ICICI Direct Cement Sector Report

April 20, 2009 | Cement
Initiating Coverage
Analysts Name Ravi Sodah ravi.sodah@icicidirect.com Vijay Goel vijay.goel@icicidirect.com

Ambuja Cement CMP TP Rating Dalmia Cements CMP TP Rating India Cements CMP TP Rating Orient Paper & Ind. CMP TP Rating ACC CMP TP Rating JK Cements CMP TP Rating Shree Cement CMP TP Rating UltraTech Cement CMP TP Rating (GUJAMB) 80 64 Underperformer (DALCEM) 95 81 Underperformer (INDCEM) 120 110 Hold (ORIPAP) 28 36.2 Outperformer (ACC) 617 500 Underperformer (JKCEME) 54 62 Performer (SHRCEM) 796 900 Performer (ULTCEM) 546 630 Performer
Indian Cement Sector

Near term macros improve
With softening interest rates, sharp correction in coal and petcoke prices and firming up of cement prices due to strong demand, we believe the near term macroeconomic conditions for the cement industry have improved significantly. We believe that due to healthier balance sheets, moderate consolidation, use of more cost efficient technology and change in the macro environment over the last two quarters cement players will be better off compared to the earlier down cycle. We are initiating coverage on the cement sector with a positive view on Shree Cement, Orient Paper, JK Cement and UltraTech Cement, neutral on India Cement and negative view on ACC, Ambuja and Dalmia Cement.
Demand growth accelerates

After reporting cement dispatch growth of merely 6.7% in the first seven months of FY09 (April-October 08), cement growth has accelerated to 10.5% in November 08-March 09. We believe the Indian cement industry will continue to grow by 1.2x GDP growth in FY10.
Oversupply is inevitable
About 62 million tonnes (MT) of cement capacity is scheduled to come on stream by the end of FY10. We expect the capacity utilisation of the industry to drop from 88% in FY09 and further to 79% in FY10. Thus, cement prices are likely to come under pressure with the beginning of the monsoon season.
Subsiding cost pressure to cushion margins in near term

A 4% cut in excise duty, sharp correction in imported coal, petcoke and crude prices by 67.8%, 49% and 66% respectively from their peak levels have reduced cost pressures for the cement industry. Apart from this, softening of interest rates would reduce the interest burden of smaller cement players, who have funded their capex by debt and cushion their PAT margins. However, we believe that in the long run, the demand-supply situation will force cement players to cut prices and pass on the benefits.
Recommendation
Some of the cement stocks are currently trading at valuations lower than the value given to loss making cement companies in the last 10 years. This is despite the fact that replacement cost for cement companies has increased significantly over the last decade. We believe that long-term value has emerged in select cement stocks. We also believe that companies that have completed a majority of their capacity addition, undertaken cost cutting measures or have low cost structure with lower earning sensitivity to price declines will be better off compared to their peers. Timely capacity addition will reduce the payback period while a low cost structure will enable them to cut prices and push volumes in a down cycle. We prefer UltraTech Cement among large caps, Shree Cement in the mid cap space and JK Cement and Orient Paper in small caps.
CMIE Cement Stock Index

4200
3200
2200
1200 July'08 Aug'08 Nov'08 Jun'08 Apr'08 M ar'08 M ay'08 M ar'09 Oct'08 Dec'08 Sep'08 Jan'09 Feb'09
ICICIdirect.com | Equity Research
Content
Demand growth accelerates Oversupply unavoidable Subsiding cost pressure to cushion margins in near term Recommendation
Page No.
3 7 12 19
Companies Section
Initiating Coverages Ambuja Cement Dalmia Cement India Cements Orient Paper & Industries 23 32 42 54
Company Updates ACC JK Cements Shree Cements Ultratech Cements 68 73 78 82
Demand growth accelerates

After reporting cement dispatch growth of merely 6.7% in the first seven months of FY09, cement growth has accelerated to 10.5% in November 08-March 09. Exhibit 1: All-India cement dispatches & YoY growth
190 180 170 160 150 140 130 120 110 100 Apr-07 14.3 11.1 11.7 8.9 6.4 5.1 Jun-07 Aug-07 May-07 Jul-07 4.1 Sep-07 Oct-07 8.5 4.8 5.2 Dec-07 Jan-08 Apr-08 Mar-08 Feb-08 6.1 4.0 Jun-08 Aug-08 May-08 Jul-08 3.8 Sep-08 Nov-08 Dec-08 Jan-09 Oct-08 Mar-09 Feb-09 8.4 8.2 9.5 8.3 4.1 13.4 12.1 11.2 10.4 8.7 16 14 12 10 8 6 4 YoY growth(%)
Lakh tonnes
3.7 Nov-07
Dispatched(LHS)
Source: CMA, ICICIdirect.com Research
YoY Growth(RHS)
Exhibit 2: Capacity utilisation (%)

110 105 100 95 % 90 85 80 75 Apr-07 Apr-08 Jul-07 Jun-07 Jun-08 Jul-08 Aug-07 Aug-08 Nov-08 Nov-07 Jan-08 May-08 Jan-09 May-07 Mar-08 Mar-09 Sep-07 Sep-08 Feb-08 Dec-07 Dec-08 Feb-09 Oct-07 Oct-08 93.5 89.6 88.4 91.2 102.6 98.0 101.2 96.3 95.7 102.4 101.2 104.1 91.9 89.1 86.5 86.4 93.4 91.7 92.0 103.0
86.3 81.6 83.3
77.3
Increased plan expenditure in the fiscal stimulus package by Rs 20,000 crore, pre-election spending led increase in demand from the infrastructure sector coupled with capacity additions have driven the volumes of the industry. Also, cooling off of raw material prices and softening interest rates have increased the viability of infrastructure projects that had turned unviable. We have determined that individual housing demand in rural and semi-urban areas has revived due to the following factors: Efforts by the government to boost the demand for houses in the below Rs 20-lakh category in stimulus packages Cooling off of land prices and steel prices Good agricultural harvest Increase in minimum support price (MSP) (wheat's MSP has risen to Rs 1,080 per quintal in 2008-09 from Rs 750 per quintal in 200607 while the figure for rice in the corresponding period has jumped to Rs 850 per quintal from Rs 580 per quintal), Increase in pay for workers under the flagship rural job guarantee scheme Implementation of debt waiver scheme and Implementation of the Sixth Pay Commission
All-India cement dispatches grew by 6.7% in April-October 08, mainly driven by the southern region, which had reported growth of 11.5% (Andhra Pradesh had been the main contributor in the southern region with growth of 15.7% mainly driven by higher spending on irrigation projects) as compared to just 4.4% for the rest of India, which forced players like ACC and Shree Cement to shut down their plants. In November 08-March 09, cement demand accelerated in other regions with the central region growing at 8.8% due to higher cement demand on part of the UP government on low-cost housing and demand from infrastructure projects such as Yamuna (Taj) Express Highway. In the northern region the growth was 18.7% due to incremental demand from major projects, viz Commonwealth Games, sewerage line project in Punjab, national irrigation project in Haryana and Delhi Metro, fly-over & Delhi Airport and re-imposition of countervailing duty (CVD) of 8% and Special CVD (special additional duty of customs) of 4%, which has dried up cement imports. Demand in the western region has continued to be muted as the organised real estate sector, which contributes a significant chunk in overall demand, has witnessed a slowdown. Exhibit 3: Region wise cement dispatches growth in FY09(in Lakh tonnes)
Regions North East West Central South All India Ex South All India Inc South Apr-Oct'08 222.2 139.5 156.7 140.1 343.9 658.5 1002.4 Apr-Oct'07 205.2 128.7 159 138 308.3 630.9 939.2 Var.(%) 8.3 8.4 -1.4 1.5 11.5 4.4 6.7 Nov-Mar'09 189.2 120.5 127.9 116.8 253.2 554.4 807.6 Nov-Mar'08 159.4 103.5 127.8 107.4 233.2 498.0 731.2 Var.(%) 18.7 16.5 0.1 8.8 8.6 11.3 10.5
Cement demand had grown at 8.1% CAGR during FY94-FY08 and at 10% CAGR during FY06-FY08. In the near future, cement consumption has been growing in line with the GDP growth rate with the correlation being close to 97%. We believe that in the long run, the cement industry will continue to grow by 1.2x GDP. With a consensus estimate of 5.9% GDP growth, we expect cement demand to grow at 7% in FY10. We are expecting around 59 MT of demand to be generated by the infrastructure sector and 11 MT by real estate projects in Tier-I cities. Exhibit 4: Cement consumption growth, GDP growth and cement to GDP multiple
14 12 10 8 Growth(%) 6 4 2 0 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 -2 -4 -0.5
r =0.97 Average GDP to cement consumption growth multiple of last 15 years is 1.2x
2.5 2.0 1.5 1.0 0.5 0.0
Cement consumption growth(%) (LHS)
Cement consumption to GDP Multiple (RHS)
-1.0 GDP growth(%) (LHS)
Source: Bloomberg, CMA, ICICIdirect.com Research
Exhibit 5: Per capita consumption of cement of major countries

