI FYP Power 2,919 6,165 Roads 1,449 3,118 Railways 1,197 2,580 Irrigation 1,115 2,231 Urban Infrastructure 648 1,991 Ports 41 739 Airports 68 347 Others 1,369 3,099 Total 8,805 20,272 Source: NHAI, CEA, NICMAR, Planning Commission, I-Sec Research Construction component (%) Demand (mnte) 46.4 75.0 31.0 38.3 34.1 10.6 4.2 8.9 248.4

42 60 60 50 42 10

Corporate capex
Backed by healthy growth of the Indian economy, most industries are operating at peak utilisation levels. With demand expected to remain firm from various sectors, most industries have announced large capacity expansion plans. CRISIL estimates an investment of ~Rs6,900bn over the next five years for various industrial projects. Consequently, we expect cement demand of ~69mnte for these projects.

SEZs, commercial construction
Commercial construction includes malls, multiplexes, office space, hotels, hospitals etc. Demand for office space is largely driven by the IT/ITES industry, which comprises 75-80% of commercial demand at present. The sector is expected to grow 25-30% annually over the next few years and would be the key driver of commercial demand.

13

Cement sector, April 21, 2008

ICICI Securities

SEZs are areas notified under the SEZ Act ’05, with benefit of fiscal incentives from both Central and State Governments along with minimal regulatory requirements and quality infrastructure for boosting economic growth. Approvals for 439 SEZs have been granted by the Government as on date, of which ~63% relate to the IT/ITES sector. Quality infrastructure requirement for SEZs would be the main driver for cement demand. We expect aggregate cement demand of 1.08bnte over the next five years, an 11.6% CAGR over FY08-12E. Table 6: Sector-wise projected cement demand (FY08-12E)
Housing Infrastructure Commercial, SEZ, Defence etc Industrial capex Exports Total Source: I-Sec Research Demand (mnte) 585 248 160 69 21 1,083 Share (%) 54.0 22.9 14.8 6.4 1.9 100.0

14

Cement sector, April 21, 2008

ICICI Securities

Demand-supply parity likely in FY10
Despatches for FY08 were depressed due to capacity constrains. While overall 31mnte is expected to be added in FY09, we believe incremental supplies are likely to be ~16mnte. Thereby, demand for FY09 would also be restricted to 16mnte even though incremental demand would have been ~20mnte at 12% growth rate. In such a scenario, the remaining ~4mnte demand not met in FY09 would get deferred to FY10. Consequently, total demand for FY10 would be the incremental demand of 23mnte (assuming 12% growth rate) coupled with the ~4mnte (from FY09E, mentioned above) totalling to 27mnte. As per our estimates, incremental supplies for FY10E would be ~29mnte. Hence, despite the expected commissioning of 33mnte capacity, we expect to see demand-supply parity in FY10E too. Table 7: Demand/supply
(’000 te) Capacity Inoperative capacity Effective capacity Production Change (%) Blending ratio (x) Utilisation (%) Total availability FY05 153,590 7,428 146,162 127,571 8.6 1.23 83.1 127,571 FY06 159,800 7,428 152,372 141,805 11.2 1.25 88.7 141,805 141,594 11.4 6,007 47.5 135,587 10.2 FY07 166,740 7,430 159,310 155,655 9.8 1.31 93.4 155,655 155,262 9.7 5,892 (1.9) 149,370 10.2 FY08E 180,030 7,430 172,600 166,940 7.3 1.31 92.7 166,940 166,518 7.3 3,750 (36.4) 162,768 9.0 FY09E 211,830 4,843 206,987 183,300 9.8 1.35 86.5 183,300 182,837 9.8 4,118 9.8 178,719 9.8 FY10E 245,130 4,843 240,287 212,628 16.0 1.38 86.7 212,628 212,091 16.0 4,323 5.0 207,767 16.3

Total despatches 127,150 Change (%) 8.5 Exports 4,072 Change (%) 21.1 Domestic consumption 123,078 Change (%) 8.2 Source: CMA, I-Sec Research

Table 8: Regional demand/supply scenario
(mnte) Incremental demand & supply North Demand Supply Surplus/(deficit) Central Demand Supply Surplus/(deficit) West Demand Supply Surplus/(deficit) East Demand Supply Surplus/(deficit) South Demand Supply Surplus/(deficit) Source: I-Sec Research FY09E 3.9 7.9 3.95 3.0 0.9 (2.08) 3.8 (3.79) 3.2 0.2 (3.05) 5.8 7.3 1.55 FY10E 4.4 9.0 4.61 3.3 4.0 0.71 4.2 1.3 (2.95) 3.6 3.7 0.11 6.4 10.7 4.25 FY11E 4.9 5.9 0.97 3.7 2.2 (1.56) 4.8 5.6 0.80 4.0 3.1 (0.93) 7.2 11.8 4.61

15

Cement sector, April 21, 2008

ICICI Securities

Pricing pressure unlikely, but upside limited too
Upsurge in cement prices was marked by rising operating rates aided by slowdown in capacity additions. This, coupled with significant jump in road freight costs following the Supreme Court’s ban on overloading, forced cement manufacturers to raise prices ~Rs45/bag within three months, January ’06 onwards; thereafter, prices in most regions have touched all-time highs. Chart 10: Rising utilisation levels and prices
235 220 205 (Rs/50kg) 190 175 160 145 130 Jun-04 12 month rolling capacity utilisation (RHS) 12 month rolling prices 105 102 99 96 93 (%) Feb-08 90 87 84 81 78 75 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Source: CMA, I-Sec Research

Chart 11: All-India average cement price trend
240 220 200 (Rs/bag) 180 160 140 120 Nov-02 Nov-04 Feb-06 Jan-02 Jun-02 Jan-04 Jun-04 Jul-06 Nov-06 Sep-01 Sep-03 Sep-05 Sep-07 Apr-03 Apr-05 Apr-07

Source: Cement Manufacturers Association (CMA), I-Sec Research

While our analysis indicates that the industry would continue to witness supply shortage in FY09E, we do not envisage substantial increase in price levels despite sharp rise in various input costs for cement companies. Aggressive price increases in January ’06 managed to catch Government attention, post which the administration has undertaken various steps to moderate cement prices.

16

Cement sector, April 21, 2008

ICICI Securities

Government intervention impacts sentiment
Table 9: Calendar of events (since January ’07)
Date Jan-07 Feb-07 Government action Reduction of import duty from 12.5% to NIL Excise duties raised for cement sold for over Rs190/bag and lowered for cement sold at/below Rs190/bag Commerce Minister announces price freeze for one year CVD and SAD on cement imports abolished Three-tier excise duty announced Finance Minister denies existence of price freeze Government mandates MMTC to import cement from Pakistan MRTP finds cartelisation between cement companies for a legal case in 1990 Excise duties on bulk cement and clinker raised Withdrawal of DEPB scheme for cement exports Government bans export of cement Impact No impact, international prices still higher Cement companies pass on the hike instead of reducing prices to avail lower excise rate Price freeze operational in most regions except South No impact, absence of bulk storage and handling facilities at ports prevents large quantities of cement imports No impact Prices remain stable in most regions except the south where they were up Rs35-40/bag despite price freeze operating earlier No impact, port infrastructure still the problem – quantities of cement imported not enough to impact prices Cease and desist order issued – No impact Impact of higher excise passed on No impact – only 2% of cement output exported Prices not likely to come under pressure. However, upside likely to be capped in coastal Gujarat and Maharashtra

Mar-07 Apr-07

May-07 Jun-07

Aug-07

Dec-07 Feb-08 Mar-08 Apr-08

Source: I-Sec Research

Various actions by the Government have had minimal real impact. While the announcement of a price freeze saw cement prices remain largely static in most regions, the South saw significant prices hikes of Rs35-40/bag during the operation of the freeze. Similarly, Government initiatives for encouraging imports with reduction of import duties, abolition of counter veiling duty (CVD) and easing of Bureau of India Standards (BIS) procedures for cement imported from Pakistan through Metals & Mineral Trading Corporation (MMTC) have also not impacted cement prices. Construction activity in the Middle East has resulted in higher cement prices in its market. Consequently, export realisations (FOB) have also improved for Pakistani cement players from US$60-65/te to US$70-75/te at present. Based on FOB imports at US$70/te, we estimate landed cost of cement at Rs216/bag assuming just 100km of lead distance from the port. However, lack of bulk storage and handling facilities at our ports act as the biggest barrier for import of large quantities of cement. The recent Government action to ban exports of cement and clinker is not likely to have any major impact on domestic prices as only 3.6% of total cement production is exported. However, pricing upside may be capped in coastal Gujarat and Maharashtra. We feel that the Government’s excessive focus on maintaining cement prices due to inflation concerns is unjustified. Cement constitutes just 1.7% weightage in the wholesale price index (WPI). Hence, moderated price hikes are likely to impact inflation minimally.

17

Cement sector, April 21, 2008 Table 10: Landed cost of cement from Pakistan
(per tonne) FOB (US$) Freight (US$) CIF (US$) US$ rate Total (Rs) Import duty Special additional duty – 4% Finance charges (Rs) Handling charges (Rs) Packing charges (Rs) CVD (Rs) Freight for minimum 100km Total Dealer margin – 5% (Rs) Subtotal (Rs) VAT (Rs) Landed costs Landed costs (Rs/bag) Source: I-Sec Research

ICICI Securities

70 8 78 40 3,120 40 250 115 3,525 140 3,665 183 3,848 481 4,329 216

However, repeated Government intervention has created uncertainty as regards sector prospects and cement players themselves have become more cautious while exercising price increases. We believe that the recent rise in various input costs of coal, fly ash, pet coke etc will force cement companies to pass them on to consumers. However, we expect cement companies to desist from aggressive price hikes, as seen in January ’06, despite expected supply shortage in FY09E to avoid Government attention. Consequently, we expect average prices to grow 4% in FY09E and remain flat in FY10E.

18

Cement sector, April 21, 2008

ICICI Securities

Cost pressures a concern, but to be passed on
Power and fuel
Power and fuel costs constitute 18-22% of cement companies’ revenues. Indian cement companies largely depend on domestic coal, imported coal and pet coke as a source of fuel. Fuel is primarily used in kilns and CPPs. While CIL raised average prices of coal 10-15% in December ’08, international coal and pet coke prices have seen a sharper rise since October ’08 (whence international coal up ~60%). This coupled with hardening of bulk freight rates has resulted in substantial rise in landed cost of imported coal. Cement companies such as ACL, ICL and UTCL use imported coal. Lower cost of captive power for both ACL and UTCL would partly offset impact of fuel costs. ICL has endeavoured to minimise international freight rates via purchase of two bulk freight carriers. Other companies such as SCL, Grasim and JKCL that use pet coke are also likely to face steep rise in fuel costs. However, both Grasim and JKCL will manage offsetting this impact through commissioning of CPPs. Companies such as ACC that have high dependence on domestic coal are likely to face lower cost escalation compared with peers. However, due to the current coal shortage, cement companies are entitled to only 70% of the linkages. For the remaining requirement, they have to purchase the fuel from open markets, where costs are 30-40% higher than linkage coal. Chart 12: International coal price movement
Coal Spot (Richard Bays SA Index) - US$/te 130 115 100 85 70 55 40 25 Mar-05 Mar-06 Mar-07 Dec-04 Dec-05 Dec-06 Dec-07 Sep-05 Sep-06 Sep-07 Mar-08 Jun-05 Jun-06 Jun-07

Source: Bloomberg

19

Cement sector, April 21, 2008 Chart 13: Baltic dry freight index
12000 10000 (Baltic Dry Freight Index) 8000 6000 4000 2000 0 Dec-03 Dec-04 Dec-05 Dec-06 Aug-03 Aug-04 Aug-05 Aug-06

ICICI Securities

Source: Bloomberg

Freight costs
Freight costs constitute 12-18% of cement companies’ revenues and depend on lead distances to markets, freight mix between road, rail & sea as well as proximity to source of raw material such as fly ash. Freight costs have also seen rising trend on account of rising diesel prices. However, companies are planning to split grinding units located closer to key markets or to fly ash sources to reduce impact of higher freight costs. Table 11: Freight mix for cement companies
(%) ACC Grasim Ambuja Cement India Cements JK Cement Shree Cement UltraTech Cement Source: CMA, I-Sec Research Rail 50 47 23 26 22 29 37 Road 50 53 60 74 78 71 52 Sea 17 11

We believe that cost escalations would be easily passed on to consumers, with the scenario of excess supply not likely till FY10E.

Cost comparison – Key cement companies
Amongst cement companies in the I-Sec universe, ACC, Ambuja Cement (ACL) and SCL have the lowest per-tonne power & fuel costs. ACC’s lower power & fuel costs are on account of high dependence on domestic coal. SCL uses 100% pet coke that has the least ash content and high calorific value, resulting in higher efficiencies. However, whilst most companies are expected to see higher energy costs in FY09 vis-à-vis FY08, we expect JKCL and UTCL to register lower energy costs per tonne as benefits of captive power start kicking in.

20

Nov-07

Mar-08

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Jul-07

Cement sector, April 21, 2008 Chart 14: Power fuel costs for key companies (FY08)
850 800 750 700 (Rs/te) 650 600 550 500 450 400 350 ACC
Source: I-Sec Research

ICICI Securities

ACL

Grasim

ICL

JKCL

SCL

UTCL

SCL has the advantage of the lowest lead distance to markets and, hence, the lowest freight cost per tonne. Usually, regional players (SCL and ICL) have lower freight costs as their markets are spread over a smaller area. However, JKCL’s higher freight costs are on account of higher lead distances to markets and higher share of road freight. Chart 15: Freight costs for key companies (FY08)
800 700 600 (Rs/te) 500 400 300 200 ACC
Source: I-Sec Research

ACL

Grasim

ICL

JKCL

SCL

UTCL

21

Cement sector, April 21, 2008

ICICI Securities

Attractive valuations
Poor performance of cement stocks since December ’07 was mainly on account of expectations on price hikes not materialising, fear of oversupply and overall negative market sentiment. Consequently, most stocks have declined 16-25% from their January ’08 levels. Fear of Government intervention has further dampened sentiment in the sector. However, given strong sector fundamentals with demand-supply parity likely in FY10E too, we do not see any risk to cement prices for the next two years. Hence, we feel that the current inexpensive valuations are inexpensive and we are Overweight on the sector. Table 12: Relative valuations
Company/price (Rs) ACC 799 Year CY05 CY06 CY07P CY08E CY09E FY06 FY07 FY08E FY09E FY10E CY05 CY06 CY07P CY08E CY09E FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E Net sales (Rs mn) 32,034 58,035 70,072 78,880 88,065 101,919 140,952 163,573 194,492 163,573 26,058 62,683 57,049 62,769 69,745 32,995 49,108 55,692 67,544 78,683 15,417 22,552 30,628 38,221 44,710 6,948 14,055 19,575 27,490 33,353 8,737 12,333 14,901 16,761 21,872 Adj. PAT (Rs mn) 2,732 10,810 12,640 13,754 14,727 10,365 19,675 27,436 33,162 36,447 4,358 15,033 13,047 14,568 15,896 2,298 7,823 10,373 13,109 15,226 357 4,788 7,023 7,650 8,852 396 1,575 2,869 6,099 8,200 326 1,786 2,926 3,625 4,236 EPS (Rs) 19.6 56.9 66.5 73.2 78.4 113.0 214.6 299.2 361.7 397.5 3.2 9.9 8.6 9.6 10.5 18.5 62.8 83.3 105.3 122.3 1.6 20.7 24.0 26.2 30.3 11.4 45.2 82.4 175.1 235.4 4.7 25.5 41.8 51.8 60.6 P/E (x) 40.7 14.0 12.0 10.9 10.2 22.8 12.0 8.6 7.1 6.5 35.1 11.4 13.2 11.8 10.8 42.4 12.5 9.4 7.4 6.4 110.8 8.7 7.5 6.9 5.9 94.7 23.8 13.1 6.2 4.6 32.1 5.9 3.6 2.9 2.5 EV/Sales (x) 4.9 2.6 2.2 1.9 1.7 2.7 2.0 1.8 1.5 1.2 6.3 2.9 2.8 2.4 2.1 3.6 2.4 2.1 1.8 1.5 3.5 2.7 2.3 1.9 1.6 6.0 3.1 2.1 1.3 0.9 1.6 1.2 1.0 1.1 0.7 EV/E (x) 30.3 9.4 7.9 6.7 6.2 13.0 7.1 5.8 4.6 3.9 22.8 8.4 7.9 7.0 6.0 21.1 8.3 6.8 5.4 4.4 20.9 8.1 6.2 5.1 4.3 18.8 7.3 5.1 3.1 2.2 10.3 4.4 3.2 3.2 2.4 RoCE (%) 18.0 38.2 35.9 33.2 30.3 17.8 31.0 31.0 30.3 30.1 15.8 20.7 38.4 34.7 31.6 12.0 36.0 37.0 37.4 36.0 7.9 21.7 27.6 28.6 27.9 8.8 17.0 26.7 44.4 44.4 13.4 31.4 35.6 32.7 30.5 Reco & EV/te (US$) Sell 165

Grasim 2,574

Buy 130

Ambuja Cement 113

Sell 222

UltraTech 784

Buy

141

India Cements 180

Hold

129

Shree Cement 1,078

Buy

97

JK Cement 150

Buy

101

Source: I-Sec Research

22

Cement sector, April 21, 2008

ICICI Securities

Cement companies get divergent valuations based on parameters such as plant location, diversified businesses, efficiently levels and EBITDA margin. Historically, ACL was valued at a premium over peers due to efficiency levels while Grasim always received a conglomerate discount on account of diversified businesses. However, over time, with capacity expansion and foray into new markets, ACL has gradually lost its competitive edge. Hence, we feel that the current valuation premium to peers is unjustified. Similarly, we believe that companies (such as JKCL and UTCL) that have been registering sustainable improvement in efficiencies are likely to get re-rated. Further, current valuations of SCL do not seem to factor its high efficiency levels.

We prefer stocks with volume upside and/or cost savings
Our expectation of 4% and 0% growth in average realisations for the next two years would mean that companies that are likely to show strong volume growth and/or significant cost savings would register higher earnings growth. We expect Grasim, UTCL and SCL to report higher volumes from fresh capacities commissioned recently, while UTCL and JKCL would benefit from lower cost of captive power. ACC and ACL are expected to register lower earnings growth on account of volume growth restriction, although impact of rising costs would partly be offset by captive power capacities. ACC and ACL are most expensive in the I-Sec Cement universe and, hence, we initiate coverage on them with a SELL. We initiate coverage on Grasim, UTCL, JKCL and SCL with a BUY, with Grasim and SCL being our top picks in the sector.

23

Cement sector, April 21, 2008

ICICI Securities

Key risks
Estimates – Incremental supply and demand
Our FY09 and FY10 incremental supply estimates are based on our interaction with cement equipment suppliers and are at variance with claims of cement companies. Should large number of capacities get commissioned before schedule, an oversupply could result in pricing pressures from FY09 itself. Further, with housing and infrastructure being key demand drivers, significant slowdown in infrastructure project implementation could affect demand estimates.

Government pressure
We have assumed a conservative 4% and 0% growth in prices for FY09E and FY10E respectively, despite our belief of supply shortage during the period. We expect cement companies to avoid aggressive price hikes to evade Government intervention. However, given the current inflationary pressures, the Government may compel cement players to cut prices or avoid future price increases. Such a scenario (such as a price freeze in March ’07) could impact our forecast as well as dampen valuations and sentiment.

Input cost pressure
While cement companies have been facing sharp cost increases since the past six months, they have recently begun passing on the increases via price hikes. Our forecast assumes fuel prices at the current high levels. However, should price of pet coke and international coal rise substantially from current levels, inability of effecting price hikes from fear of Government intervention could put severe pressure on margins.

24

Cement sector, April 21, 2008

ICICI Securities

Index of Tables and Charts
Tables
Table 1: Relative valuations..................................................................................................5 Table 2: Housing demand projection ..................................................................................11 Table 3: Road projects under NHDP ..................................................................................12 Table 4: Demand from power projects................................................................................13 Table 5: Demand from infrastructure ..................................................................................13 Table 6: Sector-wise projected cement demand (FY08-12E).............................................14 Table 7: Demand/supply .....................................................................................................15 Table 8: Regional demand/supply scenario........................................................................15 Table 9: Calendar of events (since January ’07) ................................................................17 Table 10: Landed cost of cement from Pakistan ................................................................18 Table 11: Freight mix for cement companies......................................................................20 Table 12: Relative valuations..............................................................................................22

Charts
Chart 1: Utilisation versus cement prices .............................................................................4 Chart 2: Key cement equipment suppliers and market share (excl. China) .........................6 Chart 3: Global contracted kiln capacity trend (excl. China).................................................7 Chart 4: Order inflow and backlog trend of key companies..................................................7 Chart 5: Expected incremental supplies over the next three years ......................................8 Chart 6: Production and consumption trend .........................................................................9 Chart 7: GDP versus cement demand growth ....................................................................10 Chart 8: Share of the 25-44yr age group in total population...............................................11 Chart 9: Infrastructure spending in X & XI FYPs ................................................................12 Chart 10: Rising utilisation levels and prices ......................................................................16 Chart 11: All-India average cement price trend ..................................................................16 Chart 12: International coal price movement ......................................................................19 Chart 13: Baltic dry freight index.........................................................................................20 Chart 14: Power fuel costs for key companies (FY08) .......................................................21 Chart 15: Freight costs for key companies (FY08) .............................................................21

25

Cement sector, April 21, 2008

ICICI Securities

This page has been intentionally left blank

26

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

ACC
Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Sep '07 43.0 36.3 1.8 15.5 18.8 20.7 Dec '07 43.0 36.4 2.0 15.8 18.4 20.6 Mar '08 43.0 36.2 3.1 17.8 15.1 20.8

SELL
Rs799

Lacking strength
Reason for report: Initiating coverage

ACC, the largest cement player in India, will likely witness muted volume growth in the next two years. While the company is expected to add ~1.5mnte capacity towards end-CY08E, larger expansions at Wadi and Chanda (3mnte each) would be operational only in H2CY09E and CY10E respectively. Overall, ACC will post slower earnings growth versus peers. At the current market price, it is amongst the most expensive stocks in the I-Sec Cement universe. We initiate coverage with SELL rating and Rs769/share price target in the next 12-18 months. Muted topline growth. ACC plans capacity additions of 1.28mnte at Bargarh, Orissa and 0.22mnte at Madukkarai, Tamil Nadu, both to be operational by endCY08. While these capacities are small, the benefits would only accrue in CY09. Further, benefits of larger capacity additions at Wadi and Chanda would accrue mainly in CY10E. Hence, the company’s topline growth will face capacity constraints.

