Opportunities in Mid-Sized Cement Segment

May, 2008
Executive summary

 India is currently witnessing large demand momentum. Prevailing supply shortage situation
and firm prices are likely to continue over the next 1-2 years given demand momentum and
future supply situation.

 Perceived over-supply situation in future by analysts and brokers / investors causing the
market to discount earnings below fair value

 Cement industry is largely governed by regional dynamics. Energy and freight constitute bulk
of the costs. Operating synergies due to scale economies are minimal.

 Some mid-sized companies have efficient operations which make them competitive; these
will continue to have strong future earnings

 Some of these mid-sized companies are trading at substantially lower EV/T and x
EV/EBIDTA (even, replacement cost) compared to large players

 Hypothesis that opportunity exists to purchase earnings at cheap valuation and lower than
replacement costs is tested

 Analyses indicate that investments in mid-sized cement companies may not yield acceptable
returns at low risk

2
Key characteristics

Cement industry in India is characterized by low industry profit potential …

 India has about 132 large plants (> 0.3 Mn TPA) with effective capacity of 167 Mn TPA and about 300
mini-plants (< 0.3 Mn TPA) with effective capacity of 6 Mn TPA
− Plants are located close to limestone reserves to save on inward freight. 75% of the reserves are clustered in 5 states (2
states in South India, 1 each in West, North and Central India) out of 29 states and as a result about 50% of capacity is
situated out of these clusters.
− Large players operate multiple plants to service local demands.
− Mini-cement plants were set-up to make use of small reserves that cannot support large plants, and also benefit from
excise concessions (proposed to be discontinued).
 There are 52 companies operating large plants in India and top 5 companies have a combined market
share of 46%.
 Cement is a bulk commodity and transportation over large distances makes it uncompetitive. Prices are,
thus, determined by regional supply-demand situation.
 Industry profit potential is low as
− Technology is available off-the-shelf
− Capital requirement of $100-110 / T and gestation period of ~1.5-2 years for setting up plants (typical plant size is 1.5
Mn TPA)
− No import duty is levied. In spite of that, imports is low (3%) due to high freight cost, low shelf life, high clearance time at
ports and large economic quantity for sea transportation
− Government intervenes from time to time to check cement prices
 Access to cheap power and fuel, proximity to high quality limestone reserves and demand points
contribute to critical success factors in this industry.

3
Historical demand & supply

Over the past 5-6 years, growth in demand has outstripped growth in capacity
addition
Inter-regional Movement of Cement - 2007
Historical Demand and Consumption - India
Receiving Regions
200 North East South West Centre Exports
180 175
158
166
155
165
North 87% 0% 0% 7% 18% 0%
160 152

Dispatching Regions
144 142
137
140 127
117 East 0% 87% 0% 0% 3% 1%
120 111
Mn T

100
South 0% 2% 97% 20% 0% 5%
80

60
West 0% 1% 3% 72% 3% 87%
40

20
Centre 13% 10% 0% 0% 76% 6%
0
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08

Capacity Consumption + Exports Linear (Consumption + Exports) Linear (Capacity)

Total 100% 100% 100% 100% 100% 100%

• During the period 2003 to 2008, capacity grew at a CAGR

of 5 %
clusters
• Consumption on the other hand grew at a CAGR of 9%
during the same period
• Consumption includes exports which were in the range of 3 to 5
Mn TPA (~3%)

• Large share of production in North, East and South is

consumed in the region only. However, about 20% of
requirements in Center and West were fed by North and
South respectively
Legend:

+ : Supply Shortage
x : Supply Surplus

4
Historical demand & supply (region-wise)

Situation in each region has shifted from one of supply surplus to shortage
North India - Historical Data South India - Historical Data

40 36 36 60 57
51 54 54
35 33 32 48 50
29 50 45 46
30 26 28 27
25 24 39
25 21 23 40 33
30 32
Mn T

Mn T
20 30
15
20
10
5 10
0 0
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08
Capacity Consumption Capacity Consumption
North FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 South FY 03 FY 04 FY 05 FY 06 FY 07 FY 08
Excess 3.9 3.1 3.5 2.2 0.44 0.38 Excess 15.3 14.3 14.7 11.6 3.4 3.03
Excess / Capacity 15% 12% 13% 8% 1% 1% Excess / Capacity 34% 31% 31% 23% 6% 5%