1000 Per capita consumption (Kg) 777 750 522 500 250 0 China Europe World Average USA Asia (ex china) India 348 342 301 131
Source: ICICIdirect.com Research
Cement consumption to GDP Multiple
Exhibit 6: Estimated cement demand from infrastructure sector

11th Five year Plan Investment expected from 11th Plan (Rs. Bn) Assumed that 70% will be spent Civil Construction (%) Cement Component(%) Total Cement (Rs. Bn) Cement Prices Rs/Tonne Total cement required (Mn Tonnes) Total Cement for 11th Five year Plan (Mn Tonnes) Roads/ Bridges 3142 2199 100 25 550 4200 131 295 Railways 2618 1833 42 20 154 4200 37 Urban Infra 1661 1163 60 33 230 4200 55 Irrigation 2533 1773 45 12 96 4200 23 Ports 880 616 45 30 83 4200 20 30 *Power 1760 1232
Average annual Cement consumption (Mn Tonnes) 59 *Cement demand as estimated by "White Paper on strategy for 11th Plan"
Source: Planning Commission, ICICIdirect.com Research
Exhibit 7: Year-wise planned expenditure

6500 6000 Investment in Rs Billion 5500 5000 4500 4000 3500 3000 2500 2000 FY08 FY09 FY10 FY11 FY12 2702.7 3215.8 3892.7 6.0 6.5 7.3 8.2 9.3 5959.1 10 9 8 6 5 4 3 2 1 0 as a % of GDP 7 4791.2
Investment in infrastructure (Rs Crore) (LHS)

Source: Planning Commission, ICICIdirect.com Research
Investment as % of GDP (RHS)
Exhibit 8: Estimated cement demand from real estate projects in Tier-I cities
City Mumbai Pune Chennai Delhi NCR Bangalore Hyderabad Kolkata Total Total developable area Cement consumptions per sq ft per tonne Cement demand over next two years (Mn Tonnes) Average annual cement consumption (Mn Tonnes)
Source: Industry, ICICIdirect.com Research
Residential (Mn.Sq.Ft.) Supply 19.2 14.5 28.4 164.8 59.0 58.7 31.9 376.6
Commercial (Mn.Sq.Ft.) Retail (Mn.Sq.Ft.) Supply Supply 6.2 NA 3.6 NA 5 NA 8 NA 9.1 NA 1.1 NA 1.25 NA 34.3 143.0 553.8 0.04 22.2 11.1
Oversupply unavoidable
About 62 MT of cement capacity is scheduled to come on stream by the end of FY10. We expect the capacity utilisation of the industry to drop from 95% in FY08 to 87% in FY09 and further to 79% in FY10. Thus, cement prices are likely to come under pressure from the beginning of the monsoon season. Exhibit 9: Demand-Supply scenario; Capacity Utilisation to drop Million Tonnes FY05 FY06 Effective Capacity 153.6 158.1 Production 127.6 141.8 Capacity Utilisation (%) 83 90 Domestic consumption 121.1 135.6 *Export 10.1 9.2 Import
Source: CMA, ICICIdirect.com Research *Cement and clinker
FY07 166.7 155.7 93 149.0 9.0
FY08 175.7 168.3 95 164.0 6.0 0.4
FY09 206.5 181.4 88 177.0 6.1 0.7
FY10E 246.0 195.6 79 189.8 5.8 0.0
Exhibit 10: Region wise capacity addition in FY10
12% 11% 47%
30%
South
North
East
West
Exhibit 11: Capacity addition in FY09

Capacity at the beginning of the year 2008-2009 was 198.30 Mn.T. Name of the Plant (a) New OCL India-Kapilas (G) Rain Comdt. Unit-II Line 2 India Cements-Vallur (G) UltraTech-Ginigera (G) Lakshmi Cmt-Kalol (G) Madras Cmts-Ariyalur Chettinad-Ariyalur Total (a) (b) Expansion Madras Cements - R.S. Raja Nagar Vasvadatta Cement Rain Comdt. Unit-1 Rain Comdt. Unit-II Line 1 My Home Indus. Ltd. Mangalam Cement J.K. Gotan Kesoram Cement Dalmia Cement Total (b) Total (a+b) st Capacity as on 31 March 2009 211.81 Mn.T.
State
Month of Commissioning May-09 Jun-09 Aug-09 Sep-09 Feb-09 Mar-09 Mar-09
Capacity Existing -
Capacity Added 0.9 2.0 1.1 1.3 0.6 2.0 2.0 9.9 0.6 0.5 0.4 0.1 0.4 0.5 0.4 0.3 0.5 3.7 13.5
Orissa A.P. T.N. KAR GUJ T.N. T.N.
TN KAR A.P. A.P. A.P. RAJ RAJ A.P. T.N.
Apr-09 Apr-09 Jun-09 Jun-09 Jun-09 Sep-09 Sep-09 Nov-09 Dec-09
1.2 3.7 1.0 0.5 2.8 0.5 0.1 1.2 3.5
Over the last 13 years, the steepest annual fall in cement WPI has been 3.4% as the quantum and timing of the decline has historically been different for different regions. Historically, the southern region has reported the highest decline in cement prices (due to its larger size and presence of a number of players) while the western region has shown least price declines. Exhibit 12: Cement WPI
240 220 200 WPI 180 160 140 120 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 5.0% 0.0% -5.0% 20.0% 15.0% 10.0% Change(%)
Change(%) (RHS)
Base Year 1992-93=100
WPI (LHS)
Note: Cement WPI indicates movement of average cement prices in India

Source: MOSPI, ICICIdirect.com Research
Exhibit 13: Cement price changes in major cities

30% 25% 20% 15% 10% 5% 0% -5% FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 -10% -15% -20% Delhi
Unlike other regions, prices in South had declined by 10% for 2 consecutive years
Mumbai
Chennai
Kolkata
We believe that moderate concentration of the industry and low leverage will prevent a very sharp decline in prices. It should be noted that in the last down cycle, the cement sector was not consolidated as ACC and Ambuja were not under one group and UltraTech was not a part of the AV Birla group. The top five players now control about 52% (38% by combined Holcim and AV Birla group) of the total capacity. Exhibit 14: Debt equity ratio of cement industry
4.0 3.5 Debt equity ratio (x) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Source: Capitaline, ICICIdirect.com Research
FY09
Exhibit 15: Herfindahl -Hirschman Index
Un-concentrated
Moderately concentrated
Highly concentrated
0.1
India Cement Industry
0.18
1.0
Note: HH Index is calculated by adding square of market share of industry players. The Indian cement industry has HHI of approx. 0.1, which indicates moderate concentration
An increase in the level of coordination in the industry was seen in the recent past in the northern region, which witnessed oversupply in the initial part of FY09. During April-November 08, when cement consumption grew by 6.3% in Rajasthan and only by 2.3% in the northern region, cement players were able to maintain retail cement prices on a YoY basis despite the fact that Rajasthan added 9.2 MT (38%) capacity while the northern region added 12.1 MT (33%) capacity during the period. However, prices had declined in the bulk cement segment. North-based players, having a presence in the bulk cement segment, reported a decline in net realisations of 6.5% YoY in Q3FY09 on account of their inability to pass on the higher excise duty on bulk cement due to weak demand. Exhibit 16: Installed capacity (million tonne) and consumption growth (%) Consumption Growth (%) Installed Capacity Apr-Nov'08 Nov'08 Nov'07 Capacity additions
Rajasthan Northern region 33.2 48.3 24 36.3 9.2 12.1 6.3 2.3
Exhibit 17: Cement prices in major northern cities

Rs/Bag Delhi Jaipur Ludhiana Chandigarh Jammu Nov'08 233 220 241 237 296 Nov'07 232 213 231 229 285 Var.(%) 0% 4% 4% 3% 4%
10
In order to recover cost of capital, a cement company should earn EBITDA per tonne of Rs 700 on a Greenfield plant and Rs 490 on a brownfield plant. Thus, even with 10% price correction and over Q3FY09 levels, cement industry will be able to recover its cost of capital. The actual price decline will also be a function of the decline in average cost of production of the industry. Exhibit 18: Sustainable EBITDA per tonne for cement industry
(a) Average Realisations 3493 (b) Average EBITDA Per tonne 946 (c) Capex For Greenfield 5000 (d) Cost of capital 14% (e) Required EBITDA per tonne (c*d) 700 (f) Decline in EBITDA per tonne (b-e) 246 (g) Implied decline in cement price( f/a) 7% (h) Capex For Brownfield 3500 (i) Required EBITDA per tonne (h*d) 490 (j) Decline in EBITDA per tonne (b-i) 456 (k) Implied decline in cement price (j/a) 13% (h) *Average Implied decline in cement price((k+g/2)) 10% *assuming cost structure remain same and no capacity is added by debottlenecking
Exhibit 19: Cement stock price index and major developments