Price chart
1,400 1,200 (Rs) 1,000 800 600 Jun-07 Nov-07 Sep-07 Apr-07 Jan-08 Apr-08

Lower impact of rising fuel costs. ~90% of ACC’s fuel requirements are met through domestic coal, for which price hikes are much lower than international coal or pet coke. However, the company will need to buy 20% of its requirement from open market at higher rates. We believe that the impact from this will be lower than peers with higher share of pet coke or imported coal. Consequently, ACC could witness margin expansion, primarily aided by moderate realisations. Earnings slowdown. We expect ACC to post earnings CAGR of 8% in the next two years, mainly owing to volume constraints and higher fixed costs. Strong free cashflow (FCF) of over Rs14bn would help lower D/E to 0.4x in CY08E and further to 0.3x in CY09E. Expensive valuations. ACC trades at CY08E & CY09E P/E of 10.9x and 10.2x respectively and EV/te of US$165. The company is the second most expensive stock in the I-Sec Cement universe and, given the muted earnings growth, we initiate coverage with SELL and fair value of Rs769/share in the next 12-18 months.

Market Cap Reuters/Bloomberg

Rs863.3bn/US$21.6bn ACC.BO/ACC IN 188 1315/608 57.0 15.1 16,730 (7.4) (21.9) (13.3) (18.8)

Year to Dec Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%)

CY06 58,035 10,810 56.9 190.0 14.0 71.1 9.4 1.0 38.2 41.0

CY07P 70,072 12,640 66.5 16.9 12.0 81.5 7.9 2.5 35.9 34.7

CY08E 78,880 13,754 73.2 10.0 10.9 88.9 6.7 2.5 33.2 29.7

CY09E 88,065 14,727 78.4 7.1 10.2 96.4 6.2 2.6 30.3 26.2

Shares Outstanding (mn) 52-week Range (Rs) Free Float (%) FII (%) Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Sensex Return 3m (%) Sensex Return 12m (%)

Please refer to important disclosures at the end of this report

ACC, April 21, 2008

ICICI Securities Largest player, but volume growth muted
While ACC added ~1.7mnte capacity in CY07 mainly through de-bottlenecking, it would be adding another ~1.5mnte in CY08. Capacity additions in CY08 are not large and will materialise at end year. Consequently, volume growth in CY08 is expected to be benign as benefits from capacity augmentation will largely accrue in CY09. Table 1: Capacity addition plans
Tikaria (Uttar Pradesh) Lakheri (Rajasthan) Kymore (Madhya Pradesh) Bargarh (Orissa) Madukkarai (Tamil Nadu) Wadi (Karnataka) Chanda (Maharashtra) Total Source: Company data

CY07 0.31 0.90 0.50

CY08E

CY09E

CY10E

1.28 0.22 3.00 3.00 3.00

1.71

1.50

3.00

ACC’s 3mnte expansion at Wadi and its split grinding unit will likely be commissioned only in mid-CY09E. At present, most capacity additions are lagging behind their original timelines and even a three-month delay in this project would erode substantial volume benefits for CY09E. However, in our forecasts, we have assumed that the plant will be commissioned as per schedule.

Continues to be largest player in India
Table 2: Key markets and market share
Market share (%) North Uttar Pradesh & Uttaranchal Rajasthan Punjab Haryana Himachal Pradesh West Goa Maharashtra South Tamil Nadu Karnataka Kerala Andhra Pradesh East West Bengal Bihar & Jharkhand Orissa Central Madhya Pradesh and Chhattisgarh
20.2 1.9 30.9 6.50 45.7 35.8 14.0 2.6 16.0 11.9 4.7 15.9 20.5 18.9 11.0

% of total despatches
19.8 1.0 10.9 2.0 4.6 0.8 13.7 1.8 9.6 4.5 3.1 5.9 7.9 4.5 6.2

9-yr consumption CAGR (%)
8.9 9.9 6.0 12.2 14.4 0.7 7.2 7.4 11.2 6.8 8.5 6.7 10.1 10.9 9.6

Share of total consumption (%)
12.2 6.1 4.4 3.8 1.3 6.8 12.2 8.6 7.5 4.7 8.2 4.6 4.8 3.0 7.0

Total 12.4 96.3 Source: Cement Manufacturers Association (CMA), I-Sec Research

8.1

100.0

28

ACC, April 21, 2008

ICICI Securities
ACC remains the largest cement player with pan-India presence. The company’s allIndia presence helps it insulate itself from regional variations in demand and prices. However, ACC’s market share has been eroding gradually (excluding FY04, when it acquired IDCOL Cement) due to slower pace of capacity additions compared with peers. We expect market share erosion to continue in the next couple of years till Wadi and Chanda expansions go onstream. Chart 1: Market share trends in key regions
22 20 18 (%) 16 14 12 10 FY03 All India Norh East

FY04

FY05

FY06

FY07

Source: CMA, I-Sec Research

29

ACC, April 21, 2008

ICICI Securities Lower impact of fuel costs versus peers
~90% of ACC’s coal requirements are sourced domestically. Imported coal is primarily used at its 1mnte plant in Tamil Nadu. However, Coal India (CIL) has raised coal prices by an average of 10-15% in December ’07. Further, of the total domestic coal consumed, ~20-25% has to be sourced from open markets (due to shortage of domestic coal), where prices are ~25-30% higher than CIL rates. This exposes the company to significant variations in the coal cost depending on the share of coal purchased from open markets. However, we believe that ACC’s fuel costs are going to be more benign than most of its peers who use imported coal or pet coke.

Savings in power costs unlikely
~70% of ACC’s power requirements are met captively. This share has risen post commissioning of a 25MW captive power plant (CPP) at Lakheri, Rajasthan along with capacity augmentation in CY07. Another 30MW CPP in Orissa and the Bargarh expansion is expected by end CY08 following which, we expect share of captive power to be ~82%. ACC would continue to purchase power from the grid for its Himachal Pradesh plant as it is inexpensive hydro power. We believe CPP additions are too small to have substantial impact on power cost savings. Chart 2: Power and fuel costs trend
800 700 600 500 (Rs/te) 400 300 200 100 0 9M2006 CY06 CY07P CY08E CY09E 1.5 1.0 0.5 0.0 Pow er & Fuel Average per unit cost of pow er (RHS) 3.5 3.0 2.5 2.0 (Rs/kWh)

Source: Company data, I-Sec Research

30

ACC, April 21, 2008

ICICI Securities
Sharp surge in SG&A, likely to sustain
During CY07, ACC’s administrative and other expenses surged sharply due to various management initiatives such as marketing excellence, ERP implementation and other HR initiatives. While some costs (such as part of ERP-implementation costs) are onetime expenses, we expect other costs to remain high without any commensurate financial benefit. Chart 3: SG&A expenses
5,500 5,000 4,500 (Rs mn) 4,000 3,500 3,000 2,500 2,000 1,500 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 SG&A expenses SG&A (RHS) 1,100 1,000 900 800 700 600 500 400 300 (Rs/te)

Source: Company data, I-Sec Research

31

ACC, April 21, 2008

ICICI Securities Earnings growth unimpressive
Table 3: Performance trend and forecast assumptions
(’000 te}
Capacity Production Capacity utilisation (%) Sales Growth (%) Realisations (Rs/te) Growth (%) Source: I-Sec Research

CY06 19,909 18,733 94.1 18,357 45.4 2,893 32.1

CY07 21,619 19,876 91.9 19,876 8.3 3,299 14.0

CY08E 23,039 21,267 92.3 21,267 7.0 3,480 5.5

CY09E 26,039 23,819 91.5 23,819 12.0 3,480 -

CY10E 29,039 26,201 90.2 26,201 10.0 3,236 (7.0)

Moderate topline growth. We expect ACC to post topline CAGR of 12% over the next two years. The company’s volumes are likely to improve 7% and 12% in CY08E and CY09E respectively. We expect ACC to add just 1.5mnte as of end-CY08E and another 3mnte at Wadi by mid-CY09E. Hence, substantial benefits from capacity additions are likely to come only in CY09E, resulting in lower volume growth in CY08E. We have assumed average realisations to grow 5.5% in CY08E and remain flat for CY09E. Chart 4: Sales, EBITDA and EBITDA margin movement
100,000 90,000 80,000 70,000 (Rs mn) 60,000 50,000 40,000 30,000 20,000 10,000 0 9M2006 CY06 CY07P CY08E CY09E Net sales EBITDA EBITDA Margin (RHS) 30 28 26 24 22 20 18 16 14 12 10 (%)

Source: Company data, I-Sec Research

Margin improvement in CY08. Rising fuel cost would have relatively lower impact on ACC’s operations versus peers as 90% of the company’s coal requirements are met from domestic sources. While cost of international coal has risen ~50-60%, domestic coal prices surged just 10-15% in December ’07. While ACC will also have to purchase coal from the open markets for ~20% of its requirements, the net increase in the cost of fuel for the company would be lower than peers using international coal or pet coke. Hence, the expected growth in realisations for CY08E would more-thanoffset impact of higher input costs (coal, fly ash etc) and SG&A costs. Consequently, we expect 120bps rise in margins for CY08E. In CY09E, however, margins are expected to decline 112bps on account of flat realisations. ACC’s EBITDA/te is expected to improve to Rs1,060 in CY08E from Rs965 in CY07, before falling to Rs1,015 in CY09E.

32

ACC, April 21, 2008

ICICI Securities
Slower topline growth, margin contraction in CY09 and higher interest costs would result in moderate earnings growth of 8% in the next two years. Chart 5: Key costs and EBITDA/te
1,200 1,000 800 (Rs/te) 600 400 200 0 9M2006
Source: I-Sec Research

Pow er & Fuel

Freight

EBITDA/tonne

CY06

CY07P

CY08E

CY09E

Chart 6: FCF and D/E
19,000 Free cashflow D/E (RHS) 1.5

14,000

1.0

(Rs mn)

9,000

0.5 (x)

4,000

0.0

(1,000)

-0.5

(6,000) 9M2006
Source: I-Sec Research

-1.0 CY06 CY07P CY08E CY09E

ACC is likely to generate FCF in excess of Rs14bn in the next two years despite substantial capex of ~Rs29bn for Wadi (3mnte) and Chanda (3mnte). Therefore, we expect ACC’s D/E to remain benign at 0.4x & 0.3x in CY08E & CY09E respectively.

33

ACC, April 21, 2008 Chart 7: RoCE and RoE trends
45 RoCE 40

ICICI Securities

RoE

35 (%) 30 25 20 9M2006
Source: I-Sec Research

CY06

CY07P

CY08E

CY09E

ACC’s return ratios are expected to witness a declining trend, mainly owing to earnings growth slowdown and large capex plan (6mnte), the returns from which are only expected H2CY09E onwards.

34

ACC, April 21, 2008

ICICI Securities
Expensive valuations
At the current market price, ACC is valued at CY08E & CY09E P/E of 10.9x and 10.2x and EV/E of 6.7x & 6.2x respectively. On EV/te, the company is valued at US$165. ACC is among the most expensive companies under our coverage universe (second only to Ambuja Cement). However, with volume growth likely to be restricted, cost escalation will result in lower earnings growth in the next two years. Consequently, we believe that the current valuations are expensive. Our target price of Rs769 assumes CY08E P/E & EV/E of 10.5x & 6.5x respectively. We initiate coverage with SELL. Chart 8: Rolling P/E bands
1,600 1,400 1,200 1,000 (Rs) 800 600 400 200 0 Oct-02 May-03 May-05 Feb-03 Feb-05 Dec-03 Nov-04 Dec-05 Nov-06 Feb-07 Jul-02 Jul-04 Jul-06 Jun-07 Dec-07 Sep-03 Sep-05 Sep-07 Apr-02 Apr-04 Apr-06 Apr-08 Apr-08 18x 14x 10x

Source: Bloomberg, I-Sec Research

Chart 9: Rolling EV/E bands
400,000 350,000 300,000 (Rs mn) 250,000 200,000 150,000 100,000 50,000 0 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Oct-07 5x 10x 15x

Source: Bloomberg, I-Sec Research

35

ACC, April 21, 2008

ICICI Securities
Table 6: Cash Flow Statement
(Rs mn, year ending Dec 31) CY07 70,072 70,072 50,897 19,175 27 2,668 808 1,857 17,556 1,748 4,917 4,565 351 14,388 12,640 CY08E 78,880 78,880 56,347 22,533 29 2,950 974 1,920 20,529 6,774 5,337 1,437 1 13,754 13,754 CY09E 88,065 88,065 63,898 24,168 27 3,373 1,062 2,248 21,980 7,254 5,715 1,539 2 14,727 14,727 CY06 Operating Cash flow 12,744 Working Capital changes 461 Capital Commitments (4,358) Net Operating FCF 8,848 Investing Activities (633) Issue of Share Capital 22 Buyback of shares Inc(Dec) in Borrowings (2,602) Dividend paid (1,713) Extraordinary Items 1,508 Chg. in Cash & Bank 5,174 Source: Company data, I-Sec Research CY07 12,498 (2,607) (11,281) (1,391) (264) 1 4,474 (4,283) 1,748 CY08E 16,470 (1,719) (11,802) 2,948 328 2,899 (4,283) 620 CY09E 17,676 (1,883) (9,623) 6,170 656 (280) (4,498) 682

Financial Summary
Table 4: Profit and Loss Statement
(Rs mn, year ending Dec 31) CY06 Operating Revenues (Sales) 58,035 of which Domestic 58,035 Operating Expenses 41,803 EBITDA 16,232 % margins 28 Depreciation & Amortisation 2,543 Gross Interest 752 Other Income 1,560 Recurring PBT 14,498 Add: Extraordinaries 1,508 Less: Taxes 3,688 - Current tax 3,740 - Deferred tax (52) Less: Minority Interest Net Income (Reported) 12,318 Recurring Net Income 10,810 Source: Company data, I-Sec Research

Table 7: Key Ratios
(Year ending Dec 31) CY06 Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (x) Receivables (days) Payable (days) D/E Ratio (x)
65.6 56.9 71.1 8.0 167.3

CY07 CY08E CY09E
76.6 66.5 81.5 20.0 221.1 73.2 73.2 88.9 20.0 271.5 78.4 78.4 96.4 21.0 326.0

Table 5: Balance Sheet
(Rs mn, year ending Dec 31) CY06 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Intangibles Capital Work-in-Progress Total Assets
19,683 6,202 14,890 4,792 5,035 789 4,247 29,225 4,734 43,787

CY07
21,494 6,202 12,790 8,704 7,147 780 6,367 36,661 5,920 58,432

CY08E
23,869 6,822 13,074 10,795 8,778 819 7,959 34,961 16,433 70,967

CY09E
26,471 7,504 13,396 13,075 10,410 860 9,551 47,188 10,416 81,089

81.2 213.1 295.7 190.0 201.6

20.7 18.1 16.9 16.9 14.6

12.6 17.5 8.8 10.0 9.1

11.6 7.3 7.1 7.1 8.3

Liabilities Borrowings 9,160 Deferred Tax Liability 3,207 Minority Interest Equity Share Capital 1,878 Face value per share (Rs) 10 Reserves & Surplus* 29,552 Less: Misc. Exp n.w.o. 9 Net Worth 31,420 Total Liabilities 43,787 Source: Company data, I-Sec Research *excluding revaluation reserves

13,633 3,271 1,878 10 39,656 7 41,527 58,432

16,532 3,435 1 1,878 10 49,127 5 51,000 70,967

16,252 3,607 2 1,878 10 59,356 4 61,230 81,089

14.0 11.2 4.8 9.4 2.6 11.5

12.0 9.8 3.6 7.9 2.2 15.3

10.9 9.0 2.9 6.7 1.9 10.3

10.2 8.3 2.5 6.2 1.7 9.5

15.4 4.3 10.8 22.8 (0.0) 4.9 11.7 71.0 0.4

15.0 5.0 10.6 25.0 0.0 5.2 11.3 58.3 0.4

14.6 5.0 9.4 33.0 0.1 4.8 12.0 50.0 0.4

14.6 5.0 10.2 33.0 0.1 4.7 12.5 44.1 0.3

Profitability Ratios (%) Rec. Net Income Margins 18.1 RoCE 38.2 RoNW 41.0 Dividend Payout 14.1 Source: Company data, I-Sec Research

17.6 35.9 34.7 30.1

17.0 33.2 29.7 27.3

16.3 30.3 26.2 26.8

36

ACC, April 21, 2008

ICICI Securities Index of Tables and Charts
Tables
Table 1: Capacity addition plans.........................................................................................28 Table 2: Key markets and market share.............................................................................28 Table 3: Performance trend and forecast assumptions ......................................................32 Table 4: Profit and Loss Statement ....................................................................................36 Table 5: Balance Sheet.......................................................................................................36 Table 6: Cash Flow Statement............................................................................................36 Table 7: Key Ratios.............................................................................................................36

Charts
Chart 1: Market share trends in key regions.......................................................................29 Chart 2: Power and fuel costs trend ...................................................................................30 Chart 3: SG&A expenses....................................................................................................31 Chart 4: Sales, EBITDA and EBITDA margin movement ...................................................32 Chart 5: Key costs and EBITDA/te .....................................................................................33 Chart 6: FCF and D/E .........................................................................................................33 Chart 7: RoCE and RoE trends...........................................................................................34 Chart 8: Rolling P/E bands..................................................................................................35 Chart 9: Rolling EV/E bands ...............................................................................................35

37

ACC, April 21, 2008

ICICI Securities

This page has been intentionally left blank

38

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

Ambuja Cement
Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Sep '07 37.8 44.8 2.6 14.6 27.6 17.4 Dec '07 46.5 37.6 0.6 13.5 23.5 16.0 Mar '08 46.5 36.7 0.3 13.4 23.1 16.8

SELL
Rs113

Shedding sheen
Reason for report: Initiating coverage

Ambuja Cement (ACL), which previously featured amongst the most efficient cement companies, has gradually lost its cost advantage on account of expansion and foray into new markets. With large capacity addition (6mnte) expected to come onstream only in mid-to-late CY09, capacity constraints and cost pressure would slowdown earnings growth in the next two years. At the current market price, ACL is the most expensive stock in the I-Sec Cement universe and we believe these premium valuations are unjustified. We initiate coverage with SELL rating and price target of Rs109/share. Topline growth subdued. ACL’s expansions in Bhattapara, Chhattisgarh and Rauri (in Himachal Pradesh) at 3mnte each are expected to be operational in mid-to-late CY09. Though the company is adding a 4mnte grinding unit, increase in output would be insignificant. Consequently, capacity constraints would slowdown topline growth. Cost pressure to affect margins. ACL depends on imported coal for ~40% of its fuel requirements, the cost of which has risen sharply. ACL plans to commission ~178MW of captive power by end-CY08, of which 60MW has already been commissioned in Gujarat. However, impact of imported coal would be partly offset by the commissioning of captive power, resulting in margin contraction. Earnings growth slowdown. We expect ACL’s earnings CAGR at 10% in the next two years, mainly owing to cost escalations and volume constraints. ACL should generate free cashflows (FCFs) of ~Rs18bn despite large capex plans. We expect ACL’s CY08E D/E to be benign at 0.11x but further dip to 0.08x in CY09E. Expensive valuations. ACL trades at CY08E & CY09E P/E of 11.8x & 10.8x and EV/te of US$222 ACL is the most expensive stock in the I-Sec Cement universe and the current premium to peers is unjustified. Consequently, we initiate coverage with SELL rating and Rs109/share fair value.