West India - Historical Data Central & East India - Historical Data

35 60 53
28 29 29 29 27 29 28 48 51
30 47 46 47
25 26 50 42 44 43
24 41
25 22 23 36
40 35
20
Mn T

Mn T
30
15
10 20

5 10
0 0
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08

Capacity Consumption Capacity Consumption

West FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 East & Centre FY 03 FY 04 FY 05 FY 06 FY 07 FY 08
Excess 2.6 5.5 4.3 3 1.5 0.53 Excess 7.6 7.7 6.2 5.2 4.8 5.4
Excess / Capacity 11% 20% 15% 10% 5% 2% Excess / Capacity 18% 17% 13% 11% 10% 10%

• During the period 2003 to 2007, capacity grew at a CAGR of 8%, 5%, 4% and 4% in North, South, West & East
respectively
• Consumption on the other hand grew at a CAGR of 9%, 10%, 7% and 7% in North, South, West & East respectively
during the same period
• Consumption includes exports
5
Historical prices and impact of utilization rates

Prices have gone up since FY 03 and FY 04 on account of increasing demand

and high capacity utilization rates

Price Behaviour (North) Impact of Operating Rate on Prices - North

North
3,000
1200 110%
• Industry average prices were lowest in
2,500 100%
1000 FY 2003 (Rs 1658 / T) and currently at

Operating Rate
92% 100%
2,000 88%
800 85% 87%
90% Rs xx / T

Rs / T
Rs / T

1,500 600
1008 80%
400
1,000
200 370 494 70% • Utilization rates improved to 100%
204 258
500 0 60%
0 FY 03 FY 04 FY 05 FY 06 FY 07
FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 Industry Avg (Price - Cost) Utilization Rate

FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07
Realization / T 2,074 1,769 1,658 1,662 1,883 2,130 2,833
Cost / T 1,829 1,556 1,455 1,405 1,513 1,636 1,826

Price Behaviour (South) Impact of Operating Rate on Prices - South

South
3,000
1000 95% 100%
• Industry average prices were lowest in
2,500
95% FY 2003 (Rs 1640 / T) and currently at

Operating Rate
800 87%
2,000 90%
600 85% Rs xx / T
Rs / T
Rs / T

78% 78%
1,500 75% 80%
400 815 75%
1,000
200
258 332
70%
65%
• Utilization rates improved to 96%
106 227
500 0 60%
0 FY 03 FY 04 FY 05 FY 06 FY 07
FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 Industry Avg (Price - Cost) Utilization Rate

FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07
Realization / T 2,289 2,166 1,751 1,812 1,980 2,144 2,778
Cost / T 1,651 1,621 1,330 1,379 1,572 1,693 1,784

6
Historical prices and impact of utilization rates

Prices have gone up since FY 03 and FY 04 on account of increasing demand

and high capacity utilization rates

Price Behaviour (West) Impact of Operating Rate on Prices - West

West
4,000 • Industry average prices were lowest in
3,500 1000 94% 100%
3,000 95% FY 2003 (Rs 1349 / T) and currently at

Operating Rate
800 86% 86% 90%
2,500
600
82% 85% Rs xx / T

Rs / T
Rs / T

77%
2,000 80%
400 843 75%
1,500
200 391
70% • Utilization rates improved to 94%
1,000 260 191 236 65%
500 0 60%
0 FY 03 FY 04 FY 05 FY 06 FY 07
FY 03 FY 04 FY 05 FY 06 FY 07 Industry Avg (Price - Cost) Utilization Rate

FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07
Realization / T 1,502 1,792 2,180 2,849
Cost / T 1,311 1,557 1,789 2,006

Price Behaviour (East & Centre) Impact of Operating Rate on Prices - East & Centre
East & Centre
3,000
1200 95%
• Industry average prices were lowest in
2,500 89%
1000
87% 90% FY 2003 (Rs 1710 / T) and currently at

Operating Rate
84%
2,000 80% 80% 85%
800
Rs xx / T
Rs / T
Rs / T

80%
1,500 600
1054 75%
400
1,000
200 315 402
70%
65%
• Utilization rates improved to 89%
142 204
500 0 60%
0 FY 03 FY 04 FY 05 FY 06 FY 07
FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 Industry Avg (Price - Cost) Utilization Rate

FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07
Realization / T 1,727 1,772 1,710 1,748 1,956 2,091 2,845
Cost / T 1,412 1,537 1,568 1,544 1,642 1,689 1,791

7
Short-term demand-supply situation

Demand will continue to grow at a rate of 8.5% CAGR (on the conservative side)
over the next five years …
 Current demand levels on a per capita basis is low which implies strong demand growth
possibilities for future
− Per capita consumption of 150 Kg in India is half the world average. Compared to China’s per capita
cement consumption of 700 kg and Brazil’s 200 kg, India’s consumption is low.
− Peak per capita cement consumption in various countries has been in the range of 650-800 kg
 Key demand indicators include
Demand projections over the next 5 years

Key areas. Vol, (Mn T) Details

Residential real estate 650 Indian real estate expected to add 14.3 bn sq ft over the next 5 years (2008-13) involving investments of
$325 bn.
Commercial & retail 30

Infrastructure 380 As per planning commission, planned investments in infrastructure projects in 11th five year plan (2008-
12) stands at $225 bn. This will translate into demand of 380 Mn T of cement.

Others 50 Others include defense, exports, etc.

− Based on above demand estimates, demand will grow at 11% CAGR. However, due to slowdown in
economy as currently being witnessed and future GDP projections, demand CAGR has been revised
to 8.5% (this does not include impact of price elasticity on demand and cross-elasticity with other
building materials like fly ash and aggregates)

8
Short-term demand-supply situation

On an all India basis, operating rates will remain at current levels in FY 09, while
will plummet in FY 10 as new capacities will kick in
Projected Cement Demand & Supply Situation Operating Rate (All India basis)
(All India Basis)
100%
280 95%
253 258 258 94%
260 95%
240 229
221 90% 89%
220 211
Mn TPA

195
200
175 179 255 258 85% 83%
180 165 237 82%
160 192 80%
175
140
120 75%
FY 08 FY 09(E) FY 10(E) FY 11(E) FY 12(E) FY 08 FY 09(E) FY 10(E) FY 11(E) FY 12(E)

Peak Capacity Eff Capacity Demand Operating Rate as % of Effective Capacity

Impact of price elasticity on demand is not taken into account for

demand projections. The estimated demand is thus on the
conservative side.

Expected Excess Capacity in Future • Demand supply gap likely to widen till 2011 as
a result of new capacities coming up
50 20%
43 44
• Operating rates will go down and is expected
Excess as a % of Effective

45 18%
Excess Capacity, Mn T

40 16%
35 14% to reach 83% in 2011.
29
Capacity

30 12%
25 10% • On an all India basis, excess capacity of 44
20
12
8% Mn is expected by 2011
15 6%
9
10 4% • High cost units amounting to excess capacity will
5 2% turn delinquent or make losses
0 0%
FY 08 FY 09(E) FY 10(E) FY 11(E) FY 12 (E) • Prices will drop to levels lower than production
Excess Capacity Excess / Installed
costs of these units

9
Regional demand-supply situation

In FY09, North will have supply surplus situation. While, by FY 10 all regions will
have supply surplus situation
North India - Demand Supply South India - Demand Supply West India - Demand Supply East & Central - Demand Supply

80 100 87 88 37 39 80 66 68 68
60 63 63 77 77 40 34
80 65 71 29 30 53 56
60 5754 6259 60
44 30
Mn TPA

Mn TPA

Mn TPA

Mn TPA
36 60
40 83 88 20 40
63 63 63 40 86 33 30 36 32 39 34 39 37 63 68 68 59 68 64
55 47 51 57 70 29 28 53 47 51 55
20 36 36 39 43 20 10 20
0 0 0 0
FY 08 FY 09 FY 10 FY 11 FY 12 FY 08 FY 09 FY 10 FY 11 FY 12 FY 08 FY 09 FY 10 FY 11 FY 12 FY 08 FY 09 FY 10 FY 11 FY 12

