Cement

Underweight on the sector; but selective long–term value emerges

Revathi Myneni
+91-22-6623 3316
revathi.myneni@edelcap.com

Archana Khemka
+91-22-6623 3488
archana.khemka@edelcap.com

December 2008
Summary

Current liquidity crunch is elongating project timelines

Yet, surplus in FY10E and FY11E to remain

g PAT sensitivity
While costs could be the silver lining; y remains skewed towards

realisations

Balance sheets are much stronger than in the previous downcycle and our

coverage will make cash profit even with ~20% price correction (our base

assumption is 10%)

However, current discount to replacement cost (20

(20-52%)
52%) is higher than the

previous down cycle

Accordingly, long-term value is emerging for select stocks. Grasim, UltraTech

and Ambuja are likely to be sector outperformers; upgrade to ‘ACCUMULATE’

from ‘REDUCE’. We maintain ‘Reduce’ on ACC and ‘SELL’ on India Cements and

Madras Cement

2
Current liquidity crunch elongating project timelines

Domestic projects are getting delayed/deferred by ~6 months due to liquidity

crunch, as per equipment vendors.
~15 mtpa ordered in CY08, of the total ~40 mtpa, has been postponed to the next year; ~3
mpta has been cancelled (however, these will impact additions only post FY11E).
Corporates
p are willing
g to forego
g the advance money
y ((15-25% of p
project
j cost)) due to difficulties in
arranging finance.
Low visibility on capacities scheduled to come on-stream in FY11E.
Equipment vendors are concerned about payment receipts and honouring of LCs by banks.

Capacity addition delays (available basis)

(mn tonnes) FY09E FY10E FY11E Cumulative
Original capacity addition 33 45 34 112
Revised capacity addition 27 39 34 100
% of capacities delayed 18 15 (3) 11
Source: Edelweiss research

Some global cement majors have postponed all projects scheduled to come on- stream
post CY09E, for which, equipments have not been ordered as yet.
Ease in vendor workload, however, is compressing timelines by 3-4 months.

Strained liquidity situation is compounding delays witnessed due to land

acquisition & civil contractor difficulties.

3
Yet, surplus in FY10E and FY11E to remain…
60
55 54
Lower demand growth of 8% factored vis vis-à-vis
à vis 10%
50
earlier, in line with the downward GDP revision to 7.4%
41
in FY09E and 6% in FY10E. 40
35

(m n tonnes)
Accordingly, utilisation rate expected to drop to 85% in 30

FY10E & 80% in FY11E.

FY11E
20

10

0
FY10E FY11E
Original Surplus Revised Surplus
Demand-suppy projections
Million tonnes FY08 FY09E FY10E FY11E
Effective capacity 166 193 232 266
Capacity addition 7 27 39 34
Increase in effective capacity (%) 4.4 16.1 20.0 14.8
Total supply 166 193 232 266
1 Domestic demand 163 177 191 206
growth (%) 9.8 8.3 8.0 8.0
2 Exports 6 6 6 6
Total demand (1+2) 169 183 197 212
Absolute surplus/(Deficit) (3) 10 35 54
Capacity utilisation (%) 101.7 94.6 85.0 79.7
Source: Edelweiss research
Our supply timelines factor in 50% utilisation level for a new capacity for the first two quarters post commissioning.

Surplus, though lower, remains significant at 15% in FY10E (19% earlier) and
20% in FY11E (20% earlier). 4
…With downside risk of lower demand growth

With 6% demand growth

growth, surplus could increase to 22% in FY10E vis-à-vis
vis à vis 17% at
8% demand growth

FY10E/11E continues to look unfavourable with further downside risk

Demand g
growth 6% 7% 8% 9% 10%
Surplus / (deficit)
FY10E 42 39 35 32 28
FY11E 66 60 54 49 43
Utilisation level
FY10E 82 83 85 86 88
FY11E 75 77 80 82 84
Source: Edelweiss research
Note: Housing accounts for ~55% of total domestic demand.