6000 5000 4000 3000 2000 1000 0 Dec-07 Oct-07 Feb-07 Feb-08 Oct-08 Jul-07 Sep-07 Jul-08 Nov-07 Sep-08 Mar-07 Mar-08 Nov-08 Apr-07 Apr-08 May-07 May-08 Jan-07 Jan-08 Jun-07 Aug-07 Jun-08 Aug-08 Dual excise duty on cement introduced Ad valorem duty introduced Abolition of CVD & SAD Excise duty on clinker increased to Rs 450/tn and on bulk cement increased to Rs 400/tn or 14% Export allowed from Gujarat ports Cenvat duty cut of 4% Dec-08 Feb-09 Mar-09 Jan-09 Import duty withdrawn Cement players agreed to hold prices Liberalisation in imports from Pakistan Export ban Cement clinker ban onexport to Nepal lifted Excise duty on bulk cement decreased to Rs 230/tn or 8%
Source: CMIE, ICICIdirect.com Research
11
Subsiding cost pressure to cushion margins in near term

Power & fuel constitutes 30-35% of the total expenditure for cement manufacturers. Companies mainly use coal and petcoke as fuel for power plants and kilns during the process of making cement. Due to worsening of the macroeconomics scenario, international coal and domestic petcoke prices have corrected by 67.8% and 49%, respectively, from their peak levels. The correction in sea freight has further reduced the landed cost of imported coal. The benchmark index for sea freights, the Baltic Dry Index is 80.8% down from its peak level. However, part of the benefit of softening of international coal prices has been taken away by a weaker rupee, which has deprecated 31% YoY. Exhibit 20: Baltic Dry Index & international coal prices
200 175 USD per Tonne 150 125 100 75 50 25 0 Jul-08 Oct-07 Apr-08 Jun-08 Jan-08 Nov-07 Mar-08 Sep-07 Dec-07 Feb-08 Aug-07 May-08 May-08 80.8% decline from peak of 11612 Oct-08 Nov-08 Sep-08 Dec-08 Aug-08 $57/Tonne 67.8% decline from peak of $177/tonne 14000 12000 10000 8000 6000 4000 2000 2225 Jan-09 Mar-09 Feb-09 0
Baltic dry Index (RHS)

Note: Baltic Dry Index indicates the movement of sea freight rate
Source: Bloomberg, ICICIdirect.com Research
Coal price Richards Bay, South Africa (LHS)
Exhibit 21: Rupee US dollar exchange rate

52 50 48 46 44 42 40 Aug-08 Mar-08 May-08 May-08 Nov-08 Apr-08 Jun-08 Oct-08 Mar-09 Dec-07 Jan-08 Sep-08 Dec-08 Jan-09 Feb-08 Jul-08 Feb-09 38 Rupee has depreciated nearly 31% from its peak of 39.8, which has partly neutralised the benefits of decline in international coal prices.
Source: Reuters, ICICIdirect.com Research
12
Exhibit 22: Thermal coal prices spot prices, NCDEX

4800 4500
Rs per Tonne
4200 3900 3600 3300 3000 Oct08 Oct08
33% decline from its Sept high of Rs 4560/tonne
Rs 3430/tonne Jan09 Nov08 Sep08 Dec08 Dec08 Feb09 Mar09

4053 3271
Source: NCDEX, ICICIdirect.com Research
Exhibit 23: Domestic petcoke prices

7000 6343 6073 6000 Rs per tonne 5956 6073 5807 6366 6065
5000
4793
4000
3000 Apr-08 Jul-08 Aug-08 Jun-08 Nov-08 Sep-08 Oct-08 May-08 Jan-09 Dec-08
13
As far as domestic linkage of coal prices is concerned, it was last revised in Q3FY08 by 10-15%. Players, who depend on domestic coal, are unlikely to see a sharp decline in their average coal cost per tonne due to a decline in incremental coal linkages. Exhibit 24: Fuel receipts by cement industry (in million tonne)
Receipts against linkage 10.5 10.3 10.3 10.1 10.5 9.6 8.2 9.0 9.7 11.1 12.4 13.3 14.8 14.8 14.4 14.6 Coal production 238.3 246.0 253.8 270.1 285.7 296.1 290.8 299.3 309.8 323.0 324.2 356.2 376.6 407.0 430.9 457.0 Coal Receipts as % of Coal production 4.4 4.2 4.1 3.7 3.7 3.2 2.8 3.0 3.1 3.4 3.8 3.7 3.9 3.6 3.3 3.2
Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Coal linkage 15.6 15.7 17.0 18.0 16.9 17.1 14.1 13.8 13.5 15.1 15.7 16.1 17.1 17.1 15.5 16.4
Source: CMA, Crisil, Coal India, ICICIdirect.com Research
Exhibit 25: Pithead coal prices

1200 1000 Rs per tonne 800 600 400 200 0
Note: Coal prices are for D-grade coal from Singareni Collieries. Source: Crisil, ICICIdirect.com Research
Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07
14
Exhibit 26: Fuel mix of ICICIdirect.com cement universe Company Domestic Coal(%) Imported Coal(%) ACC 85 15 Ultra Tech Cement 57 43 Shree Cement 0 0 Dalmia Cement 0 100 India Cement 30 70 JK Cement 10 0 Orient Paper 100 0 Ambuja Cement 70 30
Source: Company, ICICIdirect.com Research
Petcoke(%) 0 0 100 0 0 90 0 0
Exhibit 27: Fuel and power cost of major players for FY08/CY07 Power cost per unit Average per tonne coal of Fuel in last FY08/CY07
Company ACC #Ambuja Cement #India Cement #Ultra Tech *Shree cement *JK Cement Orient Paper Dalmia Average *Use Petoke # Imported Coal
Rate/tonne for coal used in Klin CPP cost per unit 2580 2.44 2.06 3863 NA 3017 1.73 4587 2.16 4118 3.12 2018 NA 4349 3.9 3586 2.6
Grid cost per unit 3.55 3.62 3.22 4.69 5.38 4.33 3.1 2.5 3.8
% of power requirement met through CPP(Coal &pet coke based) 59 52 NA 23 95 52 0 25 52
Exhibit 28: Electricity consumption per tonne of cement

100 90 80 70 60 50 40 30 20 10 0 ACC Ambuja Cement India Cement Ultra Tech Shree cement *JK cement Orient paper Dalmia KWH/tonne 89 89 93 85 79 80.7 74
85
*Including white cement Source: Company, ICICIdirect.com Research
15
Crude oil prices have also corrected by 66% from their peak. This, in turn, has led to a saving in packing cost (decline of about Rs 4 per bag) and cut in domestic diesel prices by Rs 2 per litre each in December 08 and January 09. However, Indian Railways has changed the product classification for cement and coal in December 08, which has resulted in an increase of 7-8% in freight charges. Apart from this, Railways has continued to levy a busy season surcharge of 7%. About 38% of the total industry volumes are dispatched by rail. With a worsening of the demand-supply situation, the lead distance to market is also expected to increase. Thus, we do not expect any significant saving in freight cost for the cement industry, which constitutes 25-30% of the total expenditure for cement manufactures. Exhibit 29: Transport mix
Company ACC Ultratech Cement Shree Cement JK Cement Dalima Cement Orient Paper Ambuja Cement Road 50 56 70 78 70 60 65 Rail 50 37 30 22 30 40 6 Sea 0 7 0 0 0 0 29
Exhibit 30: International crude oil prices & domestic diesel price
40 39 38 Rs per litre 37 36 35 34 33 Jan-08 D ec-07 A pr-08 M ar-08 Feb-08 M ay-08 32

Govt has cut diesel prices by Rs 4 per ltr
160 140 120 100 80 60 40 20 O ct-08 D ec-08 S ep-08 Jan-09 M ar-09 N ov-08 Feb-09 0 U S$ per barrel
Diesel (LHS)
A ug-08
Jun-08
Jul-08
Crude Oil (RHS)
16
Exhibit 31: Indian road freight index