Peak Cap Eff Cap Prod Peak Cap Eff Cap Prod Peak Cap Eff Cap Prod Peak Cap Eff Cap Prod
Source: HSBC, CMA, Annual Reports Source: HSBC, CMA, Annual Reports Source: HSBC, CMA, Annual Reports Source: HSBC, CMA, Annual Reports
North FY 09 FY 10 FY 11 FY 12 South FY 09 FY 10 FY 11 FY 12 West FY 09 FY 10 FY 11 FY 12 Centre & East FY 09 FY 10 FY 11 FY 12
Excess 4.53 17.13 16.04 11.87 Excess 2.79 12.50 16.19 10.66 Excess 0.29 2.02 2.19 1.75 Excess 4.80 11.18 9.14 4.54
Excess / Installed 10% 29% 26% 19% Excess / Installed 4% 16% 19% 12% Excess / Installed 1% 6% 6% 5% Excess / Installed 9% 17% 13% 7%

Major capacity likely Major capacity likely Major capacity likely Major capacity likely
• Shree Cement: 3.5 MTPA • ACC: 3 MTPA • JP Group: 1.2 MTPA • ACC: 2.1 MTPA
• Grasim: 8.2 MTPA • Madras: 5 MTPA • Orient: 1.0 MTPA • Ambuja: 1.0 MTPA
• JP Group: 6.0 MTPA • India: 3.4 MTPA • India: 1.0 MTPA • Jaypee: 2.5 MTPA
• JK Lakshmi: 1.5 MTPA • Ultratech: 4.0 MTPA • Sanghi: 3.0 MTPA • Lafarge: 2.0 MTPA
• Mangalam: 0.5 MTPA • Sagar: 2.0 MTPA • GACL: 1.0 MTPA Demand drivers
Demand drivers • Deccan: 1.0 MTPA Demand drivers • Govt’s plan for industrialization
• Commonwealth games • Chettinad: 2.0 MTPA • Exports • Focus on industrialization,
hydel power projects
• Airport, road, etc. construction • Dalmia: 2.0 MTPA • Real estate development and
infrastructure
Inter-regional movement Demand drivers
• Net export to West India will • State govt irrigation projects
balance surplus capacity
• Real estate

Further, delays of 6 to 8 months expected in commissioning of some of the capacities which may lead to higher operating
rates in 2010 and 2011 …

10
Short-term price levels

Over the next 4 years (till FY 12), companies in North will see lowest earnings
and in Centre & East highest

Price Behaviour (North) Impact of Operating Rate on Prices -

North
3,500
3,000 1200 100% 99% 110%

Operating Rate
1000 92% 100%
2,500 90%
800

Rs / T
81% 90%
2,000
Rs / T

600
1,500 400 843
1015 71% 74% 80%
200 391 432 70%
1,000 204 204 204
0 60%
500 FY FY FY FY FY FY FY
0 06 07 08 09 10 11 12
FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Industry Avg (Price - Cost) Utilization Rate

North FY 08 FY 09 FY 10 FY 11 FY 12
Cost / T 1,991 1,991 1,991 1,991 1,991
Realization / T 3,007 2,423 2,195 2,195 2,195 Average Industry Margin: Rs 261 / T
Margin / T 1,015 432 204 204 204

Price Behaviour (South) Impact of Operating Rate on Prices -

South
4,000
3,500 1400 95% 95% 96% 100%
3,000 1200 88% 95%

Operating Rate
87%
1000 84% 90%
2,500 81% 85%
Rs / T
Rs / T

800
2,000 1311 80%
600
1,500 75%
400 815 815 70%
1,000 200 332 295 227 332 65%
500 0 60%
0 FY 06FY 07FY 08FY 09FY 10FY 11FY 12
FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Industry Avg (Price - Cost) Utilization Rate

South FY 08 FY 09 FY 10 FY 11 FY 12
Cost / T 2,222 2,222 2,222 2,222 2,222
Realization / T 3,533 3,038 2,518 2,450 2,555
Average Industry Margin: Rs 418 / T
Margin / T 1,311 815 295 227 332

11
Short-term price levels

Over the next 4 years (till FY 12), companies in North will see lowest earnings
and in Centre & East highest

Price Behaviour (West) Impact of Operating Rate on Prices -

West
3,000
1000 110%
2,500
98% 99%
94% 94% 95%

Operating Rate
800 94% 100%
2,000
600 86% 90%

Rs / T
Rs / T

1,500
400 843 80%
1,000 529 529
200 391 391 391 391 70%
500 0 60%
0 FY 06FY 07FY 08FY 09FY 10FY 11FY 12
FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Industry Avg (Price - Cost) Utilization Rate