Domestic demand grew only by 7.6% in FY09 YTD (10.9% YTD in FY08).

5
How can the cycle turnaround?

When will utilisation levels improve?

p The DEMAND story
y
Demand growth Demand/capacity (%) Turnaround year
(%) FY10E FY11E FY12E FY13E (85%+)
8 85 80 80 86 FY13
10 85 81 83 91 FY13
12 85 83 86 96 FY12
15 85 85 90 104 FY11
Source: Edelweiss research

Only with 15% demand growth, utilisation levels could stabilise/improve post FY10E.

How will the surplus be absorbed? The SUPPLY story

Supply reduction Demand/capacity (%) Turnaround year

((mt)) FY10E FY11E FY12E FY13E (85%+)
( )
0 85 80 80 86 FY13
15 90 84 84 91 FY10
30 95 89 89 96 FY10
Source: Edelweiss research
N t D
Note: Demand
d growth
th implicitly
i li itl assumed
d is
i 8%

Supply needs to reduce by 15 mt in FY10E to maintain ~85% utilisation levels post FY10E. This is
possible if 40% of FY10E projects get postponed (unlikely) or supply is curtailed through lower
blending/utilisation.

Oversupply could continue till FY12E, unless supply is controlled through lower
utilisation / blending.
6
However, consolidation level is not too different than before

Capacity share of the top 8 groups is likely to be 62% in FY10E compared with ~60%
60% in FY03;
realisations corrected up to ~13% in FY03.

80%
73%
69% 67% 67%
62% 62%
60%
60%
54% 52%
47%

40%

20%

0%
North South East West All India
FY03 FY10E
Source: CMA, Edelweiss research

In North,
No th consolidation is expected
e pected to increase
inc ease to 73% in FY10E vis-à-vis
is à is 54% in
FY03. However, price corrections in this market have already begun.

7
Cut-back on blending has not happened so far

1 33x from 1.2x

Blending levels have risen to 1.33x 1 2x in FY05,
FY05 driven by shortage of cement.
cement

Surplus in FY10E can be avoided, if blending is reduced to FY05 levels.

It is unclear whether blending will be curtailed; consolidation levels in the industry has not changed
significantly and there are cost implications as well

1.40 105

1.34 96

1.28 87
(x)

(%)
1.22 78

1 16
1.16 69

1.10 60
FY03 FY04 FY05 FY06 FY07 FY08 FY09
(YTD)
Bl di
Blending ratio
ti D
Demand-capacity
d it ratio
ti (%)
Source: CMA

Till date, blending has remained unchanged, despite demand-capacity ratio

correcting ~10% in H1FY09
H1FY09.

8
Costs could be the silver lining

Imported coal rates sliding

180 12,000
Power and fuel costs (~30% of total cost)
144 9,600
could positively surprise

(USD/ttonne)
108 7,200

(US D)
FoB imported coal rate (South Africa) has corrected
48% from its peak in July; the Baltic Freight Index 72 4,800

has come down to the 1999 levels.

36 2,400

0 0

Dec-06
6

Dec-07
7
Apr-07
7

Apr-08
8
Aug-07
7

Aug-08
8
Feb-07
7

Feb-08
8
Oct-06
6

Oct-07
7

Oct-08
8
Jun-07
7

Jun-08
8
Richards Bay, South Africa Baltic Dry Freight Index
Source: Bloomberg

Imported
p coal cost assumptions
p
Indonesia South Africa
Peak rate
Coal prices at peak-FoB 105 178
Freight cost to India at peak 35 45
CIF 140 223 A 5% change in imported coal rates
Current rates will impact FY10E PAT by 0.6-2.7%
Current coal rate - FoB 72 92
Current freight cost to India 11 18
CIF 83 110
For our FY10 projections we have assumed
CIF 93 116
Source: Bloomberg, Edelweiss research
9
Costs could be the silver lining