Price chart
160 150 140 (Rs) 130 120 110 100 Nov-07 Jun-07 Sep-07 Apr-07 Jan-08 Apr-08

Market Cap Reuters/Bloomberg 52-week Range (Rs) Free Float (%) FII (%)

Rs171.6bn/US$4.3bn ABUJ.BO/ACEM IN 1,517 161/96 53.5 23.1 8,261 (14.3) (23.0) (13.3) (18.8)

Year to Dec Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%)

CY06 62,683 15,033 9.9 207.4 11.4 12.1 8.4 1.4 20.7 35.4

CY07P 57,049 13,047 8.6 (13.2) 13.2 10.2 7.9 1.5 38.4 31.7

CY08E 62,769 14,568 9.6 11.7 11.8 11.3 7.0 1.5 34.7 26.6

CY09E 69,745 15,896 10.5 9.1 10.8 12.5 6.0 1.5 31.6 23.2

Shares Outstanding (mn)

Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Sensex Return 3m (%) Sensex Return 12m (%)

Please refer to important disclosures at the end of this report

Ambuja Cement, April 21, 2008

ICICI Securities

New capacity addition only in CY09; volume growth muted
ACL is currently implementing two projects that are expected to be commissioned only in CY09 – 3mnte plant at Bhatapara, Chhattisgarh, likely to be operational by Q2CY09 and 3mnte plant at Rauri, Himachal Pradesh, expected to be commissioned in Q4CY09. In the interim, ACL is expected to set up four grinding units at Surat, Panipat, Ahmedabad and Dadri totalling 5mnte. Two additional grinding units at Nalagarh (Himachal Pradesh, 1.5mnte) and Barh (Bihar, 1mnte) are scheduled to be operational only in CY10. These grinding units are strategically located close to power plants which will allow cheaper sourcing of fly ash. Table 1: Capex plans
Capex plans Rajasthan (Clinker) Farakka, West Bengal (Grinding) Rourkee, Uttar Pradesh (Grinding) Surat, Gujarat (Grinding) Dadri, Uttar Pradesh (Grinding) Panipat, Haryana (Grinding) Rauri, Himachal Pradesh (Clinker) Bhatapara, Chhattisgarh, (Clinker) Ahmedabad, Gujarat (Grinding) Total Source: Company data CY07 0.4 1.0 1.0 CY08 CY09

1.0 1.5 1.0 3.0 3.0 1.5 7.5

2.4

2.0

Given that substantial capacities are expected only in CY09, volume growth in CY08 is likely to be muted. Even for CY09, only part of the benefit from new capacities will flow in as the plants will be operational during the course of the year. While ACL has already commissioned two grinding units in CY07 and would commission a 4.5mnte grinding unit in CY08, these will only marginally enhance production capacity though help in freight and logistic benefits. ACL is likely to see market erosion till CY09. Chart 1: Market share trend
22 20 18 16 (%) 14 12 10 8 6 FY03 All India Norh West East

FY04

FY05

FY06

FY07

Source: Cement Manufacturers Association (CMA), I-Sec Research

40

Ambuja Cement, April 21, 2008

ICICI Securities

Previously, ACL primarily focused on western and northern regions. However, with the acquisition of Ambuja Cement Eastern (erstwhile Modi Cement) and its subsequent merger with ACL, the company now has strong foothold in the East. Since FY06, only the East has seen market share improvement. Table 2: Key markets and market share
Market share (%) North Uttar Pradesh & Uttaranchal Rajasthan Punjab Haryana Himachal Pradesh Chandigarh (UT) West Gujarat Maharashtra Central Madhya Pradesh and Chhattisgarh East West Bengal Assam Orissa Total Source: CMA, I-Sec Research 3.5 14.0 28.7 14.1 48.3 20.6 % of total despatches 5.0 8.7 12.7 5.3 6.1 0.5 9-yr consumption CAGR (%) 8.9 9.9 6.0 12.2 14.4 Share of total consumption (%) 12.2 6.1 4.4 3.8 1.3 0.2

19.7 19.7

13.5 24.4

4.5 7.2

6.8 12.2

8.9

6.3

9.6

7.0

19.2 8.1 3.8 9.88

9.0 0.6 1.2 93.2

6.7 7.4 10.9 8.1

4.64 0.70 2.99 100.0

Efficiencies to be affected by rising fuel cost
ACL was previously amongst the most efficient companies in India due to use of captive and cheap power as well as lower freight costs from sea transport. However, over the years, with rising diesel cost, capacity expansion in new markets, reduction in share of sea freight and increase in average lead distances, the company has gradually lost its key cost advantages. To address the rising diesel cost concern and ensure reliability and quality of power, ACC is currently implementing fresh thermal capacities totalling 178MW. We expect average Re1/unit savings from captive power plant (CPP) operations. Table 3: Capex on captive power
Location Ambujanagar (Gujarat) Ambujanagar (Gujarat) Ambujanagar (Gujarat) Bhattapara (Chhattisgarh) Bhatapara (Chhattisgarh) Rabariyawas (Rajasthan) Chandrapur (Maharashtra) Ropar (Punjab) Total Source: Company data, I-Sec Research Power (MW) 30 30 30 15 33 19 15 6 178 Time of commissioning Q1CY07 Q4CY07 Q4CY08 Q2CY08 Q4CY08 Q1CY08 Q1CY08 Q2CY07

41

Ambuja Cement, April 21, 2008 Chart 2: Power and fuel costs trend
700 600 500 (Rs/te) 400 300 200 100 0 FY05 CY06 CY07P CY08E Pow er & Fuel Average per unit cost of pow er (RHS)

ICICI Securities

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 CY09E (Rs/kWh)

Source: Company data, I-Sec Research

While the commissioning of CPPs is likely to bring down the unit cost of power in the next two years, it would only partly offset the impact of rising fuel costs. ACL imports ~40% of its total coal requirements at present and the sharp rise in international coal prices along with bulk freight rates is bound to affect overall energy costs. Further, power plants located in Gujarat would have to use international coal for operations, thereby reducing potential savings from captive power. Chart 3: Key cost trend
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY05 CY06 CY07P CY08E CY09E Pow er & Fuel Freight EBITDA/te

Source: Company data, I-Sec Research

42

Ambuja Cement, April 21, 2008

ICICI Securities

Lower earnings growth versus peers
Table 4: Performance trend and forecast assumptions
(’000 te) Capacity Production Capacity utilisation (%) Sales Growth (%) Realisation (Rs/te) Growth (%) Exports Growth (%) Source: I-Sec Research CY06 23,450 22,633 96.5 22,602 77.7 3,102 30.5 2,503 42.6 CY07P 17,050 16,839 98.8 16,839 (25.5) 3,842 23.9 1,600 (36.1) CY08E 17,300 17,512 101.2 17,512 4.0 4,071 6.0 1,401 (12.4) CY09E 23,300 19,439 83.4 19,439 11.0 4,080 0.2 1,361 (2.9) CY10E 23,300 22,355 95.9 22,355 15.0 3,806 (6.7) 1,565 15.0

Muted topline growth. We expect ACL to face volume growth constraints in CY08 and in some part of CY09. While the company’s grinding units at Surat and Panipat will help achieve freight and logistic benefits, incremental volumes will only flow in from clinkerisation units at Bhatapara and Rauri that are expected to be commissioned in H2CY09. Consequently, we expect volume growth of 4% and 11% in CY08E and CY09E respectively. This coupled with 5.5% higher realisations in CY08E and flat realisation growth in CY09E will result in revenue growth of 10.6% in the next two years. Chart 4: Sales, EBITDA and EBITDA margin movement
80,000 70,000 60,000 (Rs mn) 50,000 40,000 30,000 20,000 10,000 0 FY05 CY06 CY07P CY08E CY09E 15 10 30 25 20 (%) Net sales EBITDA EBITDA Margin (RHS) 40 35

Source: Company data, I-Sec Research

Captive power to partly offset rising input costs. The rising cost of international coal along with bulk freight rates is bound to affect ACL’s efficiencies (~40% of the company’s coal requirements are imported). However, the company is implementing ~178MW of CPPs (60MW already commissioned), which should be commissioned by end-CY08 and help partly offset the impact of rising imported coal. However, the 60MW plant, which has already been commissioned, would rely on imported coal as fuel, thereby minimising the benefits of captive power.

43

Ambuja Cement, April 21, 2008

ICICI Securities

With Holcim acquiring management control over ACL, the management is implementing various programmes across the company, which include HR-related programmes and building robust business systems & processes through ERP implementation. These initiatives would result in higher SG&A expenses without an immediate financial benefit. Consequently, we expect ~92bps decline in EBITDA margin to 34.8% in CY08E and further 32bps decline to 34.4% in CY09E. Chart 5: EBITDA/te
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY05 CY06 CY07P CY08E CY09E

Source: Company data, I-Sec Research

Lower topline growth coupled with cost pressures will slowdown earnings growth for ACL in the next two years. Consequently, we expect ACC to post bottomline CAGR of 10% in the next two years, much lower than most of peers. ACL, which exports ~7-8% of its output at present, is likely to be affected by the recent export ban. However, the impact could be marginal as export quantities are expected to be absorbed by the western markets, given the acute supply shortage expected in FY09. Further, domestic realisations, which are ~Rs250/te higher than export rates, are likely to part compensate for the loss of export volumes. While the export ban is unlikely to be a long-term measure, ACL’s earnings would be affected ~2-6% if the ban continues through the year. Chart 6: FCF and D/E
18,000 16,000 14,000 12,000 (Rs mn) 10,000 8,000 6,000 4,000 2,000 0 FY05
Source: Company, I-Sec Research

Free cashflow

D/E (RHS)

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 (x)

CY06

CY07P

CY08E

CY09E

44

Ambuja Cement, April 21, 2008

ICICI Securities

ACL is a cash-rich company and a significant part of its capex (till CY09) will be largely met via internal accruals. Hence, despite the current capex plan, the company is likely to generate FCFs of ~Rs17.9bn in the next two years. The company’s D/E would be as low as 0.11x in CY08E and further decline to 0.08x in CY09E. ACL is currently net cash positive and will continue to remain so in CY09E. ACL’s return ratios are expected to decline, mainly due to significant capex, the benefits of which can be expected only after commissioning of the 6mnte capacity post H2CY09E. Chart 7: RoCE and RoE trends
45 40 35 (%) 30 25 20 15 FY05 RoCE RoE

CY06

CY07P

CY08E

CY09E

Source: Company data, I-Sec Research

45

Ambuja Cement, April 21, 2008

ICICI Securities

Expensive valuations
At the current market price, ACL is trading at CY08E & CY09E P/E of 11.8x & 10.8x and EV/E of 7.0x and 6.0x respectively. On EV/te, the company is valued at US$222. ACL is the most expensive company under the I-Sec Cement universe. Historically, the company has been valued at a premium to peers given its high efficiency and freight cost advantages. ACL is also likely to see volume growth restriction in the next two years and only part of its cost escalations would be offset by captive power. Over the years, owing to rising fuel costs, expansion and foray in new markets, the company has gradually lost its key cost advantages. Consequently, we believe that current substantial premiums to peers are likely to shrink. Our target price of Rs109 assumes CY08E P/E and EV/E of 11.5x and 6.9x respectively. We initiate coverage with SELL. Chart 8: Rolling P/E bands
200 180 160 140 120 (Rs) 100 80 60 40 20 0 May-05 Oct-05 Feb-06 Mar-03 Mar-07 Jul-02 Jan-05 Jun-06 Nov-02 Dec-03 Nov-06 Jul-07 Dec-07 Oct-07 Apr-04 Aug-03 Aug-04 Apr-08 Apr-08 8x 13x 18x

Source: Bloomberg, I-Sec Research

Chart 9: Rolling EV/E bands
300,000 12x 250,000 200,000 (Rs mn) 150,000 100,000 50,000 0 Oct-02 Oct-03 Oct-04 Oct-05 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Oct-06 Apr-07 6x 9x

Source: Bloomberg, I-Sec Research

46

Ambuja Cement, April 21, 2008

ICICI Securities
Table 7: Cash Flow Statement
(Rs mn, year ending Dec 31) CY07 57,049 3,898 53,152 36,695 20,354 36 2,363 590 1,697 19,098 4,644 6,050 6,059 (9) 17,691 13,047 CY08E 62,769 3,485 59,284 40,957 21,812 35 2,546 363 2,210 21,113 3,082 6,545 5,278 1,267 17,650 14,568 CY09E 69,745 3,224 66,521 45,732 24,012 34 3,104 271 2,739 23,376 7,480 5,844 1,636 15,896 15,896 CY06 Operating Cash flow 20,098 Working Capital changes (543) Capital Commitments (14,095) Net Operating FCF 5,460 Investing Activities 1,991 Issue of Share Capital 330 Buyback of shares Inc(Dec) in Borrowings (2,621) Dividend paid (2,768) Extraordinary Items 523 Chg. in Cash & Bank 2,916 Source: Company data, I-Sec Research CY07 15,441 (639) 2,260 17,063 (1,244) (4,713) (2,941) (2,194) 10,615 CY08E 16,181 (845) (9,457) 5,879 (1,319) (1,285) (2,941) (1,228) 2,188 CY09E 17,908 (467) (5,394) 12,047 (5,202) (649) (2,941) (1,597) 1,658

Financial Summary
Table 5: Profit and Loss Statement
(Rs mn, year ending Dec 31) CY06 Operating Revenues (Sales) 62,683 of which Exports 5,146 of which Domestic 57,537 Operating Expenses 41,352 EBITDA 21,331 % margins 34 Depreciation & Amortisation 3,261 Gross Interest 1,132 Other Income 1,479 Recurring PBT 18,416 Add: Extraordinaries Less: Taxes 3,384 - Current tax 3,353 - Deferred tax 31 Less: Minority Interest Net Income (Reported) 15,033 Recurring Net Income 15,033 Source: Company data, I-Sec Research

Table 8: Key Ratios
(Year ending Dec 31) CY06 Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (x) Receivables (days) Payable (days) D/E Ratio (x) 9.9 9.9 12.1 1.6 23.0 CY07 CY08E CY09E 11.7 8.6 10.2 1.7 31.2 11.6 9.6 11.3 1.7 40.9 10.5 10.5 12.5 1.7 49.4

Table 6: Balance Sheet
(Rs mn, year ending Dec 31) CY06 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Intangibles Capital Work-in-Progress Total Assets 11,776 3,781 7,016 4,760 11,331 9,861 1,470 31,241 6,349 47,333 CY07 23,175 14,396 8,898 14,277 8,558 4,146 4,411 32,333 6,124 55,167 CY08E 26,210 16,584 8,909 17,301 9,229 1,289 7,940 42,100 14,804 68,631 CY09E 28,898 18,243 9,482 19,416 17,170 1,289 15,880 44,390 1,500 80,976

140.6 194.6 245.0 207.4 158.3

(9.0) (4.6) (13.2) (13.2) (15.8)

10.0 7.2 11.7 11.7 11.1

11.1 10.1 9.1 9.1 11.0

11.4 9.4 4.9 8.4 2.9 9.1

13.2 11.1 3.6 7.9 2.8 10.8

11.8 10.0 2.8 7.0 2.4 10.0

10.8 9.0 2.3 6.0 2.1 2.9

Liabilities Borrowings 8,654 Deferred Tax Liability 3,839 Minority Interest Equity Share Capital 3,034 Face value per share (Rs) 2 Reserves & Surplus* 31,883 Less: Misc. Exp n.w.o. 77 Net Worth 34,840 Total Liabilities 47,333 Source: Company data, I-Sec Research *excluding revaluation reserves

3,941 3,877 3,034 2 44,392 77 47,349 55,167

2,657 3,916 1 3,034 2 59,101 77 62,058 68,631

2,008 3,955 2 3,034 2 72,056 77 75,013 80,976

9.4 3.3 8.0 18.4 0.0 7.7 3.5 29.3 0.4

9.8 3.5 8.9 31.7 (0.0) 5.2 4.8 44.5 0.2

10.7 3.4 10.5 31.0 0.0 5.1 4.3 40.2 0.1

10.2 3.3 11.7 32.0 0.0 5.0 4.3 37.9 0.1

Profitability Ratios (%) Rec. Net Income Margins 23.4 RoCE 20.7 RoNW 35.4 Dividend Payout 16.1 Source: Company data, I-Sec Research

22.2 38.4 31.7 19.8

22.4 34.7 26.6 17.7

21.9 31.6 23.2 16.2

47

Ambuja Cement, April 21, 2008

ICICI Securities

Index of Tables and Charts
Tables
Table 1: Capex plans .......................................................................................................... 40 Table 2: Key markets and market share............................................................................. 41 Table 3: Capex on captive power ....................................................................................... 41 Table 4: Performance trend and forecast assumptions ...................................................... 43 Table 5: Profit and Loss Statement .................................................................................... 47 Table 6: Balance Sheet....................................................................................................... 47 Table 7: Cash Flow Statement............................................................................................ 47 Table 8: Key Ratios............................................................................................................. 47

Charts
Chart 1: Market share trend ................................................................................................ 40 Chart 2: Power and fuel costs trend ................................................................................... 42 Chart 3: Key cost trend ....................................................................................................... 42 Chart 4: Sales, EBITDA and EBITDA margin movement ................................................... 43 Chart 5: EBITDA/te ............................................................................................................. 44 Chart 6: FCF and D/E ......................................................................................................... 44 Chart 7: RoCE and RoE trends........................................................................................... 45 Chart 8: Rolling P/E bands.................................................................................................. 46 Chart 9: Rolling EV/E bands ............................................................................................... 46

48

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

Grasim
Bedrock of strength

BUY
Rs2,569

Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Jun Sept '07 '07 25.2 25.2 44.1 7.9 13.2 23.0 30.7 43.3 9.2 10.6 23.4 31.5 Dec '07 25.2 43.2 10.2 10.7 22.4 31.6

Reason for report: Initiating coverage We expect Grasim’s key divisions, cement and viscose staple fibre (VSF), to drive the topline growth supported by capacity additions. While revenue growth is likely to be impressive, impact of rising input costs would largely be offset by commissioning of captive power plants (CPPs). Based on this and UltraTech Cement’s (UTCL, Grasim’s recent acquisition) impressive performance, Grasim is likely to post earnings CAGR of 15% in the next two years. Our sum-of-the-parts (SOTP) valuations indicate Rs3,638 fair value with 42% upside from current levels. We initiate coverage with BUY rating.
Cement to be key growth driver. We expect Grasim’s cement division growth to be boosted with the commissioning of two plants (Shambhupura: 4.5mnte, Kotputli: 4.4mnte) in Rajasthan. Further, while cement companies are troubled by rising input costs, commissioning of two CPPs with 75MW total capacity will help moderate cost pressures. Improvement in UTCL’s parameters will also boost the overall performance of the cement division. VSF to see margins pressure. While the division’s revenue growth is expected to be impressive owing to 64,000te capacity addition, realisations could come under pressure with VSF prices already reaching peak levels. This along with rising cost of pulp would result in EBITDA margin contraction in FY09. However, sponge iron division, with lower operating rates, could benefit from improvement in gas supplies in June-July ’08 Consolidated earnings growth to impress. We expect Grasim to report a strong 15% bottomline growth over FY08E-10E, aided partly by cost-reduction measures and strong performance from UTCL. Grasim is expected to generate free cashlow (FCF) of Rs53bn on standalone basis in the next two years. Consequently, D/E is likely to decline to 0.4x in FY09E and further to 0.2x in FY10E. Inexpensive valuations. At FY09E and FY10E P/E of 7.2x and 6.5x respectively, Grasim’s valuations remain inexpensive. At the current market price, the cement division is valued at EV/te of US$128, a significant discount to peers though with better efficiency parameters. Our SOTP valuations indicate Rs3,638/share fair value with 42% upside from current levels. Grasim is our top pick in the sector. Initiate coverage with BUY.
Market Cap Reuters/Bloomberg 52-week Range (Rs) Free Float (%) FII (%) Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%) Rs235.5bn/US$5.9bn
GRASIM.BO/GRASIM IN

Price chart
4,000 3,500 (Rs) 3,000 2,500 2,000 Jun-07 Nov-07 Sep-07 Apr-07 Jan-08 Apr-08

Year to March Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%)

FY07 140,952 19,675 214.6 89.8 12.0 9.2 7.1 1.6 31.0 34.4

FY08E 163,573 27,436 299.2 39.4 8.6 7.0 5.8 1.8 31.0 34.4

FY09E 194,492 33,162 361.7 20.9 7.1 5.8 4.6 2.0 30.3 31.3

FY10E 215,008 36,447 397.5 9.9 6.5 5.1 3.9 2.2 30.1 27.4

Shares Outstanding (mn)

91.7 4074/2326 74.8 22.4 9,600 (22.8) (29.4) (13.3) (18.8)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Sensex Return 3m (%) Sensex Return 12m (%)

Please refer to important disclosures at the end of this report

Grasim, April 21, 2008

ICICI Securities Large conglomerate with cement as key driver
On a consolidated basis, Grasim is the largest domestic player in the cement industry with pan-India presence. The company is also the largest VSF manufacturer in India, enjoying near-monopoly. Grasim’s gas-based sponge iron division with annual capacity of 0.9mnte is a standalone plant located in Raigad, Maharashtra.

Cement division – Impressive growth
Grasim’s capex plan includes 4.5mnte capacity expansion in Shambhupura, Rajasthan and another 4.4mnte increase at Kotputli, Rajasthan. A 1.5mnte split grinding unit at Panipat, Haryana has also been set up. Shambhupura and Panipat have just been commissioned, while Kotputli should be operational by SeptemberOctober ’08. Consequently, the company’s volume growth, which was restricted in the past two years by the installed capacity, is likely to post robust growth in the next two years. Table 1: Key markets and market share
Market share (%) North Uttar Pradesh & Uttaranchal Rajasthan Punjab Haryana West Gujarat Maharashtra South Tamil Nadu Karnataka Kerala Andhra Pradesh East West Bengal Bihar & Jharkhand Orissa Central Madhya Pradesh & Chhattisgarh 6.9 17.0 17.9 18.0 % of total despatches 4.4 5.4 4.1 3.5 9-yr consumption CAGR (%) 8.9 9.9 6.0 12.2 Share of total consumption (%) 12.2 6.1 4.4 3.8

38.6 34.9

10.9 21.2

4.5 7.2

6.8 12.2

14.0 29.9 8.9 9.9

6.3 11.6 2.2 4.2

7.4 11.2 6.8 8.5

8.6 7.5 4.7 8.2

24.1 11.8 26.4

5.8 2.9 4.1

6.7 10.1 10.9

4.6 4.8 3.0

26.0

9.5

9.6 8.1

7.0 100.0

Total 20.0 100.0 Source: Cement Manufacturers Association (CMA), I-Sec Research

Since the acquisition of UTCL, Grasim has become the largest player in India on consolidated basis with market share of ~20%. Grasim and UTCL are market leaders in Orissa (26.4%), Gujarat (38.6%), Goa (52.5%), Maharashtra (34.9%), Madhya Pradesh (21.7%), Chhattisgarh (33.2%) and Karnataka (30%).