West FY 08 FY 09 FY 10 FY 11 FY 12
Cost / T 2,239 2,239 2,239 2,239 2,239 Average Industry Margin: Rs 425 / T
Realization / T 2,767 2,767 2,629 2,629 2,629
Margin / T 529 529 391 391 391

Price Behaviour (East & Centre) Impact of Operating Rate on Prices -

East & Centre
4,000
93%
3,500 1600 91% 95%
89% 90%
1400 87% 87% 90%
3,000

Operating Rate
1200 83%
85%
2,500 1000
Rs / T
Rs / T

80%
2,000 800
1389 75%
600 1054
1,500 70%
400 728 728
1,000 200 402 204 315 65%
500 0 60%
0 FY 06FY 07FY 08FY 09FY 10FY 11FY 12
FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Industry Avg (Price - Cost) Utilization Rate

Centre & East FY 08 FY 09 FY 10 FY 11 FY 12

Cost / T 2,127 2,127 2,127 2,127 2,127
Realization / T 3,515 2,855 2,330 2,441 2,855
Average Industry Margin: Rs 494 / T
Margin / T 1,389 728 204 315 728

12
 Companies’ economics

Total cost of operations (including interest charges) varied from Rs 1712 / T to Rs

3070 / T for the year 2007 across various players
Companies Variable Costs / T Fixed Overheads / T Interest / T Total / T
Raw Mat'l Fuel & Power Freight Manpower Overheads Interest Total
Shree Cements 354 485 322 102 424 25 1,712
Zuari 279 596 388 98 338 60 1,759
Prism 187 719 239 88 476 22 1,731
Madras 358 554 397 101 374 45 1,829
Ambuja 165 548 472 92 532 50 1,858
India 288 652 599 121 153 178 1,991
Sanghi 163 577 673 59 398 271 2,141
Binani 194 591 611 74 423 136 2,029
Birla Corp 291 556 360 107 510 33 1,857
JK Lakshmi 341 695 403 102 361 139 2,041
Chettinad 411 683 439 107 345 68 2,052
Lafarge NA NA NA NA NA NA NA
Rain 167 595 635 71 708 192 2,368
My Home NA NA NA NA NA NA NA
* Ultratech 335 664 591 66 360 51 2,066
Penna 554 658 415 37 622 47 2,333
Diversified
companies; KCP * 333 512 93 205 600 40 1,782
total cost data Orient * 279 486 494 170 440 80 1,949
for these ACC 492 372 500 165 536 38 2,105
companies OCL * 382 580 439 98 442 106 2,047
computed Guj Sidhee 182 833 571 84 508 79 2,256
based on Dalmia * 312 585 300 136 545 153 2,031
historical data Grasim * 342 685 581 169 386 41 2,204
and Century * 204 401 385 374 533 55 1,952
assumptions on
Tamil Nadu 420 966 257 386 225 45 2,299
cost
appropriation Saurashtra 379 864 249 97 664 168 2,420
Mysore 312 780 46 180 971 105 2,395
Mangalam 390 893 586 120 305 9 2,303
JK Cements 287 723 571 107 685 123 2,497
Andhra 332 917 340 279 681 521 3,070
Jaypee * 190 336 498 141 617 261 2,044
KCL 205 821 197 342 - 94 1,659
Kesoram * 411 494 558 166 319 44 1,991
Malabar 448 334 9 322 1,181 46 2,339
CCI 383 388 247 732 977 122 2,850
Deccan Cement 597 600 511 70 217 12 2,007
Sagar Cement 241 603 340 91 795 30 2,099

13
Long-term cost structures

Operating cost structures were in the range of Rs 1690/T to Rs 2670/T in 2007.

With impending over-supply situation and drop in realization, units with high cost
structures may turn delinquent
Production Cost Continuum

180

160
Cumulative Capacity in India, Mn TPA

140

120 In 2010, India is likely to have

100 supply surplus of 44 Mn T.
Units producing at Rs 2100 /
80 T or above will either turn
delinquent or make losses.
60

40

20

0
1600 1800 2000 2200 2400 2600 2800 3000
Cost of Operations (Including Interest Charges), Rs / T

• Across all regions, there will be excess capacity as a result of new capacities being added. This will
result in price erosion. High-cost units will not be able to sustain price pressures.
• Cost of production has gone up over the last 5 years. Hence, prices will not go down to previous lows
as seen in 2003 and 2004 but will settle at levels commensurate to current cost structures.
• However, as companies are adding CPP to reduce costs, cost structures across companies will
improve by Rs 150-200 / T but prices will also drop to partially negate this cost advantage
14
Hypotheses and analyses