174 173 173 172 172 171 171 170 May-08 Aug-08 Oct-08 Mar-09 Jun-08 Nov-08 Dec-08 Sep-08 Jan-09 Jul-08 Feb-09 171 172 172 172 172 172 171 171 171 171 173
Source: TCIL, ICICIdirect.com Research
Exhibit 32: HDPE prices (packing material)
2500 2000
USD per tonne
1500 1000 500 0
USD 970 Per tonne
Apr-08
Oct-08
Dec-08
Aug-08
Sep-08
Nov-08
Mar-08
Feb-09
Jun-08
Jan-09
May-08
Mar-09
Jul-08
17
In Q3FY09, the impact of receding cost pressures was already visible in the form of sequential improvement in financials of some of the cement companies. It should be noted that high cost inventories and contracts that cement players had entered into, have prevented major cost relief in Q3FY09. Q3FY09 Result review Exhibit 33: QoQ (Q3FY09 vs. Q2FY09) change in OPM (in bps)
600 400 200 bps 0 -200 -400 -600 -800 ACC -10 -420
520
510
520 270 -100
-680 Ambuja UltraTech India Cement Cement Cement Shree Cement JK Cement Orient Paper Dalmia Cement
Exhibit 34: QoQ (Q3FY09 vs. Q2FY09) % change in net profit and operating profit
80 60 QoQ growth(%) 40 20 0 -20 -40 -60 ACC Ambuja Cement UltraTech Cement India Cement Shree Cement JK Cement Orient Paper Dalmia Cement -45 22 7 0 0 -38 45 45 24 11 61 38 13 10 -14 -41
Net Profit Growth Q0Q (%)

Operating Profit growth QoQ (%)
18
Recommendation
Some of the cement stocks are currently trading at valuations lower than the value given to loss making cement companies in the last 10 years. This is despite the fact that the replacement cost for cement companies has increased significantly over the last decade. We believe that long-term value has emerged in select cement stocks and companies that have completed a majority of their capex, undertaken cost-cutting measures or have a low cost structure and have lower earning sensitivity to price declines. These companies will be better off than their peers. Timely capex will reduce the payback period while low cost structure will enable them to cut prices and push volumes in a down cycle. We prefer UltraTech in large caps, Shree Cement in mid caps and JK Cement and Orient Paper in small caps. Our rating rationale is based on P/E & earnings risk, RoNW, EBITDA margins & EV per tonne and normalised P/E & RoNW matrix. We believe that as the cement sector is expected to witness a surplus in the near future, earnings risk will be key rather than CAGR of earnings (PEG). We have estimated the earning risk of cement companies by estimating the impact of cement price decline on earnings. Cement being a cyclical industry, we have also considered EV per tonne and normalized P/E as during a downturn, earnings contract significantly on account of the companies high earnings sensitivity to cement prices. We have calculated normalised earnings of cement companies by multiplying book value with normalized RoNW (average of business cycle RoNW). Cyclical industry stocks normally have a low P/E at the end of boom and a high P/E at the end of a down cycle. Use of normalized P/E reduces this anomaly. We have used this valuation methodology for pure cement companies having a long history. It is inappropriate to use it for diversified companies as the portion of capital employed in a cement division changes over a period of time. Exhibit 35: Some past M&A deals
Year 1998 1998 1999 2003 2005 2006 2007 2008 2008 Acquirer Guj Ambuja Grasim Ambuja Grasim Holcim Holcim Cimphor CRH Vicat Target Modi Sri Digvijay ACC L&T cement ACC Guj Ambuja Sri Digvijay My Home Sagar Capacity (mt) EV/tonne (US$) 2 42 1.1 41 12 144 17 82 18 110 13.4 195 1 152 3 220 2.5 105
19
Exhibit 36: RoNW vs. EV/tonne
50 RoNW (%) 40 30 20 10 0 0 20 40 60 EV/Tonne (US$) ACC India Cem

80
100
120
Ambuja JK Cem
UltraTech Orient Paper
Shree Cem Dalmia Cem
Note: The size of the bubble indicates FY10E/CY09E OPM (%) Exhibit 37: FY10 P/E vs. earnings risk
10 Earnings risk (%) 8 6 4 2 0 1.0 3.0 5.0 P/E ACC India Cem
7.0
9.0
11.0
Ambuja JK Cem
UltraTech Orient Paper
20
Exhibit 38: FY10 Normalised P/E & normalised RoNW (%)

24 20 Normalized P/E 16 12 8 4 6 7 8 9 10 11 12 13 Normalized RoNW(%) ACC
Ambuja
Shree
India Cem
Exhibit 39: Earnings yield (%) & Earnings CAGR (%)

20 Earning CAGR(%)
AAA bond yield As ACC and Ambuja has a negative earning CAGR with earning yield close to AAA bond, investors have no reward for bearing systematic risk in these stocks
0 5 -20 10 15 20 25 30 35 40 45
-40 Earning yield(%) ACC JK Cem

Ambuja Orient Paper
India Cem UltraTech
21
Exhibit 40: Q3FY09 cost structure of cement industry

3350 2850 Rs Per tonne 2350 1850 1350 850 350 -150 ACC Ambuja Cement India Cement Ultra Tech Shree Cement *JK cement
Stock Adj
Raw material
Employee cost
Power and Fuel
Freight
Other Expenditure
EBIDTA
*includes White Cement Source: Company, ICICIdirect.com Research
Exhibit 41: Valuation matrix EPS P/E EV/EBITDA EV/Tonne FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 ACC 67.5 62.5 51.6 9.1 9.9 12.0 5.4 6.0 7.3 94.8 94.9 88.4 Ambuja 8.3 7.4 7.2 9.7 10.7 11.1 5.2 6.6 6.2 121.7 109.1 106.3 UltraTech 80.4 75.9 68.7 6.8 7.2 8.0 4.8 5.1 4.6 94.1 76.1 61.7 Shree Cem 82.6 152.2 131.6 9.6 5.2 6.0 3.5 2.9 2.4 69.0 60.2 45.0 India Cem 23.5 18.6 19.0 5.2 6.5 6.4 4.2 3.9 3.6 105.7 86.8 59.4 JK Cem 37.9 18.4 22.3 1.4 2.9 2.4 1.8 5.4 3.3 34.8 67.6 36.1 Orient Paper 10.9 12.2 9.3 2.6 2.5 3.0 1.9 1.8 1.7 33.6 33.5 17.7 Dalmia Cem 43.0 18.2 17.4 2.2 5.2 5.5 3.5 5.7 4.4 79.8 115.8 59.9
Source: Company, ICICIdirect.com Research Note: ACCs and Ambujas numbers are for CY07, CY08 and CY09
RoNW (%) FY08 FY09 FY10 34.8 25.9 18.7 30.8 21.9 18.0 45.2 30.4 21.8 51.1 59.1 34.7 32.9 18.8 16.8 41.5 15.7 16.3 66.9 38.5 24.3 36.6 12.1 10.3
FY08 39.7 39.6 40.7 26.6 24.3 26.0 59.7 22.9
RoCE (%) FY09 FY10 32.8 23.9 27.7 23.1 28.9 23.4 35.5 26.9 18.6 17.4 12.5 13.5 39.7 27.0 10.7 10.0
22
Initiating Coverage
Ambuja Cements (GUJAMB)

Unjustified premium
Ambuja Cements (ACL) is trading at steep premium to its peers despite not having best return ratios and margins in the industry. Also, company is adding 4.5 million tonnes (MT) of new capacity by CY11, the time by which the demand-supply situation will turn adverse. With realisation and capacity utilisation set to fall, we expect EPS to decline by 12.5% CAGR (CY08-CY10). Hence, we are initiating coverage on the stock with an UNDERPERFORMER rating on account of its expensive valuations.
Current Price Rs 80 Potential upside -20%
Target Price Rs 64 Time Frame 12 months
UNDERPERFORMER
Analysts Name Ravi Sodah ravi.sodah@icicidirect.com Vijay Goel vijay.goel@icicidirect.com Sales & EPS trend
6,400 6,200 6,000 5,800 5,600 5,400 CY06 CY07 CY08 CY09E CY10E 15 Rs 10 5 0
Capacity addition to bring modest volume growth

Ambuja has expanded its capacity to 22 MT by adding 3.5 MT in CY08. The company is planning to further add 4.5 MT, which will take its capacity to 26.5 MT by CY11. 4.5 MT of capacity is scheduled to come on stream after mid CY09, the time by which the demand-supply situation will turn adverse.
Industry to face demand-supply mismatch; pricing pressure ahead

With 62 MT of capacity addition in FY10 and an expected slowdown in construction activities, we expect the demand-supply scenario to worsen. We have seen demand growth in the last couple of months on the back of pre-election spending and the governments stimulus packages. However, we believe this is a temporary relief for the players. We expect a decline in realisations and capacity utilisation.
Rs Crore
Net Sales
EPS
Stock Metrics
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes ACEM IN ABUJ.BO 2 46% 13064 119 / 43 10947 335798
Cement exports to come under pressure