50

Grasim, April 21, 2008 Chart 1: Key market share trends (Standalone)
15.0 All India Norh West

ICICI Securities

South

13.0

(%)

11.0

9.0

7.0 FY03
Source: CMA, I-Sec Research

FY04

FY05

FY06

FY07

Grasim’s market share has remained stable in the key northern markets, while in other regions it has gradually dipped owing to the gap in capacity additions. However, we expect the company’s market share in the North to surge significantly, while market share erosion is possible in the West. On a consolidated basis, the company would gain market share in the South with UTCL’s 4.9mnte capacity just being commissioned.

Captive power to reduce impact of sharp fuel cost rise
As regards costs, Grasim is setting up a 50MW CPP in Jawad, Madhya Pradesh and another 25MW plant in Raipur, Chhattisgarh. While 50MW thermal power plant (TPP) should be operational in beginning-Q1FY08, the 25MW plant is expected to be commissioned by September ’08. We expect ~Rs2/unit savings from the plant at Madhya Pradesh, which currently uses diesel generator (DG) sets. However, the company’s TPP in Raipur, which currently uses grid power, we estimate ~Rs1/unit savings from the use of coal middlings (leftovers from coal washery), the lower calorific value of which is more-than-offset by its inexpensive cost. Chart 2: Power and fuel cost trend
800 700 600 (Rs/kWh) 500 (Rs/te) 400 300 200 100 0 FY06
Source: CMA, I-Sec Research

Pow er & Fuel

Average per unit cost of pow er (RHS)

4.5 4.0 3.5 3.0 2.5 2.0 1.5

FY07

FY08E

FY09E

FY10E

51

Grasim, April 21, 2008

ICICI Securities
We expect Grasim to save Rs685bn in power costs in the next two years. However, this will only partially offset the impact of higher fuel costs. Grasim relies on domestic coal for ~50% of its total fuel requirement, while the balance is a mix of domestic pet coke, imported pet coke, international coal and alternate fuels. While Coal India (CIL) has raised prices 10-15% in December ’07, prices of international coal and pet coke have risen steeply.

Grinding units to aid better logistics and freight cost savings
Grasim will set up another 1.3mnte grinding unit at Dadri in Uttar Pradesh. The grinding units at Panipat and Dadri will help the company source cheaper fly ash and would reduce the lead distances to the markets, aiding savings in freight costs. Chart 3: Key cost trends
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY06
Source: CMA, I-Sec Research

Pow er & Fuel

Freight

EBITDA/te

FY07

FY08E

FY09E

FY10E

Stake sale in Shree Digvijay Cement positive
Grasim has sold its 54% stake in Shree Digvijay Cement (SDCL) to Cempor for Rs3.22bn, which implies EV/te of US$161. SDCL had inherent cost disadvantages such as high lead distances from limestone mines, higher power cost due to captive DG sets and lack of investment for efficiency improvements. Hence, despite cement prices at all-time highs, there was no substantial improvement in margins (Q2FY08 EBITDA margin just 3.7%). Consequently, we believe that the decision to divest stake in SDCL was a step in the right direction.

52

Grasim, April 21, 2008

ICICI Securities
VSF to benefit from volumes but prices may dip
The VSF division’s performance has been impressive in the past two years with demand being strong and prices continuously uptrending. VSF demand is likely to remain firm going forward owing to: i) shift in textile manufacturing hubs to the East, ii) rising consumer preference for natural comfort fabrics due to global warming, iii) availability of advanced spinning technologies aiding the use of VSF and iv) slowdown of cotton production worldwide. Table 2: Global cotton production and consumption
Year (August-July) Production Consumption Ending stocks Source: CMA, I-Sec Research 06-07 26.7 26.6 12.7 07-08 25.7 27.2 11.2 07-09 26.9 27.5 10.7

YTDFY08, Grasim has been operating above its rated capacity to meet the rising demand. However, the company is expected to commission another 64,000te capacity in Kharach, Gujarat in April ’08, which will ensure robust volume growth in FY09 too. Chart 4: VSF – Quarterly realisations trend
110 105 100 (Rs/kg) 95 90 85 80 75 70 Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Source: Company data

Strong VSF demand implies that Grasim easily passed on any rise in input costs (specifically pulp) to the consumers in the past three years. However, while VSF demand is expected to remain robust, we expect Grasim to face pricing pressure going forward. Most domestic textile manufacturers have been affected by the US slowdown and dollar depreciation. Hence, as a strategy, the company is expected to offer discounts to its customers so as to not burden them with higher input costs. Consequently, we have assumed a decline in VSF prices for FY09E. This coupled with rising pulp cost and sharp jump in prices of other inputs such as sulphur would pressurise the division’s margins, though absolute EBITDA is likely to remain flat, mainly owing to higher output from the new 64,000te plant at Kharach, Gujarat.

53

Grasim, April 21, 2008 Chart 5: International pulp prices
900 850 800 750 700 650 600 550 Mar-05 Mar-06 Mar-07 May-05 May-06 May-07 Nov-04 Nov-05 Nov-06 FOEX PIX Pulp Europe NBSK Price

ICICI Securities

Source: Bloomberg

In order to address the problem of pulp shortage, Grasim has focused on backward integration. The company would require additional supplies of pulp for its new plant in Kharach. For this, Grasim had acquired 45% stake in AV Nackawic Pulp Mill in Canada at end-FY05. This mill, which initially produced paper grade pulp, was converted for producing rayon grade pulp with total capacity of ~200,000te. Grasim would be entitled to ~90,000te, which would meet the requirements of its new Kharach plant. As a long-term strategy to secure pulp supplies, Grasim has initiated a pulp-cumplantation project in Laos. About 2,000 hectares (ha) have been planted till date, while another 7,000ha will be planted in the next year. However, pulp output is expected only in FY12-13. Table 3: Sources of Rayon Grade Wood Pulp for Grasim
(%) Captive AV Cell AP Rayon Sapi and others AV Nackawic Total Source: CMA, I-Sec Research FY08 25.5 14.6 32.8 27.0 0.0 100.0 FY09 22.3 12.7 28.7 15.9 20.3 100.0 FY10 20.6 11.8 26.5 14.7 26.5 100.0

54

Nov-07

Sep-04

Sep-05

Sep-06

Sep-07

Mar-08

Jan-05

Jan-06

Jan-07

Jan-08

Jul-04

Jul-05

Jul-06

Jul-07

Grasim, April 21, 2008

ICICI Securities
Sponge iron – Operations affected due to gas shortage
The sponge iron division constitutes only 8% of the total standalone revenues. It has the largest gas-based merchant power plant in India with flexibility of using multiple feedstock. Historically, this plant faced gas supply shortage from GAIL resulting in lower operating rates. But with sponge iron prices uptrending, Grasim has been able to use more expensive feedstock such as naphtha and propane in order to improve capacity utilisation rates. Chart 6: Sponge iron realisations
16,500 15,500 14,500 (Rs/te) 13,500 12,500 11,500 10,500 Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Source: Company data, I-Sec Research

Sponge iron prices are expected to remain firm owing to higher global scrap prices and record bulk freights rates. While gas supplies are expected to improve from June ’08, uncertainty over gas pricing remains a cause for concern.

55

Grasim, April 21, 2008

ICICI Securities Consolidated PAT to grow 15%
Table 4: Performance trend and forecast assumptions
FY06 Cement Capacity (’000 te) Production (’000te) Capacity utilisation (%) Sales (’000 te) Growth (%) Realisation (Rs/te) Growth (%) VSF Capacity (te) Production (te) Capacity utilisation Sales (te) Growth (%) Realisation (Rs/te) Growth (%) Sponge Iron Capacity (’000 te) Production (’000 te) Capacity utilisation (%) Sales (’000 te) Growth (%) Realisation (Rs/te) Growth (%) Source: I-Sec Research 13,115 13,826 105 14,328 16.7 2,516 8.8 257,325 228,981 89 242379 6.9 80,377 (9.8) 900 506 56 478 (38.1) 14,335 0.6 FY07 13,115 14,418 110 14,849 3.6 3,385 34.6 270,100 246,833 91 246540 1.7 91,795 14.2 900 525 58 571 19.4 14,693 2.5 FY08E 14,115 15,283 108 15,283 2.9 3,961 17.0 270,100 270,000 100 265493 7.7 113,826 24.0 900 576 64 576 0.9 17,338 18.0 FY09E 23,015 19,104 83 19,104 25.0 4,119 4.0 333,975 307,591 92 302457 13.9 109,842 (3.5) 900 675 75 675 17.2 16,817 (3.0) FY10E 24,015 21,492 89 21,492 12.5 4,119 333,975 337,315 101 331684 9.7 113,137 3.0 900 702 78 702 4.0 17,154 2.0

On a standalone basis, Grasim would post topline CAGR of 15% in the next two years, mainly aided by strong cement performance and stable VSF demand. While we expect VSF volumes to post impressive growth supported by additional capacity at Kharach, Gujarat, VSF prices will likely come under pressure. While we expect the company’s cement division to register revenue CAGR of 21% in the next two years, we believe that its VSF and sponge iron divisions would post revenue CAGR of 11% each over the same period. Overall operating margins are expected to decline marginally 64bps in FY09E, mainly on account of lower VSF prices and higher cost of pulp, sulphur, coal fly ash etc. We expect VSF margins to decline ~400bps owing to lower realisations and cost pressures. However, we estimate 50bps and 10bps improvement in cement and sponge iron margins respectively in FY09E. Overall, EBITDA margin is expected to improve 43bps in FY10E, mainly aided by the VSF division. We expect Grasim to post 14% standalone earnings CAGR in the next two years. On a consolidated basis, we expect Grasim’s PAT to grow 15% in the next two years, partly helped by strong UTCL earnings.

56

Grasim, April 21, 2008 Chart 7: Sales, EBITDA and EBITDA margin movement
160,000 140,000 120,000 (Rs mn) 100,000 80,000 60,000 40,000 20,000 0 FY06
Source: I-Sec Research

ICICI Securities
Net sales EBITDA EBITDA Margin (RHS) 35

30 25 (%) 20 15 10 FY07 FY08E FY09E FY10E Free cashflow D/E (RHS) 0.8 0.6 0.4 0.2 0.0 FY06 FY07 FY08E FY09E FY10E (x)

Grasim had planned significant capex since ’06, which included 8.9mnte cement capacity and ~64,000te VSF capacity. While 4.5mnte cement capacity has already been commissioned, the balance 4.4mnte and the VSF expansion are expected in FY09E. Consequently, we expect the company’s FCF to turn negative in FY08. However, strong FCF generation of Rs53bn is likely in the next two years. Consequently, D/E is likely to decline to 0.4x in FY09E and further to 0.2x in FY10E. Chart 8: FCF and D/E
40,000 30,000 20,000 (Rs mn) 10,000 0 (10,000) (20,000)

Source: I-Sec Research

57

Grasim, April 21, 2008

ICICI Securities Attractive valuations
At the current market price, Grasim is trading at FY09E & FY10E P/E of 7.2x and 6.5x and EV/E of 4.6x and 3.9x respectively. On EV/te, the company is valued at US$128. The company has historically quoted at a significant discount to peers due its diversified business. However, with 70% of its revenues coming from the cement division (post the acquisition of UTCL) and its exit from non-core business such as textiles, we believe a re-rating is imminent. Chart 9: Rolling P/E bands
4,500 4,000 3,500 3,000 (Rs) 2,500 2,000 1,500 1,000 500 0 Oct-02 May-03 May-05 Feb-03 Feb-05 Feb-07 Dec-03 Nov-04 Dec-05 Nov-06 Jun-07 Jul-02 Jul-04 Jul-06 Dec-07 Apr-08 Sep-03 Sep-05 Sep-07 Apr-02 Apr-04 Apr-06 Apr-08 5x 8x 11x

Source: Bloomberg, I-Sec Research

Chart 10: Rolling EV/E bands
600,000 500,000 400,000 (Rs mn) 300,000 200,000 4x 100,000 0 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Oct-07 8x 6x

Source: Bloomberg, I-Sec Research

58

Grasim, April 21, 2008 Table 5: SOTP valuations

ICICI Securities
Current price VSF Operating profits (Rs mn) EV/EBITDA (x) Value of VSF (Rs mn) Chemicals Operating profits (Rs mn) EV/EBITDA (x) Value of VSF (Rs mn) Cement Capacity (Mn tonnes) EV/tonne US$ Value of Cement business (Rs mn) Sponge Iron Operating profits (Rs mn) EV/EBITDA (x) Value of Sponge Iron business (Rs mn) Textiles Operating profits (Rs mn) EV/EBITDA (x) Value of Textiles business (Rs mn) Others Operating profits (Rs mn) EV/EBITDA (x) Value of business (Rs mn) Total value of business (Rs mn) Net debt (Rs mn) Net value (Rs mn) No of shares (mn) Value per share (Rs mn) UltraTech Capacity (mnte) EV (Rs mn) UltraTech – Ev/te (Rs mn) Less net debt (Rs mn) Market cap (Rs mn) Grasim – Consolidated market cap (Rs mn) Value per share (Rs) Source: I-Sec Research 10,909 5.2 56,728 Target Price 10,909 8.5 92,729

1,045 3.5 3,656

1,045 4.0 4,178

24.2 128 123,495

24.2 180 174,096

1,725 2.0 3,450

1,725 3.0 5,175

64 1.5 95

64 1.5 95

438 1.0 438 187,863 5,513 182,350 92 1,989

438 1.0 438 276,712 5,513 271,198 92 2,958

21.9 123,326 141 25,776 97,550 235,515 2,569

21.9 140,160 160 25,776 114,384 333,538 3,638

We have valued Grasim’s VSF division at 20% premium to Lenzing (the largest VSF player in the world with 375,000te capacity) as Grasim’s VSF margins are 2x Lenzing’s. We have assumed ~40% discount to Tata Steel for the sponge iron division as Tata Steel is a large integrated player with cost advantages. Grasim’s cement division is valued at US$180, at a slight premium to ACC’s valuations as Grasim’s cement margins are significantly better than ACC’s. Our SOTP valuations give us a target price of Rs3,638 with 42% upside from current levels. Grasim is our top pick in the sector. Initiate coverage with BUY.

59

Grasim, April 21, 2008

ICICI Securities
Table 8: Cash Flow Statement
(Rs mn, year ending March 31) FY07 FY08E FY09E FY10E 140,952 163,573 194,492 215,008 FY07 Operating Cash flow 20,204 Working Capital changes 464 Capital Commitments (34,729) Net Operating FCF (14,061) Investing Activities 3,177 Issue of Share Capital Buyback of shares Inc(Dec) in Borrowings 11,532 Dividend paid (4,283) Extraordinary Items 4,952 Chg. in Cash & Bank 1,318 Source: Company data, I-Sec Research FY08E 32,737 (3,431) (56,052) (26,745) 3,812 19,983 (5,654) 7,198 (1,407) FY09E FY10E 39,279 43,890 (5,194) (820) (19,360) (18,879) 14,724 24,191 4,024 4,578 (13,856) (20,832) (6,290) (6,867) 2,657 2,743 1,259 3,812

Financial Summary (Consolidated)
Table 6: Profit and Loss Statement
(Rs mn, year ending March 31) Operating Revenues (Sales)

Operating Expenses 101,228 111,635 132,118 146,938 EBITDA 39,723 51,938 62,375 68,070 % margins 28 32 32 32 Depreciation & Amortisation 6,100 6,133 7,577 9,818 Gross Interest 2,286 2,482 3,342 2,221 Other Income 3,177 3,812 4,024 4,578 Recurring PBT 34,515 47,135 55,479 60,608 Add: Extraordinaries Less: Taxes 10,921 14,925 16,185 17,774 - Current tax 10,971 13,763 14,804 16,266 - Deferred tax (51) 1,161 1,381 1,507 Less: Minority Interest (3,919) (4,774) (6,132) (6,387) Net Income (Reported) 19,675 27,436 33,162 36,447 Recurring Net Income 19,675 27,436 33,162 36,447 Source: Company data, I-Sec Research

Table 9: Key Ratios
(Year ending March 31) FY07 FY08E FY09E Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (x) Receivables (days) Payable (days) D/E Ratio (x) FY10E

Table 7: Balance Sheet
(Rs mn, year ending March 31) FY07 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Intangibles Capital Work-in-Progress Goodwill Total Assets 33,216 3,692 24,632 6,523 22,719 22,719 65,001 FY08E 33,511 2,285 28,671 8,585 24,730 24,730 88,710 FY09E 43,659 3,545 FY10E 50,671 7,357

214.6 299.2 361.7 397.5 214.6 299.2 361.7 397.5 281.1 366.1 444.3 504.6 41.0 47.5 52.3 56.5 723.5 1,017.9 1,295.0 1,601.4

33,548 36,623 4,840 10,111 29,495 35,214 29,495 35,214 136,146 143,239

38.3 91.2 89.8 89.8 61.1

16.0 30.7 39.4 39.4 30.2

18.9 20.1 20.9 20.9 21.4

10.5 9.1 9.9 9.9 13.6

19,721 19,217 135,242

47,869 19,217 185,366

7,451 3,701 19,217 19,217 202,420 215,419

Liabilities Borrowings 48,793 Deferred Tax Liability 11,526 Minority Interest 8,587 Equity Share Capital 917 Face value per share (Rs) 10 Reserves & Surplus* 65,419 Less: Misc. Exp n.w.o. Net Worth 66,336 Total Liabilities 135,242 Source: Company data, I-Sec Research *excluding revaluation reserves

12.0 9.2 3.6 7.1 2.0 13.6

8.6 7.0 2.5 5.8 1.8 10.3

7.1 5.8 2.0 4.6 1.5 8.4

6.5 5.1 1.6 3.9 1.2 6.1

68,776 11,804 11,456 917 10 92,413 93,330 185,366

54,920 34,087 12,282 12,777 16,484 21,721 917 917 10 10 117,818 145,916 118,735 146,833 202,420 215,419

20.3 2.9 10.4 35.7 3.6 5.6 16.5 48.2 0.9

19.4 3.3 9.0 35.2 1.4 5.4 16.9 49.6 0.9

20.6 3.0 8.2 32.8 3.2 5.6 16.5 46.2 0.6

19.9 3.0 8.4 32.8 3.1 5.5 17.3 48.7 0.3

Profitability Ratios (%) Rec. Net Income Margins 13.7 RoCE 31.0 RoNW 34.4 Dividend Payout 19.1 Source: Company data, I-Sec Research

16.4 31.0 34.4 15.9

16.7 30.3 31.3 14.4

16.6 30.1 27.4 14.2

60

Grasim, April 21, 2008

ICICI Securities
Table 12: Cash Flow Statement
(Rs mn, year ending March 31) FY07 FY08E FY09E FY10E 86,036 103,400 123,842 137,043 70,204 33,196 32 3,520 1,344 2,690 31,023 39 9,927 8,997 931 21,134 21,095 84,874 38,968 31 4,547 1,723 2,886 35,583 11,102 10,034 1,067 24,481 24,481 93,331 43,712 32 5,922 1,152 3,247 39,884 12,364 11,168 1,197 27,520 27,520 FY07 Operating Cash flow 13,651 Working Capital changes (571) Capital Commitments (17,455) Net Operating FCF (4,375) Investing Activities (3,229) Issue of Share Capital Buyback of shares Inc(Dec) in Borrowings 9,719 Dividend paid (3,720) Extraordinary Items 841 Chg. in Cash & Bank (392) Source: Company data, I-Sec Research FY08E FY09E FY10E 26,839 27,846 31,970 (1,145) (1,186) (11) (44,385) 3,095 (7,750) (18,692) 29,755 24,209 1,230 (575) (906) 22,360 (23,121) (13,422) (4,016) (4,651) (5,229) (785) (888) (1,012) 136 520 3,640

Financial Summary
Table 10: Profit and Loss Statement
(Rs mn, year ending March 31) Operating Revenues (Sales)

Operating Expenses 62,663 EBITDA 23,372 % margins 27 Depreciation & Amortisation 3,179 Gross Interest 1,118 Other Income 2,818 Recurring PBT 21,893 Add: Extraordinaries 371 Less: Taxes 6,906 - Current tax 6,924 - Deferred tax (18) Less: Minority Interest Net Income (Reported) 15,358 Recurring Net Income 14,987 Source: Company data, I-Sec Research

Table 13: Key Ratios
(Year ending March 31) FY07 FY08E FY09E Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (days) Receivables (days) Payable (days) D/E Ratio (x) 163.5 167.5 198.1 27.5 679.5 FY10E

Table 11: Balance Sheet
(Rs mn, year ending March 31) FY07 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Intangibles Capital Work-in-Progress Total Assets 23,424 1,164 14,501 8,923 42,747 26,247 16,500 45,971 12,067 97,642 FY08E 25,819 1,300 19,598 6,221 43,724 25,763 17,961 87,321 32,056 137,266 FY09E 29,704 1,820 22,414 7,291 47,185 25,763 21,421 79,678 FY10E 34,855 5,460 24,491 10,364 51,337 25,763 25,574 81,506

230.1 267.0 300.1 230.5 267.0 300.1 268.5 316.6 364.7 29.7 34.4 38.7 866.2 1,082.4 1,325.6