Freight
g rates (
(~22% of total cost)
) could soften too
Softer international diesel prices leave scope Scope for theoritical reduction in diesel rates
for reduction in domestic rates Current diesel rate- ex Delhi (INR/litre) 34.8
At current prices, implied international diesel rate
However, actual reduction could be lower, as for no under/over recovery (INR/bbl) 3,828

Domestic prices do not move in tandem Current exchange

C h rate ((USD/INR)
S / ) 49.9
99
Implied international parity price for INR 34.8/ltr
with international rates. (USD/bbl) 76.7
Pressure of past under-recoveries. Current int'l diesel rate (USD/bbl) 64.7
Source: Edelweiss research
10% reduction in diesel prices along with slow
demand is likely to lower
Significant past under recoveries in petrol
Road freight rates by ~6% and diesel
Railway freight rates by ~ 5-10% 29.0
(fuel accounts for ~60% of total road freight cost) 24.0

Cement freight cost could decline by ~4-6% 19.0

(INR/ltr)
(share of road to total cement despatches is ~60%). 14.0

9.0

We have assumed freight rates to decline by 4.0

0

~ 3% in FY10E. A 1% change in freight cost (1.0)

will impact FY10E PAT by ~0.6-1% (6.0)

Dec-06

Dec-07
Apr-07

Apr-08
Aug-07

Aug-08
Feb-07

Feb-08
Oct-06

Oct-07

Oct-08
JJun-07

JJun-08
A

A
D

D
A

A
Gasoline Diesel
Source: Edelweiss research

10
But sensitivity of PAT remains skewed towards realisation

1% realisation decline impacts PAT by (4-6.5)% 1% volume decline impacts PAT by (1-3)%
0.0 0.0

(1.0) (0.5)

(1.0)
(2.0)
(1.5)
(3.0)
%)

%)
(2 0)
(2.0)
(%

(%
(4.0)
(2.5)
(5.0)
(3.0)
(6.0) (3.5)

(7 0)
(7.0) (4 0)
(4.0)
ACC Ambuja India Madras Ultratech Grasim ACC Ambuja India Madras Ultratech Grasim
Cement Cement Cement Cement Cement Cement

1% decline in power and fuel cost impacts PAT by

0.5-1.5%, and 5% decrease in imported coal prices
impacts PAT by 0.6- 2.7% 1% decline in freight cost impacts PAT by 0.4-1%
3.0
1.8
2.5
1.5
2.0
1.2
((%)

1.5
(%))
0.9
1.0
0.6
0.5
0.3
0.0
ACC Ambuja India Madras Ultratech Grasim 00
0.0
Cement Cement Cement
ACC Ambuja India Madras Ultratech Grasim
Power and fuel Imported coal Cement Cement Cement
Source: Edelweiss research
11
Earnings likely to decline in FY10E due to price corrections

Price correction appears inevitable…

...utilization
ili i llevels
l
are set to correct
107.5 going ahead 3,500

100.0 3,100
Realisations peaked
in line with

ne)
92 5
92.5 2 700
2,700

(INR/tonn
utilization
tili ti up ti
tick...
k
(%)

85.0 2,300

77.5 1,900

70.0 1,500

FY09E
FY10E
FY11E
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Capacity Utilisation % Realisation/tonne
Source: Edelweiss research

... leading to ~20% Y-o-Y earnings decline in FY10E, despite benign cost assumptions
Change in
Company (INR mn) PAT (%) Realisation/tonne (%) Cost/tonne change (%)
ACC (37.8) (1.6) 4.4
Ambuja Cement (22.4) (5.0) (3.4)
India Cement (24.2) (6.8) (1.1)
Madras Cement 5.8 (6.1) (5.3)
Ultratech (14.0) (5.1) (2.2)
Grasim Industries (26.2) (5.2) (0.8)
Average (19.8) (5.0) (1.4)
Source: Edelweiss research
Note: We have assumed prices will correct by ~ INR 25/bag or 10% in FY10E (in Q2 and Q3) from current levels