Ambuja has exported 0.8 MT of cement (4.7% of the total sales volume) in CY08. The company mainly exports to Middle East countries. As the infrastructure and real estate projects around the Middle East slow down, Ambuja will find it difficult to divert higher volumes to export.
Valuations
At the CMP of Rs 80, Ambuja Cement is trading at 11.1x and 14.0x its CY09E and CY10E earnings, respectively. On an EV/tonne basis, it is trading at $106/tonne and $94/tonne of its CY09E and CY10E capacities, respectively. Thus, we are initiating coverage on Ambuja Cement with an UNDERPERFORMER rating and a target price of Rs 64.
Exhibit 1: Key Financials
Net Profit EPS % Growth P/E (x) P/BV (x) EV/EBITDA (x) OPM% NPM % RoNW % RoCE % CY06 1,461.5 9.6 8.3 3.5 5.4 34.0 23.3 51.6 45.2 CY07 1,256.5 8.3 -14.3 9.7 2.6 5.2 35.8 22.0 30.8 39.6 CY08 1,133.5 7.4 -9.8 10.7 2.1 6.6 27.4 18.2 21.9 27.7 CY09E 1,093.6 7.2 -3.5 11.1 1.9 6.2 29.7 17.7 18.0 23.1 CY10E 868.8 5.7 -20.6 14.0 1.7 6.7 25.2 13.9 12.8 16.9
Comparative return metrics
Stock return(%) Ambuja Cements ACC India Cement Ultratech Cement

Price Trend
140 120 100 80 60 40
3M 18 25 18 53
6M 47 28 35 52
12M -25 -23 -30 -28
Dec-
Aug-
Oct-
Apr-
Feb-
Jun-
Close Price
Target Price
23
Apr-
Company Background
Ambuja Cements was set up in 1986. The company is controlled by the Holcim group, which owns 45.68% of the company. The total capacity of the company, as on CY08, is 22 MT. Ambuja has a presence in the north, east and western regions of India. Its plants are situated in Gujarat, Maharashtra, Himachal Pradesh, Punjab, Rajasthan, Uttarakhand, Chhattisgarh and West Bengal. Ambuja has bulk cement terminals at Muldwarka (Gujarat), Panvel, Navi Mumbai and Surat. Ambuja is the largest exporter of cement in India. The company largely exports to the Middle East. The company was one of the first to be equipped with a shipping fleet and make use of the sea as a medium to transport cement across the globe. It has a port terminal at Muldwarka, Gujarat that handles ships with 40,000 DWT. Exhibit 2: Region wise capacity break up(as on Mar09)
Share holding pattern (Q4CY08)

Shareholder Promoters Institutional investors Other investors General public % holding 46.47 37.91 11.00 4.62
Promoter & Institutional holding trend (%)

100% 80% 60% 40% 20% 0% Q1 Q2 Q3 Q4 46% 38% 46% 37% 46% 37% 46% 37%
Promoter Holding
22% 35%
Institutional Holding
43%
North
West
East
24
Investment Concerns
Capacity addition to bring modest volume growth
Ambuja has expanded its capacity to 22 MT by adding 3.5 MT in CY08. The company is planning to further add 4.5 MT, which will take its capacity to 26.5 MT by CY11. 4.5 MT of capacity is scheduled to come on stream after mid CY09, the time by which the demand-supply situation will turn adverse. Thus, the sales volume of Ambuja is expected to grow at a CAGR of only 5.7% (CY08-CY10) while the end of the year installed capacity is expected to grow at 8% CAGR during the same period. Exhibit 3: Capacities commissioned in CY08 (million tonnes)
Location Surat (GJ) Bhatapara (CG) Maratha (Chandrapur) Total Caoacity 1 1 1.5 3.5 Completion CY08 CY08 CY08
Exhibit 4: Capex plan (million tonnes)

Location Bhatapara (CG) Ahemdabad (GJ) Rauri (HP) Dadri (UP) Nalagarh (HP) Total Grinding 1.5 1.5 1.5 4.5 Clinker 2.2 2.2 4.4 Expected Completion Mid 2009 First half of 2011 End of 2009 Mid 2009 First half of 2010
Industry to face demand-supply mismatch; pricing pressure ahead

With around 62 MT of capacity addition in FY10, we expect the demandsupply scenario to worsen. We have seen demand growth in the last couple of months on the back of pre-election spending and governments stimulus packages. However, we believe this is a temporary relief for the players. We expect a decline in realisations and capacity utilisation.
Cement exports in difficulty; gulf region faces oversupply
Ambuja has exported 0.8 MT of cement (4.7% of the total sales volume) in CY08. The company mainly exports to Middle East countries. As infrastructure and real estate projects around the Middle East slow down, Ambuja will find it difficult to divert higher volumes to exports.
25
Financials
Earnings to decline
During CY08-CY10, Ambujas net sales are expected to remain flat, a CAGR of 0.1% to Rs 6243 crore in CY10 from Rs 6235 crore in CY08 on account of 5.3% CAGR decline in realisation in the next two years. However, the sales volume is expected to grow at a CAGR of only 5.6% (CY08-CY10). Exhibit 5: Revenue to remain flat; volume to grow by 5.6% CAGR
7000 6000 5000 4000 3000 2000 1000 0 CY05 CY06 CY07 Sales
25 20 15 10 5 0 CY08 Sales Volume CY09E CY10E
The operating profit is expected to decline by 4.0% CAGR to Rs 1573.2 crore in CY10 from Rs 1708.7 crore in CY08 on account of a decline in operating margin. Exhibit 6: Margins to decline
40 35 30 25 20 15 10 CY06 CY07 CY08 EBITDA margin (%) CY09E NPM % CY10E 23.3 22.0 18.2 17.7 13.9 34.0 35.8 27.4 29.7 25.2
26
The reported net profit is expected to decline by 21.3% CAGR to Rs 869 crore in CY10 from Rs 1402 crore in CY08 as Ambuja had a high base in CY08. The company had a net extraordinary income on account of sale of investments, change in inventory policy and one-time retirement benefits charges. Thus, the adjusted PAT is expected to decline by 12.5% CAGR to Rs 869 crore in CY10 from Rs 1134 crore in CY08.
Return ratios to decline

Exhibit 7: RoNW & RoCE
50% 40% 30% 20% 10% 0% CY07 CY08 RoNW
39.6% 27.7% 30.8% 21.9% 16.9% 18.0% 12.8% 23.1%
CY09E ROCE
CY10E
27
Risks to our call

Captive power usage
Ambuja sources around 64% of its power requirements from captive power generation. During 2008, one new 18.7 MW power plant was commissioned at the Rabriyawas plant. Additional captive power projects are in progress at Ambujanagar, Bhatapara and Maratha. These will add approximately another 90 MW, most commissioned in 2009 and taking the total capacity to more than 400 MW. For CY08, the average cost of power generation from coal-based CPP was Rs 2.60/Kwh as against Rs 3.86/Kwh for the power purchased from grid.
Strong balance sheet

Ambuja has cash and bank balance of Rs 852 crore and investments of Rs 332 crore at the end of CY08. It has a debt/equity ratio of 0.05 at the end of CY08. We expect it to further reduce to 0.03 by CY10 as the companys total capex plan of Rs 3500 crore will be funded totally through internal accruals.
Cost pressure eases
The company meets 30% of its fuel requirement through imported coal. As international coal prices have dropped sharply by 67.8% from their peak, the company is expected to benefit from the March quarter only because it had been consuming high-cost coal inventory till now. With a worsening of the demand-supply scenario, the lead distance of the company to the markets is expected to increase. However, the cut in diesel prices by Rs 4/litre would enable the company to maintain its freight cost at current levels on a per tonne basis.
Quantum of clinker purchase to decline in future

Ambuja purchased 7.04 lakh tonnes of clinker (Rs 231.7 crore) in CY08 accounting for 38% of the total raw material cost. With new clinker capacities coming up, the company is likely to reduce clinker purchase in CY09 and CY10. The impact on the EBITDA margin of using purchased clinker rather than own produced clinker is approximately 260 bps.
28
Valuations
On an EV/tonne basis, Ambuja is trading at a steep premium to its peers despite the fact that it does not have the best return ratios and best margins in the industry. Even on a P/E basis, it is trading at richer valuations to its peers despite the fact that it does not have the lowest earnings risk in the industry. At the CMP of Rs 80, Ambuja Cement is trading at 11.1x and 14.0x its CY09E and CY10E earnings, respectively. On an EV/tonne basis, it is trading at $106/tonne and $94/tonne its CY09E and CY10E capacities, respectively. Thus, we are initiating coverage on Ambuja Cement with an UNDERPERFORMER rating and a target price of Rs 64. Exhibit 8: Movement of EV/tonne with change in RoE and RoCE
300 250 200 EV/tonne ($) 150 100 50 0 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 CY07 CY08E CY09E CY10E 55 45 35 %
P/CEPS & EV/EBITA
25 15 5 -5
EV/Tonne ($) (RHS)
ROE(%) (LHS)
ROCE (%) (LHS)
Exhibit 9: P/BV, Market cap to sales, P/CEPS, EV/EBITDA