Initial hypothesis on attractive opportunities in mid-sized segment tested in

subsequent slides
 Hypothesis:
− Opportunities exist in purchasing earnings of mid-sized cement companies at cheap valuation and
significantly lower replacement costs which can yield acceptable returns

 Testing Parameters:
1. Establish whether these mid-sized companies are available at cheap valuation and lower than
replacement costs
2. Establish whether future earnings will continue to be attractive for mid-sized companies
3. Establish whether acceptable returns will be generated at current entry levels and reasonable exit
assumptions

 Methodology:
− Compile exhaustive list of mid-sized companies and arrive at a consideration set based on initial
screening parameters
− Compare entry costs
− Estimate future earnings and yields
− Estimate return on investment

15
Screening of mid-cap cement companies

An exhaustive list of mid-sized companies considered on which screening criteria

were applied
List of Mid-Sized Cement Companies

 Andhra Cements
 CCI
 Chettinad Cements
Consideration Set
 Deccan Cements
 Deepak Cements
 Gujarat Sidhee  Deccan Cements
 JK Lakshmi Cements  Mangalam Cements
 Kalyanpur Cements  Gujarat Sidhee
 Kesoram Industries  Chettinad Cements
 KCP  Saurashtra Cements
 Mangalam Cements
 Shree Digvijay Cements
 My Home Cements
 Sagar Cements
 Mysore Cements
  Prism Cements
Panyam Cements
 Penna Cements  JK Lakshmi Cements
 Prism Cements
 Rain Industries
 Sagar Cements Companies eliminated on account of the
 Saurashtra Cements following:
 Shree Digvijay Cements
• Trading suspended / Unlisted
 Zuari Cements
• No information available

16
Brief profile of companies in consideration set

Key financial results and capacity addition plans are presented below

Current Capacity Capacity by FY 2009 Net Sales EBIDTA EBIDTA % PAT %

Company
Cement, Mn T CPP, MW Cement, Mn T CPP, MW 200803 200803 200803 200803
Chettinad Cements 2.0 15.0 2.0 15.0 9,100 3,357 37% 19%
Deccan Cement 0.6 9.0 1.8 27.0 2,052 774 38% 24%
Gujarat Sidhee 1.2 30.0 1.2 30.0 3,536 447 13% 5%
JK Lakshmi 3.4 36.0 5.0 36.0 10,987 3,507 32% 24%
Mangalam 1.5 17.5 2.0 17.5 5,043 1,533 30% 21%
Prism 2.3 - 2.3 8,647 3,620 42% 28%
Saurashtra 1.5 - 1.5 25.0 4,438 549 12% 3%
Sagar 2.6 5.0 2.6 5.0 2,451 590 24% 14%
Shree Digvijay 0.9 - 0.9 - 2,332 539 23% 16%

All figures are in Rs Mn

Note
• Future plans are as per analysts reports / discussions, company reports, etc.
• Net Sales and EBIDTA are for 4 trailing quarters (Mar’08 quarter results assumed to be same as
Dec’07 quarter results where data not available) Mkt Cap Net Debt
Company
Current 200803
• Market cap is as at 8 May, 2008
Chettinad Cements 14,160 (321)
• Net Debt as at Mar, 2008 = Total Debt as at Mar, Deccan Cement 1,960 (712)
Gujarat Sidhee 3,183 1,471
2007 + New Debt in FY 2008 – [Cash Balance as
JK Lakshmi 6,565 1,987
at Mar, 2007 + Cash generated in FY 2008] Mangalam 3,757 (703)
Prism 12,527 (3,574)
• Assumed no cash deployed for future
Saurashtra 1,825 2,442
expansion for computation of cash balance Sagar 5,450 3,306
as at Mar, 2008 Shree Digvijay 2,930 290
All figures are in Rs Mn

17
Entry cost evaluation

EV / T and x EV/EBIDTA values used for assessing entry cost. Companies with
low entry cost and high earning potential taken up for further analyses
EV/T, $ and x EV/EBIDTA Comparisons (Current)