12
Balance sheets however, stronger in current downcycle vs earlier

Cycle comparison
FY03 FY10E
Industry
Demand growth (%) 8.7 8.0 During FY06-09E (upturn),
Utilisation level (%) 81.0 85.0 realisations increased 71% vis-
R li ti
Realisation correction
ti (%) (14 6)
(14.6) (5 0)
(5.0) à-vis 39% cost increase. Thus,
Capacity share of top 10 players (%) 60.3 61.9 in this downcycle (FY10E),
Profitability profitability is likely to be
EBITDA (INR/tonne) 309.4 896.8 higher, despite assumption of
EBITDAM (%) 18.2 26.1 ~10% fall in prices.
NPM (%) 5.7 11.8
ROE (%) 13.7 18.0
ROCE (%) 4.9 9.0
Balance sheet
Debt:Equity (x) 1.3 0.3 Balance sheets are stronger
Interest coverage (x) 1.5 10.0 with
ith lower
l l
leverage.

Valuation
Replacement cost (including CPP) (INR/tonne) 2,500 4,410
Replacement cost (excluding CPP) (INR/tonne) 2,500 3,600 However, valuations have
(Discount)/ Premium to replacement cost (INR/tonne) 22% to (20-52%) corrected higher than the
(53%) previous downcycle.

Source: CMA, Edelweiss research

Profitability, balance sheet and valuation are considered for coverage
Note: In FY03, projects did not include captive power plant (CPP) facilities. Hence, replacement cost of INR
2500/tonne is ex CPP.

13
Stocks are trading at 23-55% discount to the replacement cost

In a downcycle, stocks can trade below replacement cost for an extended period
15,000 110

12,500 100
(INR/tonne)

10,000 90

(%)
7,500 80

5 000
5,000 70

2,500 60

- 50
May-96

May-01

May-06
Mar-97

Jan-98

Mar-02

Jan-03

Mar-07

Jan-08
Dec-95

Oct-96

Dec-00

Oct-01

Dec-05

Oct-06
Jun-93

Sep-94

Jun-98

Sep-99

Jun-03

Sep-04

Jun-08
Apr-94

Jul-95

Apr-99

Jul-00

Apr-04

Jul-05
Nov-93

Aug-97

Nov-98

Aug-02

Nov-03

Aug-07

Nov-08
Feb-95

Feb-00

Feb-05
A

A
M

M
D

D
N

N
S

S
A

A
India Cement Ambuja Cement ACC
Madras Cement Ultratech Cement Indicative replacement cost
Capacity utilisation
Source: Edelweiss research

Valuation comparison
p across cycle
y
Current Valuations Current discount to Historical discount to
CMP (EV/tonne) replacement cost replacement cost
FY09E FY10E FY09E FY10E FY02 FY03
INR/share USD/tonne USD/tonne (%) (%) (%) (%)
ACC 406 61 65 (32 5)
(32.5) (27 1)
(27.1) (26 4)
(26.4) (37 7)
(37.7)
Ambuja Cements 54 66 72 (26.8) (20.3) 64.1 22.4
UltraTech 265 44 41 (51.5) (52.0) NA NA
India Cements 87 50 52 (29.7) (27.7) 5.2 (1.2)
Madras Cement 59 79 66 (12.1) (26.6) (40.3) (53.5)
Source: Edelweiss research
Note: India Cements’ replacement valuations in the previous downcycle are not indicative due to high share of debt in EV (up to 96% from
~31% in FY09-10E). Also, for arriving at current discount , we consider replacement cost ex-CPP
Likewise, Ambuja Cement’s premium to replacement cost in last cycle was partly due to sales tax benefits enjoyed on ~
85% of its despatches which is reduced to ~ 15% currently.
14
And offers long term value even at stress valuations