7 6 P/BV & Mcap/ Sales 5 4 3 2 1 0 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 CY07 CY08E CY09E CY10E 25 20 15 10 5 0
P/BV (LHS)
M Cap/Sales (LHS)
P/CEPS (RHS)
EV/EBIDTA (RHS)
29
Profit and Loss Account

Year Ending March 31 Net Sales % Growth Total Expenditure EBITDA Other income Depreciation Interest Extra ordinary items PBT Taxation Reported PAT Extra ordinary items(net of tax) Adjusted PAT EBITDA margin (%) NPM % Shares O/S (crore) EPS (Rs) CY06 6,274.5 4138.1 2136.4 94.1 326.1 113.2 47.5 1838.7 338.4 1500.3 38.8 1461.5 34.0 23.3 151.7 9.6 CY07 5,704.8 -9.1 3659.7 2045.1 193.5 236.3 75.9 785.9 2712.4 943.3 1769.1 512.6 1256.5 35.8 22.0 152.2 8.3 CY08 6,234.7 9.3 4456.7 1708.7 175.4 259.8 32.1 377.6 1969.9 567.6 1402.3 268.8 1133.5 27.4 18.2 152.3 7.4 CY09E 6,187.8 -0.8 4348.4 1839.4 114.0 398.3 14.9 0.0 1540.3 446.7 1093.6 0.0 1093.6 29.7 17.7 152.3 7.2
Rs Crore
CY10E 6,243.0 0.9 4669.8 1573.2 91.0 413.3 9.8 0.0 1241.1 372.3 868.8 0.0 868.8 25.2 13.9 152.3 5.7
Rs Crore
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability Total Liability Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Current Liabilities & Provisions Miscellaneous Expenditure Total Asset CY06 304.5 3,187.2 317.8 547.6 383.9 4,741.0 2,489.2 634.9 1,133.1 378.1 90.0 408.8 295.7 701.6 12.8 4,741.0 CY07 304.9 4,356.4 100.0 230.4 378.4 5,370.1 2,959.9 696.8 1,288.9 642.6 145.7 581.6 205.4 1,169.1 18.3 5,370.1 CY08 304.9 5,368.0 100.0 188.7 380.8 6,342.3 3,192.8 1,947.2 332.4 851.8 224.6 939.8 299.9 1,473.8 27.7 6,342.3 CY09E 304.9 6,156.0 100.0 158.7 380.8 7,100.3 5,902.8 112.7 332.4 736.9 222.9 916.9 297.6 1,449.4 27.5 7,100.3
CY10E 304.9 6,782.0 100.0 128.7 380.8 7,696.3 5,821.3 0.0 332.4 1,526.7 224.9 984.7 300.3 1,521.8 27.7 7,696.3
30
Cash Flow Statement

Year Ending March 31 Profit Before Tax Depreciation Changes In working Capital Others Cash Flow from Operating activities Inc/Dec in Investment
Capex
Rs Crore
CY06 1,841.6 326.1 46.3 (412.3) 1,801.7 87.8 (756.4) 36.0 (632.7) 48.1 (340.2) (596.7) (888.9) 280.2 98.0 378.1
CY07 2,712.4 236.3 (117.9) (1,279.1) 1,551.8 266.8 (521.5) 91.8 (162.9) 32.3 (525.3) (631.4) (1,124.4) 264.4 378.2 642.6
CY08 1,969.9 259.8 (261.2) (1,002.2) 966.2 1,241.7 (1,641.5) 125.0 (274.9) 1.2 (43.4) (439.9) (482.1) 209.3 642.6 851.8
CY09E 1,540.3 398.3 2.6 (511.2) 1,429.9 0.0 (1,273.8) 79.4 (1,194.4) 0.0 (30.0) (320.5) (350.5) (115.0) 851.8 736.9
CY10E 1,241.1 413.3 (0.3) (418.9) 1,235.2 0.0 (219.1) 56.3 (162.8) 0.0 (30.0) (252.5) (282.5) 789.9 736.9 1,526.7
others Cash Flow from Investing activities Inc/Dec in capital Inc/Dec in Loan Funds Others Cash Flow from Financing activities Net Inc/dec in cash Opening Balance of Cash Closing Balance of Cash
Ratios
Year Ending March 31 EPS Cash EPS OPM (%) NPM (%) Debt/Equity RoCE (%) RoNW (%) Valuation Ratios P/E (x) P/BV (x) EV/EBITDA (x) EV/Tonne (US$) Turnover Ratios Fixed asset turnover ratio inventory turnover ratio Debtors turnover ratio CY06 9.6 12.0 34.0 23.3 0.25 45.2 51.6 8.3 3.5 5.4 150.0 1.4 10.1 92.4 CY07 8.3 13.2 35.8 22.0 0.07 39.6 30.8 9.7 2.6 5.2 121.7 1.1 6.3 48.4 CY08 7.4 10.9 27.4 18.2 0.05 27.7 21.9 10.7 2.1 6.6 109.1 1.1 4.7 33.7 CY09E 7.2 9.8 29.7 17.7 0.04 23.1 18.0 11.1 1.9 6.2 106.3 0.7 4.7 27.7 CY10E 5.7 8.4 25.2 13.9 0.03 16.9 12.8 14.0 1.7 6.7 93.7 0.7 4.7 27.9
31
Initiating Coverage

Target Price Rs 81 Time Frame 12-15 months
Dalmia Cement (DALCEM)

Caught in equity market woes
Dalmia Cement (Bharat) (DCBL) is expanding its capacity from 3.5 million tonnes (MT) to 8 MT. All plants of the company will be located in the southern region, which is expected to have surplus supplies in the next financial year. This will lead to deterioration in the return ratio below WACC. Apart from this, DCBL has had notional loss on its investments and has highest leverage in our coverage universe. Hence, we are initiating coverage on the stock with an UNDERPERFORMER rating and one-year target price of Rs 81 per share.
UNDERPERFORMER
Analysts Name Ravi Sodah ravi.sodah@icicidirect.com Vijay Goel vijay.goel@icicidirect.com
Regional player
The company has presence only in southern markets. Out of the expected 62 MT capacity addition at an all-India level in FY10, around 47% is coming up in the southern region, which will lead to a worsening
Sales & EPS trend

3000 2500 2000 60 50 40
Rs Crore
High debt to equity

DCBL has total capex of around Rs 1250 crore and is funded by debt of Rs 1100 crore and balance through internal accruals. The company has debt equity ratio of 1.9 for FY09E, highest among our coverage universe.
1000 500 0 FY07 FY08 FY09E

Net Sales
20 10 0 FY10E
EPS (Rs)
FY11E
High exposure to equity investments

DCBL has exposure to equity market investments on which it had a notional loss of Rs 160 crore on its investment books as on December 31 2008.
Stock Metrics
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes DCB IN DLMI.BO 2 54.8% 792 355 / 67.2 10947 21736
High debt to increase payoff period

The company is adding capacity at nearly Rs 2778/tonne. 80% of the capex has been funded through debt. The payoff period for the company after accounting for interest expense and interest accrued during the moratorium period will be close to six years.
Valuations
At the CMP of Rs 95, DCBL is trading at 5.2x and 5.5x its FY09E and FY10E earnings, respectively. On an EV/tonne basis, it is trading at $116/tonne and $60/tonne its FY09E and FY10E capacities, respectively. We are initiating coverage on the stock with an UNDERPERFORMER rating and a target price of Rs 81.