$200
Chettinad
$180 4.12, $177
Replacement cost with CPP:
$160
$ 110 / T
$140

$120
Prism
$, EV / T

Sh Digvijay Gujarat Sidhee

$100 2.48, $102 7.83, $99 Sagar
5.98, $94
14.85, $86
$80 Deccan JK Lakshmi
1.61, $53 6.71, $73
$60 2.44, $64
Saurashtra
1.91, $52
$40
Mangalam
Available $20
cheap with
potentially high $0
earning yield

12

16
0

10

14
x EV / EBIDTA

• Mangalam Cements, JK Lakshmi Cements & Prism Cements have been discussed in a greater
detail later on. Deccan Cements has been left out for further analyses as discussions with the
Promoters did not lead to any potential opportunity for investment
18
Company Valuation – Centre & East (Prism Cement)

Prism likely to have strong future earnings but high entry cost causing high risk in
returns on investment at conservative exit assumptions
Company Summary Valuation Summary
 Deep value: $100 / T
 SHP
− No CPP, lowest freight costs in the industry, efficient
− Promoters: Rajan Raheja group (62%)
operations
− Non-promoter (non-institution): 32%

 Current operations & Future Plans  Entry cost at current share prices and yields
− Operates 2.5 Mn T unit in Satna (MP) FY 08 FY 09 FY 10 FY 11 FY 12
− Capacity additions in planning stage Equity Value 12,527 12,527 12,527 12,527 12,527
Net Debt (3,286) (4,870) (5,540) (6,404) (7,987)
EV, Mn 9,240 7,657 6,986 6,123 4,539
 Key strengths / advantages EV / T, $ $89 $74 $67 $59 $44
x EV / EBIDTA 2.74 x 3.41 x 7.89 x 5.22 x 2.02 x
Operations  Operates largest kiln in the country and Cash Yield 14% 13% 5% 7% 13%
has efficient operations with one of the
lowest specific power and fuel
consumptions
 IRR for exit in 3 years and for various x EV /
EBIDTA
 Efficient freight management (least
freight cost in the industry) x EV/EBIDTA 5.0 x 6.0 x 7.0 x 8.0 x 9.0 x
Exit EV, Mn 5,864 7,036 8,209 9,382 10,555
Advantages  Local linkage for coal leading to lower Exit EV / T, $ $56 $68 $79 $90 $101
procurement costs (Rs 2300 / T) Exit Net Debt (6,404) (6,404) (6,404) (6,404) (6,404)
 High brand recall – able to charge a Exit Equity 12,267 13,440 14,613 15,786 16,958
IRR (3 Years) -1% 2% 5% 8% 11%
premium of 5%
 Railway siding
 Entry at 40% discount to current share prices will
yield 25% IRR at exit x EV/EBIDTA of 7.0 x and
EV/T of $80
19
Company Valuation – North (JK Lakshmi)

JK Lakshmi available at low entry cost but low expected future earnings causing
high risk in returns on investment at conservative exit assumptions
Company Summary Valuation Summary
 Deep value: $90 / T
 SHP
− Promoters: Singhania group (42%)
− $ 10 Mn for RMC; and 20% discount on replacement
− Non-promoter (non-institution): 31%
cost for existing asset due to age and inefficiency
(Power: 85 Units / T)

 Current operations and future plans

− Operates 3.4 Mn T in Rajasthan (North India)
 Entry cost at current share prices and yields
− Operates 5 RMC plants as well FY 08 FY 09 FY 10 FY 11 FY 12
− Capacity addition to reach 5 Mn TPA by Q1, FY 09 and another 7 Equity Value 6,565 6,565 6,565 6,565 6,565
RMC plants during the same year Net Debt 2,035 3,063 2,512 1,897 1,218
EV, Mn 8,600 9,629 9,078 8,462 7,783
EV / T, $ $63 $48 $45 $42 $39
 Key strengths / advantages x EV / EBIDTA 2.45 x 3.25 x 9.31 x 8.68 x 7.98 x
Cash Yield 48% 38% 8% 9% 10%
Operations  Specific power & fuel consumption
close to industry average
 New unit & CPP to result in low cost  IRR for exit in 3 years and for various x EV /
EBIDTA
Advantages  Commissioned 36 MW CPP to meet
x EV/EBIDTA 5.00 x 8.00 x 10.00 x 15.00 x 20.00 x
entire power requirement, with 10 MW Exit EV, Mn 4,875 7,800 9,750 14,625 19,500
through waste heat recovery. Railway Exit EV / T, $ $24 $39 $49 $73 $97
siding at the factory Exit Net Debt 1,897 1,897 1,897 1,897 1,897
Exit Equity 2,978 5,903 7,853 12,728 17,603
 High brand recall IRR (3 Years) -23% -3% 6% 25% 39%
 Accumulated tax losses to last for
another 3 years
 Entry at 40% discount to current share prices will
 Forward integration into RMC yield 25% IRR at exit x EV/EBIDTA of 10.0 x and
EV / T of $50
20
Company Valuation – North (Mangalam)