30.0 68.6 88.2 88.2 66.9 15.7 13.0 3.8 11.3 3.1 20.2

20.2 42.0 40.8 40.8 35.5 11.2 9.6 3.0 8.6 2.8 11.2

19.8 17.4 16.1 16.1 17.9 9.6 8.1 2.4 6.7 2.1 9.9

10.7 12.2 12.4 12.4 15.2 8.6 7.1 1.9 5.6 1.8 7.7

2,841 1,250 134,154 143,208

Liabilities Borrowings 29,516 Deferred Tax Liability 5,826 Minority Interest Equity Share Capital 917 Face value per share (Rs) 10 Reserves & Surplus* 61,384 Less: Misc. Exp n.w.o. Net Worth 62,300 Total Liabilities 97,642 Source: Company data, I-Sec Research *excluding revaluation reserves

51,875 5,971 917 10 78,502 79,419 137,266

28,755 15,333 6,150 6,335 917 917 10 10 98,332 120,623 99,249 121,540 134,154 143,208

26.0 2.8 12.9 31.0 7.9 5.9 18.8 47.9 0.6

25.5 3.4 8.7 32.0 3.6 5.6 19.5 49.8 0.7

26.7 3.0 8.1 31.2 4.1 5.8 19.4 48.1 0.4

25.8 3.2 8.1 31.0 3.4 5.8 20.2 50.8 0.2

Profitability Ratios (%) Rec. Net Income Margins 16.9 RoCE 26.6 RoNW 26.7 Dividend Payout 16.8 Source: Company data, I-Sec Research

19.9 27.6 29.8 12.9

19.3 27.5 27.4 12.9

19.6 29.6 24.9 12.9

61

Grasim, April 21, 2008

ICICI Securities Index of Tables and Charts
Tables
Table 1: Key markets and market share............................................................................. 50 Table 2: Global cotton production and consumption .......................................................... 53 Table 3: Sources of Rayon Grade Wood Pulp for Grasim.................................................. 54 Table 4: Performance trend and forecast assumptions ...................................................... 56 Table 5: SOTP valuations ................................................................................................... 59 Table 6: Profit and Loss Statement .................................................................................... 60 Table 7: Balance Sheet....................................................................................................... 60 Table 8: Cash Flow Statement............................................................................................ 60 Table 9: Key Ratios............................................................................................................. 60 Table 10: Profit and Loss Statement .................................................................................. 61 Table 11: Balance Sheet..................................................................................................... 61 Table 12: Cash Flow Statement.......................................................................................... 61 Table 13: Key Ratios........................................................................................................... 61

Charts
Chart 1: Key market share trends (Standalone) ................................................................. 51 Chart 2: Power and fuel cost trend ..................................................................................... 51 Chart 3: Key cost trends ..................................................................................................... 52 Chart 4: VSF – Quarterly realisations trend........................................................................ 53 Chart 5: International pulp prices ........................................................................................ 54 Chart 6: Sponge iron realisations........................................................................................ 55 Chart 7: Sales, EBITDA and EBITDA margin movement ................................................... 57 Chart 8: FCF and D/E ......................................................................................................... 57 Chart 9: Rolling P/E bands.................................................................................................. 58 Chart 10: Rolling EV/E bands ............................................................................................. 58

62

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

India Cements
Mixed bag
Reason for report: Initiating coverage

HOLD
Rs180

Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Sep '07 30.4 45.4 10.6 8.5 26.3 24.2 Dec '07 28.1 50.9 9.9 8.8 32.2 21.1 Mar '08 28.1 48.3 7.8 9.1 31.4 23.6

India Cements (ICL) is the largest South-based cement player with ~9mnte capacity. The company intends to enhance its capacity to 14mnte by December ’08 to ensure continued volume growth. However, with 70% of its fuel being based on imported coal, ICL is bound to face input cost pressures. This coupled with rise in effective tax rate is likely to slowdown earnings growth despite robust revenues in the next two years. This coupled with uncertainty over Indian Premier League (IPL) investments will likely impact stock performance. Consequently, we initiate coverage with HOLD rating. Revenue growth to be impressive. ICL is expected to add additional 5mnte by December ’08 through a mix of new line additions, kiln upgrades and improvement in blending ratios. The 5mnte expansion, which is planned at significantly lower captive cost of ~US$50/te, would help boost volumes. Higher share of imported coal to affect margins. ICL imports 70% of its coal requirement, leading to substantial surge in power and fuel costs. The company has acquired two bulk freight carriers to minimise the impact of rising international bulk freight rates, thereby reducing the landed cost of coal. However, these initiatives are likely to partially offset the impact of rising input costs, resulting in margin contraction. Muted earnings growth. We expect ICL to register earnings CAGR of 12% in the next two years despite robust revenue growth, mainly due to cost pressures and higher effective tax rate. The company’s free cashflow (FCF) will be marginal in FY09, albeit jumping sharply in FY10E to Rs2.3bn. Consequently, FY10E D/E should be down to 0.5x. Valuations. ICL trades at FY09E & FY10E P/E of 6.9x and 5.9x and EV/te of US$129. While these valuations may seem inexpensive, slower-than-expected earnings growth and uncertainty over investments in IPL may hamper stock performance. Consequently, we initiate coverage with HOLD rating.
Market Cap Reuters/Bloomberg 52-week Range (Rs) Free Float (%) FII (%) Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%) Rs50.5bn/US$1.26bn ICMN.BO/ICEM IN 281.2 333/161 71.9 31.4 9,900 (28.6) (42.0) (13.3) (18.8) Year to March Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%) FY07 22,489 4,788 20.7 1,175.9 8.7 22.3 8.1 0.6 21.7 43.0 FY08E 30,563 7,023 24.0 16.1 7.5 29.2 6.2 0.8 27.6 40.0 FY09E 38,154 7,650 26.2 8.9 6.9 32.1 5.1 1.0 28.6 30.6 FY10E 44,641 8,852 30.3 15.7 5.9 36.8 4.3 1.0 27.9 26.7

Price chart
350 300 (Rs) 250 200 150 Jun-07 Nov-07 Sep-07 Apr-07 Jan-08 Apr-08

Shares Outstanding (mn)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Sensex Return 3m (%) Sensex Return 12m (%)

Please refer to important disclosures at the end of this report

India Cements, April 21, 2008

ICICI Securities

Leading player in South but diversification on cards
ICL is the largest player in the South with total installed capacity of ~9mnte. It enjoys 18% total market share in the South and is a market leader in Andhra Pradesh, Tamil Nadu and Kerala. ICL, which was suffering losses in FY04 and FY05, managed a successful turnaround buoyed by higher cement prices and a CDR (corporate debt restructuring) package from lenders. With cement prices remaining firm, the consequent robust cash generation has helped ICL plan capacity increases to maintain market share. Chart 1: Market share trends
25 Andhra Pradesh Karnataka 21 Tamil Nadu Kerela

(%)

17

13

9 FY03

FY04

FY05

FY06

FY07

Source: Cement Manufacturers Association (CMA), I-Sec Research

ICL proposes to raise its capacity to ~14mnte by December ’08 from 9mnte at present at a lower capital cost of US$50/te. The company is set to achieve capacity augmentation through kiln upgrades at Yerraguntla (400te/day-TPD), Malkapur (350TPD), Raasi (1,300TPD) and Sankarnagar (300TPD). ICL is also planning a new line at Malkapur and two 1-mnte grinding units in Chennai (Tamil Nadu) and Parli (Maharashtra). Table 1: Capex plans
Plant Sankaridurg Sankarnagar Dalavoi Chimalkur Yerraguntla Raasi Malkapur Grinding units Total Source: Company data Location Tamil Nadu Tamil Nadu Tamil Nadu Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Capacity (mnte) 0.3 0.5 0.6 0.2 0.2 0.2 1.0 2.2 5.2 Time of commissioning September ’07 September ’08 December ’07 December ’08 September ’08 June ’08 December ’08 June ’08

64

India Cements, April 21, 2008 Table 2: Key markets and market share
Market share (%) South Tamil Nadu Karnataka Kerala Andhra Pradesh Pondicherry (UT) West Maharashtra Total Source: CMA, I-Sec Research 20.1 14.2 19.3 17.9 29.3 % of total despatches 29.8 18.3 15.5 25.1 1.31

ICICI Securities
9-yr consumption CAGR (%) 7.4 11.2 6.8 8.5 19.4 Share of total consumption (%) 8.62 7.46 4.68 8.18 0.26

3.9 0.7

8.2 98.2

7.2 8.1

12.21 100.0

ICL to foray in new markets
As a part of its phase II of expansion plans, ICL is foraying into new markets for panIndia presence and diversifying to avoid the risk of being a regional player. The company is primarily active in the North, where it proposes to set up a 3.5mnte plant. For this, ICL has already signed a memorandum of understanding (MoU) for a plant at Himachal Pradesh and has secured mining leases in Rajasthan. The company is also exploring to acquire limestone deposits in Madhya Pradesh; we expect this project to cost ~Rs1.2bn and likely be commissioned by mid-FY11.

65

India Cements, April 21, 2008

ICICI Securities

Dependence on imported coal to pressurise margins
Rising input costs, a concern
ICL sources only 30% power from the grid. Most of its power requirements are fulfilled from low cost sources such as wind farms, waste heat recovery power and a group company, Coromandel Electric Company. Table 3: Power sources
Grid Wind farms Coromandel Electric Company Andhra Pradesh Gas Power Corporation (APGPCL) Waste heat recovery Total requirement Source: Company data % 39.1 9.1 24.5 20.0 7.3 100.0

However, ICL imports ~70% of its coal requirements. Sharp rise in international coal prices and international freight rates in the past quarters have been serious concerns. Hence, to temper the impact of higher fuel prices, the company has purchased two bulk-cargo carriers from Essar Shipping at US$57mn. The two ships with 41,824DWT (dead weight tonne) & 38,002DWT capacity respectively would be able to meet ICL’s entire imported coal requirement. While current international freight rates vary from US$25/te to US$40/te, freight cost is likely to be lower at ~US$12-15/te if ICL operates its own ships. Chart 2: Power and fuel costs
1,000 900 800 700 (Rs/kWh) (Rs/te) 600 500 400 300 200 100 0 FY05 FY06 FY07 FY08E FY09E FY10E 2.0 2.4 2.8 3.2 Pow er & Fuel Average per unit cost of pow er (RHS) 3.6 4.0

Source: Company data, I-Sec Research

ICL is also actively mulling to invest in coal mines abroad to secure high-quality coal at reasonable prices.

66

India Cements, April 21, 2008 Chart 3: Key cost trends
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY05 FY06 FY07 FY08E FY09E Pow er & Fuel Freight EBITDA/tonne

ICICI Securities

FY10E

Source: Company data, I-Sec Research

IPL – Marketing strategy
ICL won the IPL franchise for the Chennai team at ~Rs3.6bn (US$91mn) payable over 10 years. Hence, the yearly cash outflow would be just US$9mn. Also, the company will have to incur the players’ costs, team maintenance, marketing, administration, travel and accommodation. These expenses are likely to be ~US$5mn per year. On the other hand, the teams will be entitled to their share of television rights, which have been sold to Sony for US$1bn for the next 10 years. 80% of these revenues will be distributed among the franchises for the first five years and this share would come down to 60% in the next five years. In addition, the franchises are also entitled to ~60% of title sponsorship revenues. ICL will be entitled to 100% of local revenues (gate collection, sale of logos, stadium advertising, merchandising etc). While the yearly outflow of Rs360mn may not be very significant, the success of revenue streams other than television rights and title sponsorship revenues would depend on the success of the 20-20 game format used for IPL. With other local cricket tournaments not being much of a success on account of limited viewership, we believe that a clear picture would emerge after the first season of tournaments. We have not factored in the implications of the IPL investment in our model.

67

India Cements, April 21, 2008

ICICI Securities

12% earnings CAGR through FY08-10E
Table 4: Performance trend and forecast assumptions
Capacity (’000 te) Production (’000 te) Capacity utilisation (%) Sales (mnte) Growth (%) Realisations (Rs/te) Growth (%) Source: I-Sec Research FY07 8,530 8,424 98.8 8,414 15.9 3,090 25.1 FY08E 9,430 9,284 98.5 9,284 10.3 3,847 24.5 FY09E 13,930 11,141 80.0 11,141 20.0 4,001 4.0 FY10E 13,930 13,035 93.6 13,035 17.0 4,001 -

Revenues to be driven by timely expansion. We expect ICL’s topline to be boosted by incremental volumes from debottlenecking and capacity expansion. ICL is expected to raise its installed capacity to 14mnte by December ’08. Consequently, we expect cement volumes to surge 20% and 17% in FY09E and FY10E respectively. This coupled with 4% growth in average realisations in FY09E and flat prices in FY10 would aid revenue CAGR at 21% in the next two years. Chart 4: Sales, EBITDA and EBITDA margin movement
50,000 45,000 40,000 35,000 (Rs mn) 30,000 25,000 20,000 15,000 10,000 5,000 0 FY06 FY07 FY08E FY09E FY10E Net sales EBITDA EBITDA Margin (RHS) 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Company data, I-Sec Research

Rising fuel costs to affect margins. Since 70% of ICL’s coal requirements are imported, the company will face sharp rise in coal costs. However, purchase of two bulk-freight carriers will help contain the impact with savings in freight. Hence, despite an expected 4% increase in average realisations, we expect the company’s EBITDA margin to contract 36bps to 37% in FY09E. In FY10E, EBITDA margin is likely to decline further 84bps to 36.1%.

68

India Cements, April 21, 2008 Chart 5: EBITDA/te
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY06 FY07 FY08E FY09E

ICICI Securities

FY10E

Source: Company data, I-Sec Research

ICL is expected to post interest cost CAGR of 10% through FY08-10E, mainly on account of planned capex in the South and the North going forward. The company’s effective tax rate is expected to jump to 33% from the current ~23% as the company has exhausted all tax shelters in FY08. As a result, earnings are expected to grow a moderate 12% in the next two years. Chart 6: Positive FCF from FY08
5,000 4,000 3,000 2,000 (Rs mn) (x) 1.0 0.5 0.0 FY06 FY07 FY08E FY09E FY10E 1,000 0 (1,000) (2,000) (3,000) (4,000) 1.5 2.0 Free Cashflow D/E (RHS) 2.5

Source: Company data, I-Sec Research

ICL’s FCF is expected to turn positive FY08 onwards. Further, in FY10E, FCF is likely to rise sharply post completion of significant capex. Robust cash generation will aid repayment of debt, which will bring down D/E to ~0.5x in FY10E. ICL, similar to most other cement companies, will see a decline in return ratios owing to large capex plans, limited cement pricing upside and cost pressures.

69

India Cements, April 21, 2008 Chart 7: RoCE and RoE trends
50 40 30 (%) RoCE

ICICI Securities

RoE

20 10 0 FY06

FY07

FY08E

FY09E

FY10E

Source: Company data, I-Sec Research

70

India Cements, April 21, 2008

ICICI Securities

Valuations
ICL is valued at FY09E & FY10E P/E of 6.9x and 5.9x with EV/E of 5.1x and 4.3x respectively. On EV/te, the company is valued at US$129. Though ICL’s topline growth is likely to be impressive, input cost pressures (primarily international coal) and higher effective tax rate would slowdown earnings growth. Though we have not factored in the impact of IPL investment in our estimates, uncertainly over the success of IPL is likely to limit stock performance going forward. Hence, despite inexpensive valuations, we initiate coverage with HOLD. Chart 8: Rolling P/E bands
400 12x

300 8x (Rs) 200 5x 100

0 May-06 May-07 Dec-05 Nov-06 Feb-07 Mar-06 Oct-07 Jun-05 Jul-07 Sep-05 Apr-05 Jan-08 Dec-07 Aug-06 Apr-08 Apr-08

Source: Bloomberg, I-Sec Research

Chart 9: Rolling EV/E bands
140,000 120,000 100,000 (Rs mn) 80,000 60,000 40,000 20,000 0 Dec-03 Dec-04 Dec-05 Dec-06 Apr-03 Apr-04 Apr-05 Apr-06 Aug-03 Aug-04 Aug-05 Aug-06 Apr-07 Aug-07 5x 7x 9x

Source: Bloomberg, I-Sec Research

71

India Cements, April 21, 2008

ICICI Securities
Table 7: Cash Flow Statement
(Rs mn, year ending March 31) FY08E 30,628 30,628 19,195 11,432 3,733 1,196 1,400 224 9,061 2,039 1,359 680 2 7,023 7,023 FY09E 38,221 38,221 24,094 14,127 3,696 1,368 1,577 235 11,418 3,768 2,626 1,142 3 7,650 7,650 FY10E 44,710 44,710 28,560 16,149 3,612 1,505 1,680 247 13,211 4,360 3,039 1,321 4 8,852 8,852 FY07 Operating Cash flow 6,520 Working Capital changes 119 Capital Commitments (9,853) Net Operating FCF (3,214) Investing Activities 101 Issue of Share Capital 696 Buyback of shares Inc(Dec) in Borrowings 5,085 Dividend paid (501) Extraordinary Items (302) Chg. in Cash & Bank 1,866 Source: Company data, I-Sec Research FY08E FY09E FY10E 8,862 10,007 11,432 (2,293) (502) (1,771) (6,199) (8,921) (5,355) 370 583 4,306 117 (6) (357) 208 (1,216) 1,238 (1,932) (493) (576) (576) (735) (1,129) (1,308) (1,750) 110 132

Financial Summary
Table 5: Profit and Loss Statement
(Rs mn, year ending March 31) FY07 Operating Revenues (Sales) 22,552 of which Domestic 22,552 Operating Expenses 15,209 EBITDA 7,343 % margins 3,256 Depreciation & Amortisation 1,026 Gross Interest 1,498 Other Income 101 Recurring PBT 4,920 Add: Extraordinaries Less: Taxes 131 - Current tax 17 - Deferred tax 114 Less: Minority Interest 1 Net Income (Reported) 4,788 Recurring Net Income 4,788 Source: Company data, I-Sec Research

Table 8: Key Ratios
(Year ending March 31) FY07 FY08E FY09E Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (days) Receivables (days) Payable (days) D/E Ratio (x) 18.4 20.7 22.3 1.0 23.5 25.0 24.0 29.2 1.5 49.4 27.2 26.2 32.1 1.8 78.5 FY10E 31.5 30.3 36.8 1.8 111.8

Table 6: Balance Sheet
(Rs mn, year ending March 31) FY07 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Intangibles Capital Work-in-Progress Total Assets 17,175 2,302 4,340 12,835 551 497 54 27,958 FY08E 17,819 552 4,630 13,189 658 497 161 29,543 FY09E 19,069 662 5,350 13,719 900 497 403 36,888 FY10E 21,395 795 5,774 15,621 1,504 497 1,007 35,883

46.3 181.4 1,239.5 1,175.9 271.7

35.8 55.7 46.7 16.1 30.9

24.8 23.6 8.9 8.9 9.7

17.0 14.3 15.7 15.7 14.8

1,428 34,952

4,847 40,967

5,055 49,843

9,910 56,749

Liabilities Borrowings 20,588 Deferred Tax Liability 430 Minority Interest Equity Share Capital 2,604 Face value per share (Rs) 10 Reserves & Surplus* 19,482 Less: Misc. Exp n.w.o. 331 Net Worth 13,934 Total Liabilities 34,952 Source: Company data, I-Sec Research *excluding revaluation reserves

19,372 443 2,812 10 26,011 400 21,153 40,967

20,609 456 2,812 10 33,086 400 28,777 49,843

18,677 470 2,812 10 41,362 401 37,602 56,749

8.7 8.0 7.7 8.1 2.7 9.0

7.5 6.1 3.6 6.2 2.3 10.8

6.9 5.6 2.3 5.1 1.9 7.6

5.9 4.9 1.6 4.3 1.6 7.2

10.6 8.3 2.1 2.7 0.3 4.5 35.1 31.2 1.5

9.4 6.8 2.5 22.5 0.3 4.2 34.6 30.9 0.9

10.1 6.3 2.1 33.0 0.3 4.1 35.0 30.9 0.7

10.3 6.1 1.9 33.0 0.3 3.9 35.0 31.9 0.5

Profitability Ratios (%) Rec. Net Income Margins 21.1 RoCE 21.7 RoNW 43.0 Dividend Payout 4.8 Source: Company data, I-Sec Research

22.8 27.6 40.0 6.2

19.9 28.6 30.6 6.7

19.7 27.9 26.7 5.8

72

India Cements, April 21, 2008

ICICI Securities

Index of Tables and Charts
Tables
Table 1: Capex plans ..........................................................................................................64 Table 2: Key markets and market share.............................................................................65 Table 3: Power sources ......................................................................................................66 Table 4: Performance trend and forecast assumptions ......................................................68 Table 5: Profit and Loss Statement ....................................................................................72 Table 6: Balance Sheet.......................................................................................................72 Table 7: Cash Flow Statement............................................................................................72 Table 8: Key Ratios.............................................................................................................72

Charts
Chart 1: Market share trends ..............................................................................................64 Chart 2: Power and fuel costs.............................................................................................66 Chart 3: Key cost trends .....................................................................................................67 Chart 4: Sales, EBITDA and EBITDA margin movement ...................................................68 Chart 5: EBITDA/ te ...........................................................................................................69 Chart 6: Positive FCF from FY08........................................................................................69 Chart 7: RoCE and RoE trends...........................................................................................70 Chart 8: Rolling P/E bands..................................................................................................71 Chart 9: Rolling EV/E bands ...............................................................................................71

73

India Cements, April 21, 2008

ICICI Securities

This page has been intentionally left blank

74

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

JK Cement
Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Sept '07 61.6 24.2 5.4 3.9 14.8 14.3 Dec '07 61.6 23.5 4.4 4.0 15.1 14.9 Mar '08 61.6 21.4 4.0 4.0 13.4 17.1