Stock return(%) Dalmia Cem Jk Cem Shree Cem Orient Paper 3M 28 36 69 56 6M 1 -18 74 46 12M -65 -62 -24 -33
Exhibit 1: Key financials

Net Profit EPS % Growth P/E (x) P/BV (x) EV/EBITDA (x) OPM% NPM % RoNW % RoCE % FY07 230.2 53.8 1.8 0.5 3.7 25.0 23.0 39.0 22.8 FY08 348.0 43.0 -20.1 2.2 0.7 3.5 32.0 23.0 36.6 22.9 FY09E 147.3 18.2 -57.7 5.2 0.6 5.7 25.0 8.0 12.0 11.0 FY10E 140.5 17.4 -4.6 5.5 0.5 4.4 22.0 6.0 10.0 10.0 FY11E 105.2 13.0 -25.2 7.3 0.5 4.5 18.0 4.0 7.0 9.0
Price Trend
330 280 230 180 130 80 30
Mar-
May-
Nov-
Sep-
Close Price
Target Price
Jan-
32
Mar-
Jul-
Rs
1500
30
Company Background
Share holding pattern (Q3FY09)
Dalmia Cements (Bharat) Ltd (DCBL) was established in 1935. DCBL has two major business segments cement and sugar. The company started its cement operations in 1939. DCBL has a presence only in the southern region. The companys other product profile includes power, refractories and refractory products, multilayer ceramic chip capacitors, industrial Promoter & Institutional holding trend (%) alcohol and others. DCBL has a current cement capacity of 3.5 MT with a plant in Tamil Nadu. The company is in the process of expanding its cement capacity by 4.5 MT by setting up plants at Kadapa, Andhra Pradesh and Ariyalur, Tamil Nadu of 2.25 MT each. DCBL has expanded its sugar business to 22500 TCD at three locations of Uttar Pradesh with cogeneration power plant capacity of 79 MW and ethanol plant with a capacity of 80 KL per day. The company also has a 16-MW wind farm power generation unit. The power generated from this unit is utilised for consumption at the cement unit by wheeling through the state electricity grid. Exhibit 2: Revenue mix (FY08)
5% 18%
100% 80% 60% 40% 20% 0% Q4 Q1 Q2 55% 55% 55%
55%
5%
5%
5%
6% Q3
Promoter Holding
77%
Cement
Sugar
Others
Exhibit 3: Cement geographical mix (FY08)

4%
9%
27% 60%
Tamil Nadu
Kerala
Karnataka
Others
33
Investment concerns
Regional player
The company has 100% presence in the southern markets. Out of the expected 62 MT capacity addition at an all-India level, around 47% is coming up in the southern region in FY10. This will lead to a worsening of the demand-supply scenario.
High debt to equity

DCBL has a total capex of around Rs 1250 crore and is funded by debt of Rs 1100 crore with the balance through internal accruals. The company has a debt equity ratio of 1.9 for FY09E. This is the highest in our coverage universe. However, the debt repayment will start after two years. Thus, we do not expect the company to face a cash crunch for two years.
High debt to increase payoff period

The company is adding capacity at nearly Rs 2778/tonne. 80% of the capex has been funded through debt. The payoff period for the company after accounting for interest expense and interest accrued during the moratorium period will be close to six years.
High exposure to equity investments

The company has exposure to equity market investments on which it had notional loss of Rs 160 crore on its investment books as on December 31 2008.
High-cost coal inventories procurement till Q4FY09

Dalmia had procured imported coal at nearly $190 per tonne. We expect these high-cost coal inventories to be consumed by Q4FY09. Thus, it will depress the Q4FY09 earnings of the company. We expect the company to only benefit in terms of coal cost from Q1FY10 as imported coal prices have corrected by nearly 67.8% from their peak.
34
Financials
Topline to grow at 22% CAGR (FY08-FY11)
Net sales is expected to grow at 23.1% CAGR (FY08-FY11) to Rs 2762.7 crore in FY11 from Rs 1482 crore in FY08 on the back of 25.2% CAGR increase in cement sales volume during the same period. Exhibit 4: Revenue to grow at 23% CAGR (FY08-FY11)
3000 2500 Rs crore 2000 1500 1000 500 0 FY08 FY09E Net Sales FY10E FY11E 60% 50% 40% 30% 20% 10% 0%
% Growth
Exhibit 5: Revenue mix

3000 2500 Rs crore 2000 1500 1000 500 0 FY08 FY09E Cement Sugar FY10E Others FY11E
35
Margins
The OPM is expected to decline to 17.9% in FY11 from 31.8% in FY08 on the back of a fall in cement realisations. Exhibit 6: OPM of cement and sugar business
50% 40% 30% 20% 10% 0% FY08 FY09E Cement
44% 36% 32%
27%
11%
11%
10%
6%
FY10E Sugar
FY11E
Exhibit 7: OPM & NPM

35% 30% 25% 20% 15% 10% 5% 0% FY07 FY08 FY09E FY10E FY11E 25.4% 23.3% 23.5% 31.8% 25.2% 21.6% 17.9% 8.4% 5.9% 3.8%
OPM%
NPM %
Exhibit 8: EBITDA per tonne of cement and sugar business

2500 2000
Rs per tonne
2125 1519 1389
2240
2145
1500 1000 500 0 FY08
1129
1181 920
FY09E Cement
FY10E Sugar
FY11E
36
Net profit
The net profit is expected to decline by 33% CAGR (FY08-FY11) to Rs 105.2 crore from Rs 348 crore on account of the lower operating margin and high interest cost. Exhibit 9: Net profit to decline by 33% CAGR (FY08-FY11)
400 350 300 250 200 150 100 50 0 348.02 230.17 147.34 140.50 105.15
Rs
FY07
FY08
FY09E Net Profit
FY10E
FY11E
Return ratios to decline

RoNW and RoCE are expected to decline to 7.1% and 8.9% in FY11 from 36.6% and 22.9% in FY08, respectively. Exhibit 10: RoNW & RoCE
40% 30% 20% 10% 0% FY07 FY08 FY09E
RoNW %
39.0% 36.6%
22.8%
22.9% 10.7% 12.1% 10.3% 10.0% FY10E

RoCE %
7.1% 8.9% FY11E
37
Risks to our call

Capacity addition to drive cement volume growth by 25% CAGR (FY08-FY10)
DCBL is expanding its cement capacity by 4.5 MT to 8 MT by adding two units of 2.25 MT each. Clinker production from the AP plant has already been commissioned in December 2008 whereas production from the Tamil Nadu plant is expected from July 2009. We expect the cement sales volume of DCBL to grow at 25% CAGR (FY08-FY10). This would enable the company to maintain its bottomline in FY10 despite a fall in cement prices.
Location Capacity (Million Tonnes) Kadapa, Andhra Pradesh * 2.25 Ariyalur, Tamil Nadu 2.25 * Clinker unit commisioned in Dec'08 Expected Completion Mar-09 Jul-09
Presence in highly priced markets
The company has a presence in the highly priced southern region markets, viz. Tamil Nadu, Kerala, Karnataka and Andhra Pradesh. On account of its market mix, DCBL has the highest realisations in our coverage universe. The net realisation of the company for Q3FY09 was Rs 3891/tonne and for 9MFY09 was Rs 3758/tonne. Exhibit 11: Net realisation of our coverage as of Dec 08 quarter
5000 Rs per tonne 4000 3000 2000 1000 Ultratech 0 Ambuja India Cem ACC Shree Cem JK Cem Orient Paper Dalmia 3455 3606 3765 3568 3654 2952 3891
3049
Meets entire fuel requirement through imported coal

The company meets its entire fuel requirement through imported coal for its kiln and power plant operations. As imported coal prices have corrected by nearly 67.8% from their peak, the company is likely to benefit in terms of coal cost from Q1FY10.
Firm sugar prices to drive sugar revenue
Indias sugar inventory has declined to 4.6 MT in 2009 from 9.1 MT in 2008. The current favourable demand-supply scenario has led to a surge in sugar prices to Rs 23 per kg (ex-factory). In the short to medium term, sugar prices are likely to remain firm on the back of tight supply in India and a global deficit.
38
Valuations
At the CMP of Rs 95, DCBL is trading at 5.2x and 5.5x its FY09E and FY10E earnings, respectively. On an EV/tonne basis, it is trading at $116/tonne and $60/tonne its FY09E and FY10E capacities, respectively. We believe Dalmia Cement being a regional player having high debt/equity is more vulnerable to its peers in a down cycle. Also we expect the return ratios of DCBL to decline below WACC in the current down cycle. Factoring in concerns like lower return ratios, high leverage and presence in price sensitive markets of southern India, we expect Dalmia Cement to continue to trade at a steep discount to its replacement cost. Thus, we are initiating coverage on Dalmia Cement with an UNDERPERFORMER rating and a target price of Rs 81. Exhibit 12: Historical Valuations
12 P/CEPS, EV/EBITDA 10 8 6 4 2 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 0 3.5 3 P/BV, MCap/Sales 2.5 2 1.5 1 0.5 0
P/CEPS (LHS)
EV/EBIDTA (LHS)
P/BV (RHS)
M Cap/Sales (RHS)
39