Even with a ~20% correction in cement prices, we do not expect our

coverage to enter into cash losses in FY10E
Base case assuming 10% price correction
Ambuja India Madras Avg. of 6
FY10E ACC Cement Cements Cement UltraTech Grasim cos
EBITDA (INR/tonne) 736 1,013 1,057 1,295 808 853 960
Cash profit (PAT+
depreciation) 554 762 739 831 623 735 708
EBITDAM 21.4 30.1 30.6 35.6 24.5 19.0 26.9
NPM (%) 11.0 16.4 14.7 17.1 12.7 9.9 13.6
ROE (%) 13.7 15.6 15.4 32.1 21.5 18.1 19.4
ROCE (%) 18.7 23.1 16.1 24.6 20.0 17.1 19.9
EPS (INR/share)
(INR/ h ) 39 0
39.0 61
6.1 18 8
18.8 19 0
19.0 70 0
70.0 204 0
204.0
Debt:Equity (x) 0.1 0.1 0.5 0.9 0.4 0.3 0.4
Interest coverage (x) 16.9 45.7 8.0 7.1 9.2 10.4 16.2
EV/tonne (USD/tonne) 65 72 52 66 41 45
EV/EBITDA (x) 5.6 4.4 3.3 3.5 2.8 2.9

S
Stress case assuming
i 20% price
i correction
i
Ambuja India Madras Avg. of 6
FY10E ACC Cement Cements Cement UltraTech Grasim cos
EBITDA (INR/tonne) 510 791 735 969 484 530 670
Cash profit (PAT+
depreciation) (INR/tonne) 394 612 521 610 381 558 513
EBITDAM (%) 15 9
15.9 25 2
25.2 23 5
23.5 29 3
29.3 16 3
16.3 12 7
12.7 20 5
20.5
NPM (%) 6.8 12.8 9.3 12.1 5.9 6.5 8.9
ROE (%) 8.1 11.5 9.1 21.8 9.8 10.7 11.8
ROCE (%) 11.2 16.8 9.9 17.2 9.2 10.0 12.4
EPS (INR/share) 22.5 4.5 10.7 11.6 29.5 123.0
Debt:Equity (x) 0.2 0.1 0.6 1.0 0.6 0.3 0.5
Interest coverage (x) 85
8.5 28 3
28.3 45
4.5 47
4.7 36
3.6 55
5.5 92
9.2
EV/tonne (USD/tonne) 67 73 55 69 45 50
EV/EBITDA (x) 8.3 5.7 5.0 4.9 5.2 5.1
Source: Edelweiss research
15
Selective value emerges
Grasim- Correction overdone

Investment Rationale:
Strong balance sheet: Balance sheet is healthy with cash and liquid investments expected to
be INR 14.6 bn in FY10E (INR 160/share or 18% of current market cap). Leverage levels remain
comfortable with D/E of 0.5x for FY09E and 0.3x for FY10E.
Maintain market share in a downcycle: We expect the company to maintain market share in
a do tu
downturn (a a ab e capac
(available ty s
capacity a e likely
share e y to increase
c ease to 9 5% in FY10E
9.5% 0 from
o 8 6% in FY08).
8.6% 08)
With the full benefit of increase in capacity from 34 mtpa to 49 mtpa likely in FY10E, we expect
FY10E cement volumes to grow 16% vis-à-vis 8% growth expected for the entire industry.
Attractive valuations with limited downsides: Assigning 2x FY10E EV/EBITDA for the VSF
business, we arrive at an implied EV/tonne of USD 45 for cement, which is ~50% discount to the
current replacement cost.
cost This discount is the highest amongst it
it’s
s peers in the sector,
sector despite
Grasim’s pan-India presence and healthy operating performance. The stock is trading at P/B of
0.7x FY09E and 0.6x FY10E.