BUY
Rs150

Cost-pruning to fructify
Reason for report: Initiating coverage

Rajasthan-based JK Cement (JKCL) primarily caters to northern Indian markets. The company was incorporated post restructuring of JK Synthetics and is engaged in the production of both grey and white cement at present. JKCL is likely to see improvement in both volume growth and cost savings in the next couple of years. The stock is attractively valued on an EV/te of US$101 and FY09E P/E of 2.9x. We initiate coverage with BUY recommendation. Volume upside. JKCL is expected to register robust volumes even in the face of imminent supply shortage. The company is expected to add 0.4mnte from April ’08. Further, the company’s 3mnte Karnataka project is likely to be operational by mid FY10E. Consequently, the company would continue posting impressive volumes in both FY09E and FY10E. Cost control initiatives to bear fruit. JKCL has invested ~Rs2.5bn towards costcutting measures, which involve a 20MW pet coke-based captive power plant and 13.2MW waste-heat recovery plant as well as replacement of its 7.5MW turbine with a 10MW one. The company is expected to operate with 100% captive power on the back of these measures. Full benefits from captive power would start flowing from beginning FY09E, thereby minimising impact of rising fuel costs. Earnings growth to impress. We expect JKCL to register a strong 20% bottomline growth over FY08-10E, aided primarily by cost-reduction measures. However, freecash flows (FCFs) are expected to turn negative in FY09E as the 3mnte plant at Karnataka would require an investment of Rs10.5bn. Despite borrowing Rs5.5bn for the plant, the D/E is expected to rise only marginally to 0.7x in FY09E before falling to 0.4x in FY10E. High prospects of re-rating. JKCL’s valuations seem attractive at FY09E and FY10E P/E of 2.9x and 2.5x respectively. The company is likely to see a re-rating, with savings from power expected to improve margins. We estimate fair value of Rs209/share (FY09E P/E of 4x), implying a 39% potential upside. Initiate coverage with BUY recommendation.
Market Cap Reuters/Bloomberg 52-week Range (Rs) Free Float (%) FII (%) Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%) Rs10.5bn/US$260mn JKCE.BO/JKCE IN 69.9 257/123 38.4 13.4 9,850 (18.4) (30.6) (13.3) (18.8) Year to March Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%) FY07 12,333 1,786 25.5 448.0 5.9 30.3 4.4 2.3 31.4 41.2 FY08E 14,901 2,926 41.8 63.8 3.6 47.7 3.2 3.3 35.6 45.1 FY09E 16,761 3,625 51.8 23.9 2.9 58.5 3.2 3.5 32.7 38.1 FY10E 21,872 4,236 60.6 16.8 2.5 70.9 2.4 3.0 30.5 32.1

Price chart
260 240 220 200 180 160 140 120 Jun-07 Nov-07 Sep-07 Apr-07 Jan-08 Apr-08

(Rs)

Shares Outstanding (mn)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Sensex Return 3m (%) Sensex Return 12m (%)

Please refer to important disclosures at the end of this report

JK Cement, April 21, 2008

ICICI Securities

Key player in supply-deficit market
North to continue seeing impressive demand
JKCL is a key player in northern Indian markets, with an installed capacity of ~4mnte of grey cement and 0.5mnte of white cement. JKCL’s plants, located in Nimbehera and Mangrol in Rajasthan, primarily cater to the northern markets, where the company has ~7% market share, with Haryana, Rajasthan and Delhi being key markets. In FY07, the northern region (including Uttar Pradesh) consumed ~46mnte of cement. We expect the region to grow over 10%, driven by the strong boom in real estate, hydro power projects and incremental demand for the Common Wealth Games 2010. While the region is facing supply shortage (YTDFY08; capacity utilisation including inoperative capacities in the region was 101%) at present, we feel that the market would easily absorb recently commissioned capacities (of Grasim, Shree Cement), with some supplies moving to Gujarat. Consequently, we expect prices in the region to remain firm.

Volume growth expected from acquisition of Nihon Nirman
JKCL added 0.5mnte in August ’06 and is expected to add a further 0.4mnte by April ’08 via Nihon Nirman, a 0.1mnte white cement plant acquired by JKCL in January ’07. JKCL expects to convert it into a 0.4mnte grey cement plant and commission it by April ’08, thereby ensuring volume growth in the face of supply tightness in the industry. Table 1: Key markets and market share
Market share (%) North Uttar Pradesh & Uttaranchal Haryana Punjab Rajasthan Delhi Jammu & Kashmir West Gujarat Central Madhya Pradesh 3.4 20.0 4.3 8.9 14.5 0.6 % of total despatches 16.8 30.7 7.8 22.4 11.9 0.2 9-yr consumption CAGR (%) 8.9 12.2 6.0 9.9 3.2 13.0 Share of total consumption (%) 12.2 3.8 4.4 6.1 2.0 0.8

1.6

4.4

4.5

6.8

3.3

5.8

9.8 8.1

7.0 100.0

Total 2.4 100.0 Source: Cement Manufacturers Association (CMA), I-Sec Research

76

JK Cement, April 21, 2008

ICICI Securities

Efficiency improvement and capex on track
Cost-cutting measures to bear fruit in FY09E
JKCL’s high dependence on grid power led to enhanced power and fuel costs, resulting in lower margins than peers. Consequently, the company undertook an aggressive restructuring exercise to reduce its dependence (by setting up captive power plants) and planned a 20MW pet coke-based power plant and a 13.5MW waste-heat recovery-based power plant at Nimbehera. Further, the company is likely to replace its 7.5MW turbine at its power plant in Bamania, Rajasthan with a 10MW one. While the pet coke-based power plant has already been commissioned in Q3FY08, the waste-heat recovery plant would be commissioned in a phased manner in Q3/Q4FY08 as it would have to be hooked up with kilns inline with scheduled maintenance shutdowns. Table 2: Captive power consumption and per unit rate
FY08E mn units (MU) 7 53 60 rate/unit 0.35 2.71 2.44 FY09E MU 84 127 210 rate/unit 0.35 2.75 1.80

13MW waste heat recovery CPP 20MW pet coke-based CPP Total/average rate Source: I-Sec Research

Post commissioning of the plants, we expect significant reduction in the per-unit cost of power. While the average cost is ~Rs4.5/unit at present, cost of power from the pet coke unit is expected to be just Rs2.75/unit (initially, expected at ~Rs2.25/unit but, following sharp rise in pet coke prices, cost of generation is also expected to increase). Further, at the waste-heat recovery plant, costs are even lower at ~Rs0.35/unit. Consequently, average cost of power from the company’s captive units would be below Rs2/unit. We believe that the lower cost of power along with the strong cement-price outlook would significantly contribute to margin improvement. Chart 1: Power and fuel costs
850 800 750 700 (Rs/te) 650 3.5 600 550 500 450 400 FY06 FY07 FY08E FY09E FY10E 2.5 2.0 3.0 4.0 (Rs/KwH) Pow er & Fuel Average per unit cost of pow er (RHS) 5.0 4.5

Source: Company data, I-Sec Research

JK Cement, April 21, 2008 Chart 2: Key cost trend
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY05 FY06 FY07 FY08E Pow er & Fuel Rs/tonne Freight EBITDA/tonne

ICICI Securities

FY09E

FY10E

Source: Company data, I-Sec Research

Also, the company’s power plants would be entitled to income-tax exemption under Section 80IA for the next ten years, which would reduce effective tax rate for the company to 24% from ~33% at present.

Capex plans and funding on track
JKCL has already announced plans to set up a 3mnte plant in Karnataka, to be located in Mugdol and in proximity to the Bangalore market. Further, the nearest cement plant is located at 600km from the proposed location. We expect the plant to be commissioned in Q2FY10E. The unit would have clinker capacity of 2.3mnte and, based on the blend of fly ash and slag, production could increase to as high as 3.5mnte. We expect the blending ratio to be conservative at 1.3x. Total cost of the Karnataka project is expected to be ~Rs10.5bn. With prices reigning at all-time highs and expected to rise further, JKCL is likely to generate operating cashflows of ~Rs12.2bn over the next three years. Hence, despite expected borrowings of ~Rs5.5bn, the company’s D/E is likely to remain benign till FY10. While the cost of setting up CPPs (~Rs 2.5bn) would be met via the equity issue in February ‘06, operating cash flows for FY07 (~Rs1.7bn) would be used to part finance the Nihon Nirman acquisition & upgradation (~Rs1.1bn).

78

JK Cement, April 21, 2008

ICICI Securities

White cement – Low growth but stable business
JKCL is the country’s second-largest producer of white cement, with a 0.4mnte capacity, located at Gotan in Rajasthan. The white cement industry has grown ~4% over the past ten years. It is seen as a high-end product, primarily for aesthetic use. Further, unlike grey cement that has no substitute, white cement constantly faces threat from substitutes such as marble and the ceramic-tile industry. The white cement production process is slightly different from that of grey cement and involves higher cost of production. • Impurities such as iron, manganese, titanium and chromium have to be physically removed from limestone (involving higher mining costs) as against mechanised mining, which is not viable China clay is then mixed with limestone and ground before being fed to the kiln Coal-based fuels cannot be used to heat kilns as ash residue would affect the ‘whiteness’ of clinker. Hence, petroleum-based fuels (that are costlier), are used in kilns Cooling of clinker needs absence of oxygen to prevent colour addition to the clinker due to oxidisation

• •

Despite only two major players (Grasim and JKCL) in the white cement industry, it is expected to see only moderate rise in both volumes and prices mainly due to stiff competition from substitutes. JKCL plans to focus on value-added products such as wall putty that would help it achieve higher realisations. Table 3: White cement operating parameters
(’000 te) Capacity Production Sales Gross realisations (Rs/te) Source: I-Sec Research FY06 350 227 221 7,219 FY07 400 249 247 7,342 FY08E 400 254 254 7,599 FY09E 400 262 262 7,751 FY10E 400 268 268 7,751

We expect white cement volumes to grow ~3% and 2% in FY09 and FY10 respectively. Further, we believe that white cement realisations would rise ~2% in FY09 and remain flat in FY10.

JK Cement, April 21, 2008

ICICI Securities

Estimate 20% earnings CAGR through FY08-10E
Table 4: Performance trend and forecast assumptions
(’000 te) Capacity Production Capacity utilisation (%) Sales (mnte) Growth (%) Realisations (Rs/te) Growth (%) Source: I-Sec Research FY07 4,000 3,641 91 3,640 4 3,554 35 FY08E 4,400 3,806 87 3,806 5 4,186 18 FY09E 4,400 4,136 94 4,136 9 4,354 4 FY10E 7,400 5,542 75 5,542 34 4,354 0

Volumes – Main revenue driver. JKCL acquired Nihon Nirman, a white cement plant with 0.1mnte capacity, in January ’07. The company is in the process of converting this plant into a 0.4mnte capacity grey cement one by April ’07. This would help boost volumes in FY09E. Further, JKCL’s Karnataka plant is expected to be commissioned by Q4FY09E; however, we have assumed a six-month delay for its commissioning, given delays in fresh capacities at present. Consequently, we expect ~9% and 34% rise in volumes in FY09E and FY10E respectively. We estimate realisations to rise 4% in FY09E and remain flat in FY10E. Overall, topline is expected to post CAGR of 21% over the next two years. JKCL’s installed capacity is likely to be 4.4mnte by April ’08. However, this rated capacity is on the basis of a 70:30 PPC-to-OPC mix. Since the company is receiving Government orders (that include only OPC cement) at present at Rs20/bag higher prices than market price of PPC, it has raised share of OPC production to 50%. Consequently, despite an effective capacity of 4.4mnte (including Nihon Nirman) in FY09E, we have assumed sales of only 4.1mnte. Chart 3: Sales, EBITDA and EBITDA margin movement line light
25,000 Net sales EBITDA EBITDA Margin (RHS) 35 30 20,000 25 (Rs mn) 15,000 20 15 10 5,000 5 0 FY06 FY07 FY08E FY09E FY10E 0 (%)

10,000

Source: Company data, I-Sec Research

80

JK Cement, April 21, 2008

ICICI Securities

Cost savings to help margin expansion. Cost savings along with cement price improvements are likely to boost FY09E margins despite sharp rise in fuel costs. With pet coke and waste-heat recovery plants already commissioned in September ’07 and February ’08 respectively, a substantial part of the benefit from lower costs would accrue in FY09E too. However, margins would be under pressure in FY10E due to limited upside on prices. We expect JKCL’s EBITDA/te to jump to Rs1,249 in FY09E from Rs1,091 in FY08 before declining to Rs1,177 in FY10E. Chart 4: EBITDA/te
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY06 FY07 FY08E FY09E FY10E

Source: Company data, I-Sec Research

JKCL is expected to register interest cost CAGR of 29% over FY08-10E, mainly on account of borrowings for the expansion at Karnataka. The company will benefit from lower effective tax rate via exemptions under Section 80IA for power plants. Consequently, with effective tax rate at 24% over the next two years, we expect PAT to post an impressive CAGR of 20% over FY08-10E. Chart 5: Negative FCF from FY08 due to capex for Karnataka plant
2,000 1,000 0 (Rs mn) (1,000) (2,000) (3,000) (4,000) (5,000) (6,000) (7,000) FY06 FY07 FY08E FY09E FY10E Free Cashflow D/E (RHS) 1.8 1.6 1.4 1.2 (x) 1.0 0.8 0.6 0.4 0.2 0.0

Source: Company data, I-Sec Research

JK Cement, April 21, 2008

ICICI Securities

The cost of the Karnataka project is ~Rs10.5bn, which includes a 50MW captive power plant. While JKCL is expected to borrow Rs5.5bn for the project, the balance would be met via internal accruals. However, we have assumed a ~six-month delay in commissioning of the plant. This would enable further cash accruals of six months for the company. Consequently, the FCF would turn negative in FY09E before turning positive in FY10E, thereby leading to D/E rising to 0.7x in FY09E before falling to 0.4x in FY10E. Chart 6: RoCE and RoE trends
50

40

30 (%) 20 10 0 FY06

FY07

FY08E

FY09E

FY10E

Source: Company data, I-Sec Research

Buoyed by robust cement prices over the past couple of years, JKCL’s return ratios saw significant jump till FY07. However, large capex for the Karnataka plant would result in return ratios dipping as return from investments in Karnataka would start flowing in only from FY10E.

82

JK Cement, April 21, 2008

ICICI Securities

Inexpensive valuations
We value JKCL at FY09E and FY10E P/E of 2.9x and 2.5x and EV/E of 3.2x and 2.4x respectively. On the EV/te front, the company is valued at US$101. Historically, the company’s poor operational efficiencies have been reflected in valuations. However, with the company expected to achieve operating margins of over 30% supported by cost-cutting initiatives coupled with 20% CAGR over the next two years, we expect it to get re-rated. Based on FY09E P/E of 4x, we target a price of Rs208, an upside of 39% from current levels. We initiate coverage with a BUY rating. Chart 7: P/E bands
400 350 300 250 (Rs) 200 150 3x 100 50 0 May-07 Feb-07 Mar-06 Oct-07 Jun-05 Jun-06 Dec-05 Nov-06 Sep-05 Jan-08 Nov-07 Jan-08 Aug-06 Aug-07 Apr-08 Apr-08 5x 7x

Source: Bloomberg, I-Sec Research

Chart 8: EV/EBITDA bands
30,000 9x 25,000 (Rs mn) 20,000 15,000 10,000 5,000 May-06 May-07 Mar-06 Nov-05 Nov-06 Mar-07 Jun-05 Jan-06 Jul-06 Jan-07 Sep-05 Sep-06 Jul-07 Sep-07 7x

5x

Source: Bloomberg, I-Sec Research

JK Cement, April 21, 2008

ICICI Securities

Summary financials
Table 5: Profit and Loss Statement
(Rs mn, year ending March 31) Operating Income (Sales) of which Domestic 12,333 Operating Expenses 9,042 EBITDA 3,292 % margin 26.7 Depreciation & Amortisation 332 Gross Interest 529 Other Income 288 Recurring PBT Add: Extraordinaries Less: Taxes 934 - Current tax 718 - Deferred tax 215 Less: Minority Interest (3) Net Income (Reported) 1,786 Recurring Net Income 1,786 Source: Company data, I-Sec Research FY04 12,333 FY05E 14,901 14,901 10,472 4,429 29.7 411 438 171 825 675 150 (2) 2,926 2,926 FY06E 16,761 16,761 11,267 5,495 32.8 463 430 169 108 1,145 906 239 (1) 3,625 3,625 FY07E 21,872 21,872 15,032 6,840 31.3 725 738 196 522 1,338 1,059 279 4,236 4,236

Table 7: Cash Flow Statement
(Rs mn, year ending March 31) FY04 FY05E Operating Cash flow 2,461 3,350 Working Capital changes (1,214) 92 Capital Commitments (1,830) (2,956) Net Operating FCF (583) 486 Investing Activities 182 117 Issue of Share Capital Buyback of shares Inc(Dec) in Borrowings (245) (1,430) Dividend paid (245) (350) Extraordinary Items (39) (133) Chg. in Cash & Bank (929) (1,309) Source: Company data, I-Sec Research FY06E FY07E 4,146 4,961 (371) (466) (6,798) (2,452) (3,023) 2,043 89 76 3,552 (1,350) (367) (315) (221) (260) 31 194

Table 8: Key Ratios
(Year ending March 31) FY04 Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (days) Receivables (days) Payable (days) D/E Ratio (x) 25.5 25.5 30.3 3.5 29.9 FY05E 41.8 41.8 47.7 5.0 70.0 FY06E 51.8 51.8 58.5 5.3 119.8 FY07E 60.6 60.6 70.9 4.5 179.1

Table 6: Balance Sheet
(Rs mn, year ending March 31) FY04 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Capital Work-in-Progress Goodwill Total Assets 5,311 1,925 2,146 3,165 159 53 106 9,224 1,644 11,145 FY05E 4,335 616 2,641 1,694 212 53 160 10,950 2,500 12,422 FY06E 4,635 647 2,563 2,072 292 53 239 11,024 8,798 19,364 FY07E 5,447 841 2,670 2,777 412 53 359 20,835 750 22,067

41.2 149.3 448.0 448.0 233.0

20.8 34.6 63.8 63.8 57.6

12.5 24.1 23.9 23.9 22.5

30.5 24.5 16.8 16.8 21.3

Liabilities Borrowings 5,577 4,147 Deferred Tax Liability 432 449 Minority Interest Equity Share Capital 699 699 Face value per share (Rs) 10 10 Reserves & Surplus* 7,502 10,078 Less: Misc. Exp # 17 17 Net Worth 5,136 7,826 Total Liabilities 11,145 12,422 Source: Company data, I-Sec Research *excluding revaluation reserves; # = not written off

5.9 4.9 5.0 3.2 1.0 4.2

3.6 3.1 2.1 3.2 1.1 4.7

2.9 2.6 1.2 2.4 0.7 3.6

2.5 2.1 0.8 1.7 0.4 1.8

7,699 467 699 10 13,337 17 11,198 19,364

6,349 486 699 10 17,258 17 15,232 22,067

9.8 2.5 10.6 34.3 11.1 5.9 13.9 41.7 1.2

9.5 2.5 4.5 22.0 8.7 5.4 14.6 39.4 0.6

8.9 2.5 3.5 24.0 7.4 5.0 15.3 42.7 0.7

9.7 2.5 3.5 24.0 8.8 5.9 14.3 32.8 0.4

Profitability Ratios (%) Rec. Net Income Margins 14.2 RoCE 31.4 RoNW 41.2 Dividend Payout 13.7 Source: Company data, I-Sec Research

19.4 35.6 45.1 11.9

21.4 32.7 38.1 10.1

19.2 30.5 32.1 7.4

84

JK Cement, April 21, 2008

ICICI Securities

Index of Tables and Charts
Tables
Table 1: Key markets and market share.............................................................................76 Table 2: Captive power consumption and per unit rate ......................................................77 Table 3: White cement operating parameters.....................................................................79 Table 4: Performance trend and forecast assumptions ......................................................80 Table 5: Profit and Loss Statement ....................................................................................84 Table 6: Balance Sheet.......................................................................................................84 Table 7: Cash Flow Statement............................................................................................84 Table 8: Key Ratios.............................................................................................................84

Charts
Chart 1: Power and fuel costs.............................................................................................77 Chart 2: Key cost trend .......................................................................................................78 Chart 3: Sales, EBITDA and EBITDA margin movement line light.....................................80 Chart 4: EBITDA/te .............................................................................................................81 Chart 5: Negative FCF from FY08 due to capex for Karnataka plant.................................81 Chart 6: RoCE and RoE trends...........................................................................................82 Chart 7: P/E bands..............................................................................................................83 Chart 8: EV/EBITDA bands.................................................................................................83

JK Cement, April 21, 2008

ICICI Securities

This page has been intentionally left blank

86

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

Shree Cement
Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Sept '07 63.7 14.1 6.3 0.8 7.0 22.2 Dec '07 63.7 14.4 5.8 1.3 7.3 21.9 Mar '08 63.7 14.8 6.5 0.7 7.7 21.5

BUY
Rs1,078

Proficient performer
Reason for report: Initiating coverage

Price chart
1,700 1,500 (Rs) 1,300 1,100 900 Jun-07 Nov-07 Sep-07 Apr-07 Jan-08 Apr-08