Mangalam available at low entry cost but low expected future earnings causing
high risk in returns on investment at conservative exit assumptions
Company Summary Valuation Summary

 SHP  Deep value: $ 75 / T

− Inefficient mini plant of capacity 0.4 Mn TPA and 5% discount on
− Promoters: BK Birla Group (27%)
new plant (1.1 Mn TPA)
− Non-promoter (non-institution): 47%

 Entry cost at current share prices and yields

 Current operations and future plans FY 08 FY 09 FY 10 FY 11 FY 12
− Operated 2 units in Rajasthan (North India) with capacities of 0.4 Equity Value 3,814 3,814 3,814 3,814 3,814
Mn TPA and 0.6 Mn TPA Net Debt (550) (598) (914) (1,230) (1,547)
EV, Mn 3,264 3,216 2,900 2,583 2,267
− In FY 2008, increased capacity to 1.5 Mn TPA and commissioned EV / T, $ $54 $40 $36 $32 $28
17.5 MW CPP x EV / EBIDTA 2.13 x 2.72 x 7.44 x 6.62 x 5.81 x
− By Q1 2009, will add another 0.5 Mn TPA. Cash Yield 28% 22% 8% 8% 8%

 Key strengths / advantages

 IRR for exit in 3 years and for various x EV / EBIDTA
Operations  New plant & CPP to result in low cost x EV/EBIDTA 5.00 x 8.00 x 10.00 x 15.00 x 20.00 x
of operations Exit EV, Mn 1,950 3,120 3,900 5,850 7,800
Exit EV / T, $ $24 $39 $49 $73 $97
Advantages  Local linkage for coal leading to lower Exit Net Debt (1,230) (1,230) (1,230) (1,230) (1,230)
procurement costs (Rs 2600 / T) Exit Equity 3,180 4,350 5,130 7,080 9,030
IRR (3 Years) -6% 4% 10% 23% 33%
 CPP to meet entire power
requirement
 Interest rate subsidy of 5% under
BIFR scheme  Entry at 30% discount to current share prices will yield
 Railway siding at both locations 25% IRR at exit x EV/EBIDTA of 10.0 x and EV / T of $50

21
Industry Comparators

Industry comparators indicate that exit assumptions made for computing IRR
were on the conservative side
 Recent transactions in Indian cement industry
Acquirer Target Year Stake Capacity, Mn T Transaction at $ EV / T
Cimpor Shree Digvijay Cements 2007 53.63% 1.07 $ 162 / T

Italcementi Shri Vishnu Cements 2006 50.00% 1.30 $ 80 / T

CRH My Home Industries 2008 50.00% 2.50 $ 215 / T

Heidelberg Mysore Cement 2006 54.89% 2.30 $ 112 / T

 Historical trading multiples for consideration set

Historical EV/T ($) for Mid-Cap Players Historical x EV/EBIDTA for Mid-Cap Players

$200 20
$150
10
$100
0
$50
$0 -10
FY 07 FY 06 FY 05 FY 04 FY 03 FY 07 FY 06 FY 05 FY 04 FY 03
JK Lakshmi $83 $92 $61 $45 JK Lakshmi 4 10 13 26
Mangalam $73 $101 $54 $33 $42 Mangalam 3 6 9 5 -41
Prism $113 $93 $76 $55 $52 Prism 3 7 9 10 18
Chettinad $172 $145 $75 $51 $71 Chettinad 8 17 9 6 11
Saurashtra $83 $76 $75 $57 $53 Saurashtra 9 32 90 -11 274

JK Lakshmi Mangalam Prism Chettinad Saurashtra JK Lakshmi Mangalam Prism Chettinad Saurashtra

Mean: $76/T Median: $74/T

22
Thank You