Outlook and valuations: Current valuations favourable; upgrade to ‘ACCUMULATE’

Factoring
F t i i the
in th concerns off lower
l offtake
fft k and
d price
i corrections
ti i the
in th VSF segment, t we are assuming
i fl t
flat
volumes in FY10E (72% capacity utilization vis-à-vis higher than 90% maintained since FY03) and ~18%
Y-o-Y realization correction in FY10E (FY06 levels– pre-uptick). Accordingly, we are reducing our earnings
by 1.4% in FY09E and 15.6% for FY10E. At CMP INR 905, the stock is trading at an EV/EBITDA of 2.7x
FY09E and 2.8x FY10E and P/E of 3.3x FY09E and 4.4x FY10E. Even on reduced estimates, we believe
Grasim is the most favourable bet on the cement sector and current valuations provide an entry
opportunity for longer term horizon. Accordingly, we upgrade our recommendation on the stock from
‘REDUCE’ to ‘ACCUMULATE’.

Key risks
Risk of sharper price correction or slower demand growth.
growth
Sharp upward revision of international coal prices.

17
UltraTech- In the value zone

Investment rationale:
FY10E volume growth to exceed industry average: Volumes expected to grow by 11% Y-o-Y,
compared to industry growth of ~8% led by 4.9mtpa capacity expansion (27% of current
capacity).
Savings from CPP to support margins: A total of 192 MW of CPP will cushion EBITDA margins
at 24.5% in FY10E. 45% exposure to imported coal will provide Y-o-Y earnings support due to
sharp correction in international coal prices. Accordingly, we expect FY10E profit to de-grow by
14% compared to ~14-50% for our coverage universe.
Valuations attractive,
attractive correction overdone: The stock is trading at FY10E EV/tonne of USD 41,41
steep discount of ~52% to current replacement cost. FY10E P/B of 0.8x provides an opportunity to
buy business and not only earnings.

Outlook and valuations: current valuations favourable, upgrade to ‘ACCUMULATE’

At CMP INR 265, the stock is trading at FY10E EV/EBITDA of 2.8x and EV/tonne of USD 41. We believe that
while near-term stock performance (one year) could be impacted by over-supply concerns in the sector,
the current valuations limit downside and provide a long term investment opportunity. Accordingly, we
upgrade our recommendation on the stock from ‘REDUCE’ to ‘ACCUMULATE’.

Key risks
Risk of sharper price correction or slower demand growth.
Sharp upward revision of international coal prices.

18
Ambuja Cements- Efficient player

Investment rationale:
Superior profitability:
High EBITDAM: Expected at 30% in CY09E vis-à-vis average FY10E margin of ~27% for our
coverage. At stress valuations (assuming 20% price cut vis-à-vis 10% assumed by us for
our FY10E estimates), EBITDAM is expected to be ~25%. Future cost efficiencies expected
under Holcim,
Holcim a global leader in Alternate Fuel Technology.
Technology
Superior RoCEs: CY09E RoCE at 23% is high compared to peer average of 20.0%.
Lower sensitivity to realizations: ~4% impact on FY10E PAT for ~1% change in realization
compared to 4-6.5% for others.
Strongg balance sheet with comfortable leverage:
g D/E
/ at 0.1x in CY08E,, lowest among g
peers (ranges between 0.3x to 2.7x) provides comfort in the current liquidity constrained
environment.
Strong brand coupled with Holcim patronage: Holcim, global cement major acquired the
company in 2005 and currently owns 46.5% stake. 5% creeping acquisition limit for the stock
for FY09E was unexhausted till September
p 2008 which if utilized,, will p
provide support
pp to the
stock.

Outlook and valuations: Limited downside, upgrade to ‘ACCUMULATE’

At INR 54, the stock trades at CY09E EV/EBITDA of 4.4x and EV/tonne of USD 72, ~20% discount to
replacement
p cost. We believe that the stock can trade at a discount to replacement
p cost in the current
downcycle unlike ~22% premium that it commanded in the last downturn (earlier premium was
supported by sales tax incentives which stand reduced now to 15% of total sales compared to 85%
earlier) and higher EBITDA margin vis-à-vis it’s peers (32% compared to ~15-25% for others in FY03 ).
However, we believe downside from current levels is limited. Hence, upgrade our recommendation from
‘REDUCE’ to ‘ACCUMULATE’

Key risks - Risk of sharper price correction or slower demand growth.