Shree Cement (SCL) is the most efficient cement manufacturer in India at present, with inherent cost advantages from lower lead distances to markets and usage of 100% pet coke as fuel. SCL has regularly augmented capacities over the past couple of years, which would help it post the highest topline growth amongst cement companies in the I-Sec universe. Despite an expected earnings CAGR of 70% over the next two years, the company is valued at FY09E and FY10E EV/E of 3.1x and 2.2x respectively. We initiate coverage with a BUY recommendation, targeting a price of Rs1,686/share over next 12-18 months. Highest volume growth amongst peers. SCL has added 3mnte capacity since September ’07, taking its total installed capacity to 9mnte. The company has also commissioned a 3mnte grinding unit at Khushkhera, Rajasthan over the same period. This would help it register volume growth of 31% and 21% in FY09E and FY10E respectively as well as push up overall revenues 31% over the next two years. Margins to be under pressure. SCL is the only cement company in India to use 100% pet coke at its kilns and captive power plants (CPPs). While pet coke has the least amount of ash content and high calorific value that enhances operating efficiencies, the raw material prices have seen sharp rise in line with rising crude prices. While the split grinding unit at Khushkhera should help savings in freight, overall margins are likely to see marginal contraction. Earnings growth to impress. SCL’s strong topline growth would directly help post PAT CAGR of 70% over the next two years. Also, the company is expected to generate free cash flows (FCFs) of ~Rs13.3bn over FY08-10E, with substantial capex plans already reaching completion. Strong cash generation should aid a sharp fall in D/E to ~0.6x in FY10E from 1.7x in FY08. Attractive valuations. At FY09E and FY10E EV/E of 3.1x and 2.2x respectively and EV/te of US$106, SCL’s valuations are inexpensive. The company is expected to register the highest earnings growth amongst peers, which should drive stock rerating. We estimate fair value of Rs1,686/share (FY09E EV/E of 5.1x), implying a 56% potential upside. Initiate coverage with BUY recommendation.
Market Cap Reuters/Bloomberg 52-week Range (Rs) Free Float (%) FII (%) Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%) Rs37.6bn/US$939mn SHCM.BO/SRCM IN 34.8 1700/900 36.3 7.7 203 (15.7) (22.4) (13.3) (18.8) Year to March Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%) FY07 14,055 1,575 45.2 297.3 23.8 169.5 7.3 0.6 17.0 42.0 FY08E 19,575 2,869 82.4 82.1 13.1 214.6 5.1 2.3 26.7 51.7 FY09E 27,490 6,099 175.1 112.6 6.2 268.5 3.1 2.8 44.4 67.2 FY10E 33,353 8,200 235.4 34.4 4.6 322.7 2.2 3.3 44.4 54.4

Shares Outstanding (mn)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Sensex Return 3m (%) Sensex Return 12m (%)

Please refer to important disclosures at the end of this report

Shree Cement, April 21, 2008

ICICI Securities

Timely capex to boost growth
Only player to commission capacities prior to schedule
In the current scenario, where most cement equipment manufacturers boast of full order books, large capacity additions are expected to get delayed. However, over the past couple of years, SCL has consistently managed to commission its expansions on or before the scheduled date. SCL follows a strategy of planning relatively smaller capacities that aid quicker implementation as many ancillary components such as mills, switch gears etc can be sourced from various suppliers, thus avoiding delay in supply. On the other hand, larger capacities would require components from few suppliers that have specific capabilities; this could delay overall project implementation. Table 1: Capacity additions
Plants Unit III Unit IV Unit V Grinding units Grinding units Unit VI Unit VII Source: Company data Location Ras, Rajashtan Ras, Rajashtan Ras, Rajashtan Khushkhera, Rajashtan Khushkhera Rajashtan Ras, Rajashtan Ras, Rajashtan Time of commissioning February ’06 March ’07 September ’07 September ’07 December ’07 March ’08 H2FY10 Capacity (mnte) 1.5 1.5 1.5 2.0 1.5 1.5 1.0

SCL’s unit V along with phase I of the grinding unit at Khushkhera was commissioned almost three months prior to schedule. Further, commissioning of its unit VI, which was moved forward ~six months, recently got commissioned. Post addition of unit VI, SCL’s installed capacity has increased to ~9mnte from ~4.5mnte at end FY06. Also, the company is implementing another 1mnte expansion, expected to be operational by Q2FY10. Whilst most cement players have witnessed muted volume growth due to capacity constraints, SCL has and would take full advantage of the robust cement demand.

SCL to continue gaining market share in key markets
SCL is amongst the largest players in northern India and the market leader in Rajasthan and Delhi. Further, the company is the second-largest supplier in Haryana. With commissioning of its Khushkhera grinding unit (located near Gurgaon, Haryana), we expect the company to gain market leadership in Haryana too by FY09E. With the company’s timely capacity additions, market share in other key markets is also likely to see further boost.

88

Shree Cement, April 21, 2008 Table 2: Key markets and market share
Market share (%) North Uttar Pradesh & Uttaranchal Haryana Punjab Rajasthan Delhi Jammu & Kashmir Total Source: Company data, I-Sec Research 4.5 19.0 7.3 20.4 17.9 4.5 3.2 % of total despatches 16.9 22.1 9.9 38.7 11.1 1.2 99.8

ICICI Securities
9-yr consumption CAGR (%) 8.9 12.2 6.0 9.9 3.2 13.0 8.1 share of consumption (%) 12.2 3.8 4.4 6.1 2.0 0.8 100.0

Cement demand in northern India is expected to see substantial growth from various infrastructure projects, especially hydro power and the Common Wealth Games 2010. SCL will likely benefit from the robust demand and also register the highest volume growth amongst peers in FY09E. Chart 1: Key market share trends
24 20 16 (%) Haryana Punjab Rajasthan Delhi

12 8 4 FY05

FY06

FY07

Source: Cement Manufacturers Association (CMA), I-Sec Research

Shree Cement, April 21, 2008

ICICI Securities

Remains most efficient player
Power & fuel costs advantage
SCL is the only company in India to use 100% pet coke as fuel for its kilns and power plants. Pet coke has the advantage of being the cheapest in terms of cost per kcal compared with domestic/imported coal. Further, pet coke has the lowest percentage of ash content, thus resulting in higher kiln efficiency. SCL’s major power requirement is met via captive pet coke-based power plants. Whilst cost of pet coke has seen significant rise in line with cost of petroleum products, per unit cost would still be cheaper than domestic or imported coal, the cost of which has also risen. Chart 2: Power & fuel costs trend
800 700 600 (Rs/kWh) 500 (Rs/te) 400 300 200 100 0 FY05 FY06 FY07 FY08E FY09E FY10E 0.5 0.0 2.0 1.5 1.0 Pow er & Fuel Average per unit cost of pow er (RHS) 2.5 3.0

Source: Company data, I-Sec Research

Locational advantage helps lower freight cost
SCL has the distinct advantage of its plants being located in proximity to its key markets. Consequently, average lead distances for the company are much lower visà-vis competitors. However, rising fuel costs are expected to translate into higher road freight for all cement players in FY09. Commissioning of the company’s 3.5mnte grinding unit at Khushkhera, Rajasthan is expected to partly mitigate impact of higher freight costs. Fly ash would be sourced from the Panipat Thermal Station nearby, reducing cost of fly ash. Cement from this unit would primarily cater to the Haryana market.

90

Shree Cement, April 21, 2008 Chart 3: Key cost trend
1,600 1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY05 FY06 FY07 FY08E Pow er & Fuel Freight EBITDA/tonne

ICICI Securities

FY09E

FY10E

Source: Company data, I-Sec Research

Shree Cement, April 21, 2008

ICICI Securities

Estimate 70% earnings CAGR over FY08-10E
Table 3: Performance trend and forecast assumptions
(’000 te) Capacity Production Capacity utilisation (%) Sales (mnte) Growth (%) Realisations (Rs/te) Growth (%) Source: I-Sec Research FY07 6,000 4,799 80 4,833 51 3,338 30 FY08E 7,500 5,985 80 5,985 24 3,889 17 FY09E 9,000 7,830 87 7,830 31 4,044 4 FY10E 10,000 9,500 95 9,500 21 4,044 0

Volumes boost strong revenue growth. SCL is likely to see very impressive volume growth aided by capacity additions (3mnte) in FY08. The company’s strategy of planning smaller capacities and commissioning them prior than scheduled would help it post highest volume growth amongst peers. We expect the company to post 31% and 21% rise in volumes in FY09E and FY10E respectively. We have assumed 4% and 0% improvement in realisations in FY09E and FY10E respectively. We expect the company’s topline to post CAGR of 31% over the next two years. Chart 4: Sales, EBITDA and EBITDA margin movement
40,000 35,000 30,000 (Rs mn) 25,000 20,000 15,000 10,000 5,000 0 FY05 FY06 FY07 FY08E FY09E FY10E 20% 15% 35% 30% 25% Net sales EBITDA EBITDA Margin (RHS) 45% 40%

Source: Company data, I-Sec Research

Margins to come under pressure. While SCL’s topline is likely to see an impressive rise, higher input costs (especially pet coke) and rising freight costs are expected to pressurise operating margins. Consequently, we expect EBITDA margin to decline marginally ~67bps to 40.4% in FY09E and further 68bps to 39.7% in FY10E. We estimate the company’s EBITDA/te to rise to Rs1,418 in FY09E, before falling to Rs1,394 in FY10E.

92

Shree Cement, April 21, 2008 Chart 5: EBITDA/te
1,600 1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY05 FY06 FY07 FY08E FY09E

ICICI Securities

FY10E

Source: Company data, I-Sec Research

SCL’s interest cost is expected to rise with the commissioning of units V & VI and the grinding unit at Khushkhera at end-FY08. SCL has been charging depreciation on the WDV (written down value) as per the Income Tax Act, 1961. Thereby, depreciation should see substantial decline in FY09E and FY10E. Post assuming an effective tax rate of ~25% for the next couple of years, we expect the company to post earnings CAGR of 70% over the next two years. Chart 6: Strong FCF over next couple of years
7,000 6,000 5,000 4,000 (Rs mn) 3,000 2,000 1,000 0 (1,000) (2,000) (3,000) FY06 FY07 FY08E FY09E FY10E 0.0 0.5 1.0 1.5 (x) 2.0 Free Cashflow D/E (RHS) 2.5

Source: Company data, I-Sec Research

SCL should see robust cash generation over the next two years, partly aided by firm cement prices and incremental volumes. We expect the company to generate FCFs of ~Rs13.3bn over the next two years. The company’s D/E should also see a sharp fall to ~0.6x in FY10 from 1.7x in FY08.

Shree Cement, April 21, 2008 Chart 7: RoCE and RoE trends
80 70 60 50 (%) 40 30 20 10 0 FY06 RoCE RoE

ICICI Securities

FY07

FY08E

FY09E

FY10E

Source: Company data, I-Sec Research

Buoyed by rising cement prices over the past couple of years, most cement companies saw a sharp jump in their return ratios over the period. SCL would see its RoCE stabilising over the next two years, while return-on-equity could decline in FY10E.

94

Shree Cement, April 21, 2008

ICICI Securities

Inexpensive valuations
SCL is valued at FY09 and FY10 P/E of 6.2x and 4.6x and EV/E of 3.1x and 2.2x respectively. On the EV/te front, the company is valued at US$97. SCL is the most efficient cement manufacturer in India. SCL is likely to post the highest earnings growth (70%) amongst cement companies under I-Sec coverage. Hence, we believe that the current valuations are inexpensive, with the stock likely to get re-rated. Our target price of Rs1,686/share, which is a 56% upside from current levels, assumes an EV/E of 5.1x our FY09 estimates. Consequently, we initiate coverage with a BUY rating. SCL is our top pick in the sector. Chart 8: P/E bands
3,500 3,000 2,500 (Rs) 2,000 1,500 1,000 500 0 Oct-02 May-03 Oct-05 May-06 Mar-04 Nov-03 Dec-04 Nov-06 Mar-07 Jul-02 Jan-03 Jun-04 Jul-05 Jan-06 Jun-07 Dec-07 Sep-04 Sep-07 Oct-07 Apr-02 Apr-05 Aug-03 Aug-06 Apr-08 Apr-08 8x 13x 20x

Source: Bloomberg, I-Sec Research

Chart 9: EV/EBITDA bands
200,000 180,000 160,000 140,000 (Rs mn) 120,000 100,000 80,000 60,000 40,000 20,000 0 Oct-02 Oct-03 Oct-04 Oct-05 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Oct-06 Apr-07 20x 28x 36x

Source: Bloomberg, I-Sec Research

Shree Cement, April 21, 2008

ICICI Securities

Summary financials
Table 4: Profit and Loss Statement
(Rs mn, year ending March 31) Operating Income (Sales) of which Domestic 14,055 Operating Expenses 8,133 EBITDA 5,922 % margin 4,214 Depreciation & Amortisation 4,331 Gross Interest 104 Other Income 212 Recurring PBT 1,700 Add: Extraordinaries 195 Less: Taxes 124 - Current tax 852 - Deferred tax (727) Less: Minority Interest 1 Net Income (Reported) 1,770 Recurring Net Income 1,575 Source: Company data, I-Sec Research FY07 14,055 FY08E 19,575 19,575 11,539 8,036 4,105 4,607 406 752 3,775 11 906 906 2 2,880 2,869 FY09E 27,490 27,490 16,389 11,101 4,038 3,254 623 908 8,132 2,033 2,033 3 6,099 6,099 FY10E 33,353 33,353 20,113 13,241 3,970 3,041 719 1,453 10,934 2,733 2,733 4 8,200 8,200

Table 6: Cash Flow Statement
(Rs mn, year ending March 31) FY07 FY08E Operating Cash flow 5,718 6,718 Working Capital changes (1,573) (184) Capital Commitments (6,553) (4,034) Net Operating FCF (2,408) 2,500 Investing Activities 212 752 Issue of Share Capital Buyback of shares Inc(Dec) in Borrowings 5,586 1,652 Dividend paid (230) (871) Extraordinary Items 42 (0) Chg. in Cash & Bank 3,342 4,098 Source: Company data, I-Sec Research FY09E 8,620 148 (2,700) 6,069 908 (591) (1,045) 5,342 FY10E 9,998 (430) (3,595) 5,974 1,453 1,611 (1,254) 0 7,784

Table 7: Key Ratios
(Year ending March 31) FY07 Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation ratio (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (days) Receivables (days) Payable (days) D/E Ratio (x) 50.8 45.2 169.5 6.6 116.3 FY08E 82.7 82.4 214.6 25.0 174.0 FY09E 175.1 175.1 268.5 30.0 319.1 FY10E 235.4 235.4 322.7 36.0 518.5

Table 5: Balance Sheet
(Rs mn, year ending March 31) FY07 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Capital Work-in-Progress Total Assets 7,741 3,533 2,846 4,895 500 500 5,482 3,438 13,822 FY08E 12,662 7,631 3,479 9,183 500 500 7,875 471 17,483 FY09E 18,755 12,974 4,553 14,202 500 500 6,592 1,200 21,946 FY10E 26,673 20,758 4,468 22,205 500 500 7,751 595 30,503

102.3 167.1 297 297 1.9

39.3 35.7 82 82 0.3

40.4 38.1 113 113 0.3

21.3 19.3 34 34 0.2

Liabilities Borrowings 9,314 10,966 Deferred Tax Liability (37) (37) Minority Interest Equity Share Capital 348 348 Face value per share (Rs) 10 10 Reserves & Surplus* 4,689 6,698 Less: Misc. Exp # Net Worth 4,545 6,555 Total Liabilities 13,822 17,483 Source: Company data, I-Sec Research *excluding revaluation reserves; # = not written off

10,375 (37) 348 10 11,753 11,609 21,946

11,986 (37) 1 348 10 18,699 18,555 30,503

23.8 6.4 9.3 7.3 3.1 10.4

13.1 5.0 6.2 5.1 2.1 6.3

6.2 4.0 3.4 3.1 1.3 4.0

4.6 3.3 2.1 2.2 0.9 3.0

11.5 4.9 12.5 6.5 9.9 7.0 5.0 56.0 2.0

10.3 4.6 19.9 23.9 8.9 6.2 6.3 60.1 1.7

12.1 4.4 11.2 25.0 5.6 5.6 7.4 60.9 0.9

12.0 4.3 13.3 25.0 4.7 6.2 7.9 54.8 0.6

Profitability Ratios (%) Rec. Net Income Margins 11.0 RoCE 17.0 RoNW 42.0 Dividend Payout 14.6 Source: Company data, I-Sec Research

14.1 26.7 51.7 30.4

21.5 44.4 67.2 17.1

23.6 44.4 54.4 15.3

96

Shree Cement, April 21, 2008

ICICI Securities

Index of Tables and Charts
Tables
Table 1: Capacity additions.................................................................................................88 Table 2: Key markets and market share.............................................................................89 Table 3: Performance trend and forecast assumptions ......................................................92 Table 4: Profit and Loss Statement ....................................................................................96 Table 5: Balance Sheet.......................................................................................................96 Table 6: Cash Flow Statement............................................................................................96 Table 7: Key Ratios.............................................................................................................96

Charts
Chart 1: Key market share trends .......................................................................................89 Chart 2: Power & fuel costs trend .......................................................................................90 Chart 3: Key cost trend .......................................................................................................91 Chart 4: Sales, EBITDA and EBITDA margin movement ...................................................92 Chart 5: EBITDA/te ............................................................................................................93 Chart 6: Strong FCF over next couple of years ..................................................................93 Chart 7: RoCE and RoE trends...........................................................................................94 Chart 8: P/E bands..............................................................................................................95 Chart 9: EV/EBITDA bands.................................................................................................95

Shree Cement, April 21, 2008

ICICI Securities

This page has been intentionally left blank

98

Equity Research
April 21, 2008 BSE Sensex: 16481

INDIA

UltraTech Cement
Cement
Shareholding pattern
Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Others Source: CMIE Sept '07 53.7 17.3 1.9 5.9 9.5 29.0 Dec '07 54.1 16.7 1.8 6.9 8.0 29.2 Mar '08 54.4 15.5 1.9 7.0 6.7 30.1

BUY
Rs784

Stalwart of success
Reason for report: Initiating coverage

UltraTech Cement (UTCL), having witnessed capacity constraints in the past, is likely to benefit from commissioning of a 4.9mnte plant in Tadipatri, Andhra Pradesh. Besides volume growth, UTCL would see cost savings from commissioning of 190MW captive power in FY09E. The company’s impressive earnings of 21% over FY08-10E would be aided by improvement in both topline and margins. We believe that current valuations are inexpensive and initiate coverage with BUY recommendation, targeting a price of Rs1,105/share over the next 12-18 months. Volumes to boost topline. While UTCL has already commissioned its 3.3mnte clinkerisation unit in Andhra Pradesh end-March ’08, its grinding unit is likely to be operational in the next couple of months. As a result, an additional 4.9mnte would help strong revenue growth going forward vis-à-vis the company facing capacity constraints in the past couple of years. Further, UTCL is implementing two grinding units in Gujarat along with port terminals, the benefits from which are likely to accrue largely in FY11E. Captive power to aid margin expansion. UTCL would commission a 92MW lignite-based plant at Gujarat from April ’08 in a phased manner. Additionally, the company is expected to commission a 50MW thermal power plant (TPP) at Chhattisgarh and another 50MW TPP along with the Tadipatri expansion. Savings resulting from these two plants would help offset impact of rising international coal prices, thereby leading to margin expansion.

Price chart
1,200 1,100 (Rs) 1,000 900 800 700 Jun-07 Nov-07 Sep-07 Apr-07 Jan-08 Apr-08

Earnings growth to impress. We expect UTCL to post earnings CAGR of 21% over the next two years, backed by both volume growth and cost savings. While the company’s FY09E free cash flow (FCF) should turn negative, an estimated free cash generation of Rs12bn in FY10E would ensure D/E falling to 0.4x. Attractive valuations. UTCL is currently trading at attractive valuations of FY09E and FY10E EV/E of 5.4x and 4.4x respectively and EV/te of US$141. Although the company is comparable with ACC in terms of size and width of market presence at present, it is likely to achieve operating margins higher than ACC’s. We estimate a fair value of Rs1,105share (FY09E EV/E of 7.1x), which is a 41% upside from current levels. We initiate coverage with BUY recommendation.
Market Cap Reuters/Bloomberg 52-week Range (Rs) Free Float (%) FII (%) Daily Volume (US$'000) Absolute Return 3m (%) Absolute Return 12m (%) Sensex Return 3m (%) Sensex Return 12m (%) Rs97.6bn/US$2.4bn ULTC.BO/UTCEM IN 124 1165/707 45.6 6.7 2,120 (10.7) (22.6) (13.3) (18.8) Year to March Revenue (Rs mn) Net Income (Rs mn) EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield RoCE (%) RoE (%) FY07 49,108 7,823 62.8 240.3 12.5 81.0 8.3 1.3 36.0 55.8 FY08E 55,692 10,373 83.3 32.6 9.4 101.9 6.8 1.7 37.0 47.4 FY09E 67,544 13,109 105.3 26.4 7.4 129.4 5.4 2.1 37.4 41.6 FY10E 78,683 15,226 122.3 16.1 6.41 153.3 4.4 2.5 36.0 35.3

Shares Outstanding (mn)

Novonil Guha
novonil_guha@isecltd.com +91 22 6637 7385

Please refer to important disclosures at the end of this report

UltraTech Cement, April 21, 2008

ICICI Securities

New plant operations to boost growth
Post Grasim’s acquisition of UTCL in ’03, UTCL was initially focusing on improving overall efficiencies, maximising existing volume potential through debottlenecking and improving its balance sheet. Thereafter, helped by higher cement prices, consequent cash generation and improvement in operational efficiency levels, the company embarked on a 4.9mnte brownfield capacity expansion along with a 50WM captive TPP in Tadipatri, Andhra Pradesh in mid ’06. A clinkerisation unit of 3.3mnte has just been commissioned while the grinding unit is expected to be operational in Q1FY09. UTCL’s volume growth has been muted in the past, primarily due to capacity constraints; however, with commissioning of new capacity, we expect impressive growth as the company gets full benefit of the robust demand.

Market leader in key markets
Table 1: Key markets and market share
Market share (%) West Gujarat Maharashtra South Tamil Nadu Karnataka Kerala Andhra Pradesh East West Bengal Bihar & Jharkhand Orissa Assam Central Madhya Pradesh and Chhattisgarh 29.6 21.9 % of total despatches 16.6 27.9 8-year consumption CAGR (%) 4.5 7.2 Share of total consumption (%) 6.8 12.2

7.2 12.0 4.6 7.1

6.9 10.0 2.4 6.5

7.4 11.2 6.8 8.5

8.6 7.5 4.7 8.2

18.0 6.4 20.3 17.3

9.3 3.4 6.7 1.3

6.7 10.1 10.9 7.4

4.6 4.8 3.0 0.7

9.3

7.3

9.6 8.1

7.0 100

Total 9.7 98.3 Source: Cement Manufacturers Association (CMA), I-Sec Research

UTCL’s key market is the western region, where the company is the market leader in Maharashtra and Gujarat. Maharashtra also happens to be the largest cement consuming state in India. UTCL and Grasim together hold ~35% market share in Maharashtra and ~39% market share in Gujarat. Further, UTCL is also a significant player in the South and East. UTCL, along with Grasim, is the market leader in Orissa (26%), Madhya Pradesh (22%), Chhattisgarh (33%) and Karnataka (30%). With significant presence in key markets coupled with synergy gains, especially in logistics and freight, we expect the company to post strong performance going forward. Further, commissioning of the second unit at Tadipatri would boost market share in Andhra Pradesh, Karnataka and Kerala. However, UTCL has negligible presence in the northern markets, which is primarily catered to by Grasim.

100

UltraTech Cement, April 21, 2008 Chart 1: Key market-share movement
35 30 25 (%) 20 15 10 FY04
Source: CMA, I-Sec Research

ICICI Securities

Gujarat WB

Maharashtra Orissa

Karnataka

FY05

FY06

FY07

101

UltraTech Cement, April 21, 2008

ICICI Securities

Captive power to moderate rising costs
UTCL imports ~30% of total coal requirements at present and, hence, is exposed to sharp rise in prices of international coal and bulk freight rates. While the company is expected to see higher impact of fuel costs as against peers using domestic coal, commissioning of captive power plants would help partly neutralise the impact.

Investment in efficiency improvements to bear fruit
UTCL has consistently focused on higher efficiencies and modernisation. Initial investments were aimed at achieving rated capacity (historically, UTCL has operated at very low utilisation due to production bottlenecks). High cost of power was also a concern for the management, thereby prompting it to set up captive power plants; UTCL is implementing three captive power plants totalling 175MW (excluding the 50MW brownfield expansion at Tadipatri). Of these plants, a 92MW lignite-based plant at Pipavav (Gujarat) is expected to be commissioned from Q1FY08 in a phased manner while a 50MW coal-based TPP at Hirmi (Chhattisgarh) is likely to be commissioned by September ’08. The lignite-based TPP will replace the current naphtha-based plant, which has become operationally unviable due to restrictive cost of naphtha. The company uses grid power at Gujarat at present and the lignite-based TPP would save over Rs2/unit of power. The TPP at Hirmi would be based on coal middlings (leftovers from coal washery), which are lower on calorific value and even lower on cost. The plant uses grid power at present and switching to captive power would result in ~Re1/unit savings in power costs. Overall, we expect ~Rs1bn savings for UTCL over the next couple of years. Chart 2: Power & fuel costs and average unit cost of power
900 800 700 (Rs/te) 600 500 400 300 200 100 0 FY06
Source: I-Sec Research

Pow er & Fuel Average per unit cost of pow er (RHS)

5 4 3 2 1 0 (Rs/kWh)

FY07

FY08E

FY09E

FY10E

102

UltraTech Cement, April 21, 2008 Chart 3: Key cost and EBITDA/te
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY06 FY07 FY08E FY09E Pow er & Fuel Freight EBITDA/tonne

ICICI Securities

FY10E

Source: Company data, I-Sec Research

Grinding units to have logistic and freight benefits
Amongst other capex plans, UTCL is implementing two grinding units at Gujarat as well as port terminals along coastal Gujarat and Maharashtra. Consequently, the company would meet its western Maharashtra cement demand from Gujarat itself using the cheaper transportation mode of sea freight, resulting in significant savings in freight from transporting cement from its Chandrapur plant in eastern Maharashtra. However, these benefits are likely to accrue only in FY11E.

103

UltraTech Cement, April 21, 2008

ICICI Securities

Estimate 21% earnings CAGR over FY08-10E
Table 2: Performance trend and forecast assumptions
Capacity (’000 te) Production (’000 te) Capacity utilisation (%) Sales (mnte) Growth (%) Realisation (Rs/te) Growth (%) Source: I-Sec Research FY07 17,000 14,635 86 17,669 13.6 3,318 32.0 FY08E 17,000 15,436 91 17,436 (1.3) 3,923 18.3 FY09E 21,900 18,615 85 19,615 12.5 4,080 4.0 FY10E 23,900 22,227 93 22,477 14.6 4,080 -

Tadipatri expansion to drive topline. UTCL’s volumes that were constrained by installed capacity would witness a boost, primarily from its 4.9mnte Tadipatri brownfield expansion. We expect volumes to grow 12.5% and 14.6% for FY09E and FY10E respectively. Further, we expect share of clinker as part of total sales to dip over the next two years. Assuming 4% and 0% realisations growth over FY09E and FY10E respectively, we expect the company’s topline to post CAGR of 19% over the next two years. Chart 4: Sales, EBITDA and EBITDA margin movement
90,000 80,000 70,000 60,000 (Rs m) 50,000 20 40,000 30,000 20,000 10,000 0 FY06 FY07 FY08E FY09E FY10E 15 10 5 0 Net sales EBITDA EBITDA Margin (RHS) 40 35 30 25 (%)

Source: Company data, I-Sec Research

Margin improvement from captive power. While UTCL is expected to face the brunt of steep rise in prices of imported coal along with international freight rates, the impact is expected to be partly neutralised by the commissioning of ~140MW of captive power. This coupled with the expected 4% growth in prices in FY09E is likely to result in ~250bps rise in operating margins for the year. However, for FY10E, EBITDA margin is expected to decline 55bps due to lack of any significant pricing upside.

104

UltraTech Cement, April 21, 2008 Chart 5: EBITDA/te
1,400 1,200 1,000 (Rs/te) 800 600 400 200 0 FY06
Source: Company, I-Sec Research

ICICI Securities

FY07

FY08E

FY09E

FY10E

UTCL’s interest depreciation is expected to rise in FY09E with commissioning of the 4.9mnte Tadipatri plant. UTCL’s effective tax rate is likely to remain high at ~33% for the next couple of years. Aided by robust topline growth and cost savings, the company is expected to post earnings CAGR of 21% over the next two years. The recent export ban is likely to impact Gujarat based companies to some extent. However, the impact is expected to be marginal as export quantities are expected to be absorbed by the western markets given the acute supply shortage expected in FY09E. While the export ban is not likely to be a long term measure, should it be effective for the entire year, and we expect about 3-4% earnings impact for UTCL. Chart 6: FCF and D/E
14,000 12,000 10,000 8,000 (Rs mn) (x) 1.0 0.5 0.0 FY06
Source: I-Sec Research

Free cashflow

D/E (RHS)

2.5 2.0

6,000 4,000 2,000 0 (2,000) (4,000) FY07 FY08E FY09E FY10E

1.5

UTCL’s FCF is expected to turn negative in FY09E, mainly due to capex for the Tadipatri expansion. However, the company is expected to generate FCF of ~Rs12bn in FY10. UTCL’s D/E is also likely to see substantial reduction to ~0.4x in FY10E.

105

UltraTech Cement, April 21, 2008 Chart 7: RoCE trend
60 50 40 (%) 30 20 10 0 FY04 RoCE

ICICI Securities

RoE

FY05

FY06

FY07

FY08E

FY09E

FY10E

Source: I-Sec Research

UTCL’s return ratios saw substantial improvement in FY07, primarily helped by rising cement prices. However, we expect RoCE to stabilise at ~36% in FY10E while RoE is likely to decline to 35% in FY10 from ~47% in FY08.

106

UltraTech Cement, April 21, 2008

ICICI Securities

Attractive valuations
At the current market price, the stock is trading at FY09E and FY10E P/E of 7.4x and 6.4x and EV/E of 5.4x and 4.4x respectively. On EV/te, the company is valued at US$141. UTCL is the closest to ACC in terms of size and market spread. However, despite its operating efficiencies being better than ACC’s, UTCL is valued at a significant 32% discount to ACC in P/E terms. We believe that UTCL should get a marginal premium to ACC, given higher earnings growth and operational efficiencies. On the basis of FY09E EV/E of 7.1x, we target a price of Rs1,105/share, which is a 41% upside from current levels. We initiate coverage with a BUY recommendation. Chart 8: P/E bands
1,800 1,600 1,400 1,200 (Rs) 1,000 800 600 400 200 0 Oct-04 May-05 May-06 Oct-06 May-07 Feb-05 Mar-06 Feb-07 Apr-07 Jul-05 Sep-05 Dec-04 Nov-05 Dec-06 Aug-04 Aug-06 Nov-07 Jan-08 Sep-07 Mar-08 Apr-08 Jan-06 Jun-06 Jul-07 Apr-05 Jan-08 8x 11x 15x

Source: Bloomberg, I-Sec Research

Chart 9: EV/EBITDA bands
250,000 200,000 9x (Rs mn) 150,000 7x 100,000 5x 50,000 0 Oct-05 Oct-06 Apr-05 Apr-06 Apr-07 Oct-07 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

Source: Bloomberg, I-Sec Research

107

UltraTech Cement, April 21, 2008

ICICI Securities

Summary financials
Table 3: Profit and Loss Statement
(Rs mn, year ending March 31) Operating Income (Sales) of which Exports 6,928 Domestic 42,180 Operating Expenses 34,930 EBITDA 14,178 % margin 29 Depreciation & Amortisation 2,263 Gross Interest 868 Other Income 615 Recurring PBT 11,662 Add: Extraordinaries Less: Taxes 3,839 - Current tax 4,006 - Deferred tax (167) Less: Minority Interest 3 Net Income (Reported) 7,823 Recurring Net Income 7,823 Source: Company data, I-Sec Research FY07 49,108 FY08E 55,692 5,527 50,165 38,224 17,467 31 2,308 748 957 15,367 4,994 4,764 231 4 10,373 10,373 FY09E 67,544 3,938 63,606 44,670 22,874 34 2,998 1,388 1,078 19,565 6,457 6,163 293 5 13,109 13,109 FY10E 78,683 2,463 76,220 52,465 26,218 33 3,855 896 1,259 22,725 7,499 7,158 341 6 15,226 15,226

Table 5: Cash Flow Statement
(Rs mn, year ending March 31) FY07 FY08E FY09E Operating Cash flow 8,826 13,793 15,831 Working Capital changes 602 (1,741) (693) Capital Commitments (7,352) (10,343) (17,691) Net Operating FCF 2,076 1,709 (2,553) Investing Activities (2,496) (191) 504 Issue of Share Capital 1 Buyback of shares Inc(Dec) in Borrowings 1,268 439 4,557 Dividend paid (1,408) (1,867) (2,360) Extraordinary Items Chg. in Cash & Bank 280 90 148 Source: Company data, I-Sec Research FY10E 18,561 (1,228) (5,411) 11,922 (4) (9,064) (2,741) 113

Table 6: Key Ratios
(Year ending March 31) FY07 Per Share Data (Rs) EPS(Basic) Diluted Recurring EPS Diluted Recurring CEPS Dividend per share Book Value Growth Ratios (% YoY) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating Income EV / Operating FCF Operating Ratios (%) Raw Material / Sales SG&A / Sales Other Income / PBT Effective Tax Rate NWC / Total Assets Inventory (x) Receivables (days) Payable (days) D/E Ratio (x) 62.8 62.8 81.0 9.9 141.7 FY08E 83.3 83.3 101.9 13.2 210.0 FY09E 105.3 105.3 129.4 16.6 296.4 FY10E 122.3 122.3 153.3 19.3 396.6

Table 4: Balance Sheet
(Rs mn, year ending March 31) FY07 Assets Total Current Assets of which Cash & cash equivalents Current Liab. & Prov. Net Current Assets Investments of which Strategic/Group Marketable Net Fixed Assets* of which Intangibles Capital Work-in-Progress Goodwill Total Assets 9,602 896 7,552 2,050 4,835 242 4,592 25,173 6,970 39,027 FY08E 11,116 985 9,073 2,043 5,983 242 5,740 24,364 15,813 48,202 FY09E 13,120 1,133 10,744 2,376 6,557 242 6,314 50,259 4,610 63,802 FY10E 15,537 1,247 12,218 3,319 7,819 242 7,577 53,974 2,451 67,564

48.8 1.6 240.5 240.3 1.3

13.4 0.2 32.6 32.6 0.3

21.3 0.3 26.4 26.4 0.3

16.5 0.1 16.1 16.1 0.2

12.5 9.7 5.5 8.3 2.4 12.5

9.4 7.7 3.7 6.8 2.1 9.8

7.4 6.1 2.6 5.4 1.8 8.1

6.4 5.1 2.0 4.4 1.5 6.6

Liabilities Borrowings 15,786 16,226 Deferred Tax Liability 5,603 5,833 Minority Interest Equity Share Capital 1,245 1,245 Face value per share (Rs) 10 10 Reserves & Surplus* 16,393 24,899 Less: Misc. Exp # Net Worth 17,638 26,144 Total Liabilities 39,027 48,202 Source: Company data, I-Sec Research *excluding revaluation reserves; # = not written off

20,783 6,127 1 1,245 10 35,648 36,893 63,802

11,718 6,467 2 1,245 10 48,133 49,378 67,564

8.6 2.6 5.3 32.9 0.0 5.8 11.8 40.9 1.2

8.6 3.4 6.2 32.5 0.0 5.2 11.7 45.3 0.8

9.7 2.9 5.5 33.0 0.0 5.1 11.9 43.9 0.7

9.4 2.6 5.5 33.0 0.0 4.9 12.0 44.4 0.4

Profitability Ratios (%) Rec. Net Income Margins 15.7 RoCE 36.0 RoNW 55.8 Dividend Payout 15.8 Source: Company data, I-Sec Research

18.3 37.0 47.4 15.8

19.1 37.4 41.6 15.8

19.0 36.0 35.3 15.8

108

UltraTech Cement, April 21, 2008

ICICI Securities

Index of Tables and Charts
Tables
Table 1: Key markets and market share...........................................................................100 Table 2: Performance trend and forecast assumptions ....................................................104 Table 3: Profit and Loss Statement ..................................................................................108 Table 4: Balance Sheet.....................................................................................................108 Table 5: Cash Flow Statement..........................................................................................108 Table 6: Key Ratios...........................................................................................................108

Charts
Chart 1: Key market-share movement..............................................................................101 Chart 2: Power & fuel costs and average unit cost of power............................................102 Chart 3: Key cost and EBITDA/te .....................................................................................103 Chart 4: Sales, EBITDA and EBITDA margin movement .................................................104 Chart 5: EBITDA/te ...........................................................................................................105 Chart 6: FCF and D/E .......................................................................................................105 Chart 7: RoCE trend .........................................................................................................106 Chart 8: P/E bands............................................................................................................107 Chart 9: EV/EBITDA bands...............................................................................................107

109

UltraTech Cement, April 21, 2008

ICICI Securities

This page has been intentionally left blank

110

UltraTech Cement, April 21, 2008

ICICI Securities

ANALYST CERTIFICATION
We /I, Novonil Guha, CA, research analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Nonrated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Novonil Guha, CA, research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its affiliates collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. It is confirmed that Novonil Guha, CA, research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

111

UltraTech Cement, April 21, 2008

ICICI Securities
EQUITIES

A Murugappan ANALYST
Anand Shah Girish Pai Amar Kedia Amit Mishra Gaurav Pathak Krupal Maniar, CFA Novonil Guha Poonam Nishal Prakash Goel Rajesh Vora Rahul Jain Sanjay Singh Sandeep Shah Shilpa Gupta Siddharth Teli Vikash Mantri, CFA Gagan Dixit Nishant Bhargava Swarit Dakalia Sunil Teluja Alok Kapadia Abhijit Mitra Abhishek Murarka Amit Shah Hemant Joshi Rishi Agrawal Sagar Thakkar Sanket Maheshwari Shaleen Silori Prakriti Singh Simmu Kahlon Hemant Jathar Ruben Fernandes Rishikesh Joshi Sachin Shahane T S Baskaran Vinay Patel Darshit Shah Melrick D’Souza Kishore Chinai Dharmesh Desai Ketan Shah Pinakin Mistry Dr. C. K. Narayan Sriram Jagdish Anant Rao Rishad Tehrani Rohit Dhundele

Executive Director +91 22 6637 7101 a_murugappan@isecltd.com Equity Research – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2448 SECTOR ALLOCATION DIRECT NOS. E-MAIL
Co-Head Research – FMCG Co-Head Research – Strategy Aviation, Logistics Oil & Gas, Petrochemicals Real Estate Technology Cement Telecom, Utilities Agriculture Pharmaceuticals Metals FMCG Technology Automobiles, Healthcare Banking Media Sr. Associate (Oil&Gas, Petrochemicals) Sr Associate (Textiles) Sr. Associate (Construction) Sr. Associate (Capital Goods, Engineering, Strategy) Associate (Banking) Associate Associate Associate Associate Associate Associate (Technology) Associate Associate Editor Editor Production Production +91 22 6637 7230 +91 22 6637 7311 +91 22 6637 7271 +91 22 6637 7274 +91 22 6637 7339 +91 22 6637 7254 +91 22 6637 7385 +91 22 6637 7443 +91 22 6637 7373 +91 22 6637 7508 +91 22 6637 7314 +91 22 6637 7386 +91 22 6637 7114 +91 20 6401 7125 +91 22 6637 7298 +91 22 6637 7161 +91 22 6637 7480 +91 22 6637 7143 +91 22 6637 7366 +91 22 6637 7312 +91 22 6637 7231 +91 22 6637 7289 +91 22 6637 7351 +91 22 6637 7297 +91 22 6637 7380 +91 22 6637 7436 +91 22 6637 7225 +91 22 6637 7159 +91 22 6637 7188 +91 11 24390154 +91 22 6637 7202 +91 22 6637 7135 +91 22 6637 7442 +91 22 6637 7229 +91 22 6637 7223 +65 6823 1556 +91 22 6637 7275 +91 22 6637 7152 +1 646-701-4465 +91 22 6637 7130 +91 22 6637 7227 +91 22 6637 7121 +91 22 6637 7279 +91 22 6637 7365 +91 22 6637 7455 +91 22 6637 7131 +91 22 6637 7193 +91 22 6637 7288 anand_shah@isecltd.com girish_pai@isecltd.com amar_kedia@isecltd.com amit_mishra@isecltd.com gaurav_pathak@isecltd.com krupal_maniar@isecltd.com novonil_guha@isecltd.com poonam_nishal@isecltd.com prakash_goel@isecltd.com rajesh_vora@isecltd.com rahul_jain@isecltd.com sanjay_singh@isecltd.com sandeep_shah@isecltd.com shilpa_gupta@isecltd.com siddharth_teli@isecltd.com vikash_mantri@isecltd.com gagan_dixit@isecltd.com nishant_bhargava@isecltd.com swarit_dakalia@isecltd.com sunil_teluja@isecltd.com alok_kapadia@isecltd.com abhijit_mitra@isecltd.com abhishek_murarka@isecltd.com amit_shah@isecltd.com hemant_joshi@isecltd.com rishi_agrawal@isecltd.com sagar_thakkar@isecltd.com sanket_maheshwari@isecltd.com shaleen_silori@isecltd.com prakriti_singh@isecltd.com simmu_kahlon@isecltd.com hemant_jathar@isecltd.com ruben_fernandes@isecltd.com rishikesh_joshi@isecltd.com sachin_shahane@isecltd.com ts_baskaran@icicisecurities.com vinay_patel@isecltd.com darshit_shah@isecltd.com melrick_dsouza@icicisecurities.com kishore_chinai@isecltd.com dharmesh_desai@isecltd.com ketan_shah@isecltd.com pinakin_mistry@isecltd.com ck_narayanan@isecltd.com sriram_jagdish@isecltd.com anant_rao@isecltd.com rishad_tehrani@isecltd.com rohit_dhundele@isecltd.com

Equity Sales – Asia-Pacific – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341

Equity Sales – Europe – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Equity Sales – US – Telephone : +1 212-921-2344 / +1 212 453 670 Equity Dealing – Telephone : +91 22 2281 4570 Fax: +91 22 2288 2341

Equity Derivatives – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341

ICICI Securities Limited ICICI Centre, H T Parekh Marg, Churchgate, Mumbai 400 020, Telephone: +91 22 2288 2460/70 Fax: +91 22 2288 2448 ICICI Securities Inc. ICICI Securities Inc. Level 57, Republic Plaza, 9, Raffles Place, Singapore 048 619 1 Liverpool Street, London EC2M 7QD, United Kingdom. Telephone: +65 6823 1556/57 Fax: +65 6823 1425 Tel (Board): +44 20 79562051, Tel (Direct): +44 20 79562554 / 2555 Fax: +44 20 79562211 ICICI Securities Inc. 461, 5th Avenue, 16th Floor, New York, NY 10017, USA. Telephone: +1 212-921-2344 / +1 212 453 6704 Fax: +1 212-453-6710

112

Sign up to vote on this title
UsefulNot useful