19
ACC- Current valuations fair, upside doubtful

Investment rationale:
Profitability lower than others: We expect ACC’s EBITDA margin to be 21.4% in FY10E, which
while healthy, is lower than 25-30% which we expect for the rest of our coverage universe. RoE
too, is muted at 13.7% for FY10E due to low NPM. (11% vis-à-vis 13-17% for others).

Earning upside limited:

Limited volume gains: 6 mtpa addition (Wadi and Chanda) expected only by H2CY10E. We
expect volumes to de-grow by ~7% Y-o-Y in CY09E. Pace of additions at 4% CAGR (CY07-
09E) much slower than industry average of ~18%.
High sensitivity to realization: ~6.5% impact on FY10E PAT for ~1% change in realization
which increases the risk to earnings versus 4 5% for others.
4-5% others
Least benefited by imported coal price correction: Only 15% exposure to imported coal
(upto 75% for remaining coverage) to limit earnings upside from sliding international coal
prices.

Upside from current levels limited: The stock is trading at 27% discount to current
replacement cost vis-à-vis ~38% discount that the stock traded at in the previous downcycle
(ROE of 11.9% in FY03 and 11.2% in CY09E). Proportion of cash and equivalents in CY09E
remain low ~5% of current market cap. Also, the stock is trading at CY09E book of 1.3x
compared to 0.7x for Grasim (FY10E)

Outlook and valuations: Cautious; maintain ‘REDUCE’

At CMP INR 406, the stock is trading at an CY09E EV/EBITDA of 5.6x and EV/tonne of USD 65 (current
replacement cost of USD 90. We maintain our ‘REDUCE’ recommendation on the stock.

Key risks: Risk of lower than 10% price correction in FY10E. Consolidation in the sector. Fuel efficiencies
due to Alternate Fuel Technology

20
India Cements- Regional risk

Investment rationale:
Regional risk: ~92% of current sales and 80% of the 4.9mtpa capacity addition is in south. We
expect south will account for ~52% of all India capacity addition between FY09-11E with the
demand-capacity ratio likely to correct by ~21% in the same period (vis-à-vis ~15% for the
sector as a whole). This exposes the company to the risk of any sharp correction in cement
prices in the region (we have assumed 10% price correction in FY10E).
Valuations do not provide comfort of limited downside risk: The stock trades at EV/tonne
of USD 52, 28% discount to current replacement cost ex-CPP (~USD 72/tonne). While current
valuations appear
pp reasonable,, they
y do not alleviate our concerns of sharper
p price correction.
p
Also, comparable companies like Madras Cement had traded at a discount of upto 50% in the
previous downcycle (discount for India Cement is not indicative as 97% of the company’s EV
comprised of debt).

O l k and
Outlook d valuations:
l i C
Cautious;
i maintain
i i ‘REDUCE’
‘ C ’
At CMP INR 87, the stock is trading at a FY10E EV/EBITDA of 3.3x and EV/tonne of USD 52. In view of
the over supply concerns in the sector, we believe stock performance can be impacted in the near term.
Accordingly, we maintain our ‘REDUCE’ recommendation on the stock.

Key risks:
Risk of lower than 10% price correction in FY10E.
Consolidation in the sector

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Annexure

At a glance
Financials (INR mn) Growth (%) Valuations (X)
Price Mkt cap Mkt cap Reco Revenue EBITDA Net Annualised Revenue EBITDA Net Annualised EV/tonne EV/ PE
Company (INR) (INR bn) US bn profit EPS profit EPS (USD) EBITDA
ACC 406 76.0 1.5163 Reduce CY05 31,602 5,192 5,442 14.1 8.4 11.3 (8.6) (11.4) 87 15.9 28.8
CY06 57,170 16,459 12,318 57.5 35.7 137.7 69.8 307.3 74 4.5 7.1
CY07 68 780
68,780 19 193
19,193 14 386
14,386 65 2
65.2 20 3
20.3 16 6
16.6 16 8
16.8 13 5
13.5 58 34
3.4 62
6.2
CY08E 73,162 18,969 12,276 62.7 6.4 (1.2) (14.7) (3.8) 61 3.7 6.5
CY09E 66,765 14,285 7,331 39 (8.7) (24.7) (40.3) (37.8) 65 5.6 10.4
Ambuja Cement 54 81.4 1.6231 Accumulate FY05 26,247 7,517 4,683 3.5 32.7 35.5 39.0 36.3 120 10.6 15.4
CY06 63,400 22,048 15,033 9.6 61.0 95.6 114.0 176.6 102 3.8 5.6
CY07 57,424 20,827 17,691 7.8 35.9 41.7 76.5 (18.9) 71 3.1 6.9
CY08E 61,868 19,141 14,756 7.9 7.7 (8.1) (16.6) 1.9 66 3.4 6.8
CY09E 57,149 17,200 9,364 6.1 (7.6) (10.1) (36.5) (22.4) 72 4.4 8.7
India Cements 87 24.4 0.4877 Sell FY06 15,433 2,684 453 1.9 31.1 70.1 NM NM 81 11.7 46.4
FY07 22,566 7,467 4,788 18.4 46.2 178.3 956.7 881.5 94 5.4 4.7
FY08 30,622 11,107 6,375 24.3 35.7 48.7 33.1 32.3 84 3.3 3.6
FY09E 37,668 13,028 6,493 24.9 23.0 17.3 1.8 2.2 50 2.7 3.5
FY10E 36,096 11,050 5,309 18.8 (4.2) (15.2) (18.2) (24.2) 52 3.3 4.6
Madras Cement 59 07
0.7 0 0143
0.0143 Sell FY06 10 085
10,085 2 126
2,126 790 33
3.3 36 3
36.3 35 4
35.4 38 2
38.2 (93 0)
(93.0) 62 88
8.8 17 7
17.7
FY07 15,742 5,560 3,078 12.9 56.1 161.6 289.5 286.3 65 3.5 4.6
FY08 20,119 7,523 4,080 17.1 27.8 35.3 32.6 32.5 73 3.9 3.5
FY09E 25,526 9,287 4,283 18.0 26.9 23.4 5.0 5.0 79 3.8 3.3
FY10E 29,004 10,322 4,532 19.0 13.6 11.1 5.8 5.8 66 3.5 3.1
UltraTech 265 32.9 0.6571 Accumulate FY06 32,200 5,873 2,251 18.1 19.0 58.5 NM NM 54 7.8 14.6
FY07 47,863 14,317 7,849 63.1 48.6 143.8 248.7 248.4 51 3.1 4.2
FY08 56,238 17,320 10,101 81.1 17.5 21.0 28.7 28.7 53 2.8 3.3
FY09E 65,406 17,758 10,174 81.7 16.3 2.5 0.7 0.7 44 2.9 3.2
FY10E 68,673 16,825 8,709 70.0 5.0 (5.3) (14.4) (14.4) 41 2.8 3.8
Grasim Industries 909 83.4 1.6629 Accumulate FY06 102,240 20,687 10,365 113.0 5.2 8.0
FY07 140,952 39,723 19,683 214.7 37.9 92.0 89.9 89.9 NM 2.8 4.2
FY08 169,739 49,598 26,091 284.6 20.4 24.9 32.6 32.6 NM 2.6 3.2
FY09E 186 060
186,060 48 891
48,891 25 334
25,334 276 3
276.3 96
9.6 (1 4)
(1.4) (2 9)
(2.9) (2 9)
(2.9) NM 27
2.7 33
3.3
FY10E 188,275 43,804 18,707 204.0 1.2 (10.4) (26.2) (26.2) NM 2.8 4.4
Note: Ambuja Cement Eastern merged with Gujarat Ambuja wef January 2006. Figures for India Cement include Visaka Cement

Prises as on 02, December 2008

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