Year Ending March 31 Net Sales % Growth Total Expenditure EBITDA Other income Depreciation Interest Extra ordinary items PBT Taxation Reported PAT Extra ordinary items(net of tax) Adjusted PAT EBITDA margin (%) NPM % Shares O/S (crore) EPS (Rs) FY07 986.5 735.9 250.6 156.1 55.1 54.0 0.0 297.6 67.5 230.2 0.0 230.2 25.4 23.3 4.3 53.8 FY08 1,482.0 50.2 1011.0 471.0 164.0 87.1 112.9 0.0 435.0 86.9 348.0 0.0 348.0 31.8 23.5 8.1 43.0 FY09E 1,752.8 18.3 1311.9 440.9 14.0 92.5 141.8 0.0 220.5 73.2 147.3 0.0 147.3 25.2 8.4 8.1 18.2 FY10E 2,395.6 36.7 1879.1 516.6 14.0 129.3 206.1 0.0 195.1 54.6 140.5 0.0 140.5 21.6 5.9 8.1 17.4
Rs Crore
FY11E 2,762.7 15.3 2269.2 493.5 15.4 131.3 231.5 0.0 146.0 40.9 105.2 0.0 105.2 17.9 3.8 8.1 13.0
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability Total Liability Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Current Liabilities & Provisions Miscellaneous Expenditure Total Asset FY07 8.6 745.0 930.6 84.0 129.3 1,897.4 1,227.1 116.5 378.6 103.8 82.1 197.5 292.2 500.3 0.0 1,897.4 FY08 16.2 1,131.0 1,050.1 533.3 163.0 2,893.5 1,324.7 501.3 613.8 87.0 105.1 491.6 433.2 663.3 0.0 2,893.5 FY09E 16.2 1,278.3 1,700.1 733.3 163.0 3,890.8 2,082.2 673.7 613.8 73.1 124.3 637.9 512.4 826.5 0.0 3,890.8 FY10E 16.2 1,418.8 1,798.1 733.3 163.0 4,129.3 2,453.0 0.0 613.8 412.8 169.8 913.7 700.3 1,134.0 0.0 4,129.3
Rs Crore
FY11E 16.2 1,524.0 1,918.1 733.3 163.0 4,354.5 2,371.7 0.0 613.8 607.8 195.9 1,103.4 807.6 1,345.7 0.0 4,354.5
40
Cash Flow Statement

Capex
Rs Crore
FY07 296.4 55.4 123.1 (120.8) 354.2 (66.9) (611.5) (0.1) (678.5) 117.3 333.1 (81.2) 369.2 44.8 58.9 103.7
FY08 434.1 87.3 (299.2) (88.8) 133.4 250.3 (575.2) (345.3) (670.2) 90.6 569.3 (139.8) 520.1 (16.7) 103.7 87.0
FY09E 220.5 92.5 (81.5) 54.6 286.2 0.0 (1,022.4) 14.0 (1,008.4) 0.0 850.0 (141.8) 708.2 (14.0) 87.0 73.0
FY10E 195.1 129.3 (201.6) 137.5 260.3 0.0 173.5 14.0 187.5 0.0 98.0 (206.1) (108.1) 339.7 73.0 412.7
FY11E 146.0 131.3 (111.4) 175.2 341.1 0.0 (50.0) 15.4 (34.6) 0.0 120.0 (231.5) (111.5) 195.0 412.7 607.8
Ratios
Year Ending March 31 EPS Cash EPS OPM (%) NPM (%) Debt/Equity RoCE (%) RoNW (%) Valuation Ratios P/E (x) P/BV (x) EV/EBITDA (x) Turnover ratios Fixed asset turnover ratio inventory turnover ratio Debtors turnover ratio FY07 53.8 66.7 25.4 23.3 1.3 22.8 39.0 1.8 0.5 3.7 0.6 3.7 9.0 FY08 43.0 53.8 31.8 23.5 1.4 22.9 36.6 2.2 0.7 3.5 0.8 2.1 9.6 FY09E 18.2 29.7 25.2 8.4 1.9 10.7 12.1 5.2 0.6 5.7 0.6 2.1 10.6 FY10E 17.4 33.4 21.6 5.9 1.8 10.0 10.3 5.5 0.5 4.4 0.7 2.1 11.1 FY11E 13.0 29.2 17.9 3.8 1.7 8.9 7.1 7.3 0.5 4.5 0.8 2.1 11.6
41
Initiating Coverage
India Cement (INDCEM)

Fairly valued
India Cement (ICL) is currently trading at lower valuations on EV/tonne and EV/EBIDTA basis than the last down-cycle, in which it incurred losses due to higher leverage. However, in terms of P/BV, Mcap/sales and normalised P/E it is still trading at a premium to the last down cycle. Even on a relative valuations basis, it is richly valued compared to north-based players. Thus, we are initiating coverage on the stock with a HOLD rating and price target of Rs 110 per share.
Target Price Rs 110 Time Frame 12 months
HOLD
Rs Crore 4000 3000 2000 1000 FY07 FY08 FY09E FY10E FY11E 15 25 20 R
To benefit from decline in coal prices

Imported coal meets approximately 70% of ICLs fuel requirement. The prices of imported coal have declined by 67.6% to $57 per tonne from their peak of $177 per tonne. The benefit of the decline in coal prices is likely to be visible from Q4FY09.
Dependence on grid power

India Cement (ICL) does not have captive power plants (CPPs) at any of its unit except for a waste heat recovery power plant (of 8 MW), wind power (of 10 MW) and DG sets. However, it has power supply arrangement with APGPCL and Coromondel Power Company for the rest of the requirement.
Sales
EPS
Stock Metrics Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes Comparative return metrics
Stock return (%) India Cement ACC Ambuja Cements Ultratech Cement 3M 18 25 18 53 6M 35 28 47 52 12M -30 -23 -25 -28
FCCB may require Rs 575 crore cash outflow in FY12

ICL has outstanding foreign currency convertible bonds (FCCBs) of US475 million, which are to be converted at the price of Rs 305 or are redeemable at 147.7% of its face value. Thus, this could result in a cash outgo of Rs 575 crore (i.e. approximately half of the reported EBITDA of FY08) in May 2011.
Valuations
At the CMP of Rs 120 per share, the stock is trading at 6.5x and 6.4x its FY09E and FY10E earnings, respectively. It is trading at an EV/tonne of $87 and $60 its FY09E and FY10E capacities, respectively. We are initiating coverage on the stock with a HOLD rating and a price target of Rs 110 per share. Exhibit 1: Key Financials
Year Ending March 31 Net Profit (Rs Cr) EPS (Rs) % Growth P/E (x) P/BV (x) EV/ OPM(%) NPM (%) RoNW (%) 6.6 2.2 FY07 478.8 18.4 FY08 661.3 23.5 27.6 5.2 1.3 FY09E 523.8 18.6 -20.8 6.5 1.1 FY10E 535.7 19.0 2.3 6.4 1.0 FY11E 527.1 18.7 -1.6 6.5 0.9
ICEM IN ICMN.BO 10 28 3680 195 / 68 10947 252982
Price Trend
190 140 90 40
Apr-08
Jun-08
Aug-08
32.6 21.2 37.4
35.4 21.7 32.9
30.4 15.4 18.8 18.6
27.8 14.5 16.8 17.4
25.2 13.2 14.6 15.8
Close Price
RoCE (%) 20.2 24.3 Source: Company, ICICIdirect.com Research
ICICIdirect.com| Equity Research
Dec-08
Target Price
42
Apr-09
Feb-09
Oct-08
6.6
4.2
3.9
3.6
3.2
Company background
Established in 1946, India Cement (ICL) is among the largest players in South India, with a cement capacity of 10.8 million tonnes (MT). The company has seven plants of which four are in Andhra Pradesh and three are in Tamil Nadu. India Cements key markets are Andhra Pradesh, Tamil Nadu, Kerala, parts of Karnataka and Maharashtra. ICL has historically been a south-based player. However, going forward, it is in the process of diversifying its presence by venturing into North India. India Cement sells its cement under the brand name of Sankar Super Power, Coromandel Super Power and Raasi Super Power. India Cement has acquired the Chennai franchisee in the Indian Premier League (IPL), the 20:20 format tournament started by the Board of Control of Cricket in India (BCCI) for US$91 million in January 2008. The investment in IPL was done by the company from the point of view of advertising its brands all across the country. Shareholding pattern (Q3FY09)

40% 35% 27% 20% 36% 28% 37% 28% 37% 28%
0%
Q4
Promoter Holding
Q1
Q2
Q3
Exhibit 2: Volume break up
7% 2% 15% 36%
16% 24%
Tamil Nadu Karnataka
Andhra Pradesh Maharashtra
Kerala Others
43
Investment Rationale
To benefit from decline in coal prices
Imported coal meets approximately 70% of ICLs coal requirements. The prices of imported coal have declined by 66% to $57 per tonne from their peak of $177 per tonne. The benefit of decline in coal prices is likely to be visible from Q4FY09. India Cement has also acquired two second-hand dry bulk carriers of about 40,000 tonne each to transport coal from international markets. However, due to sharp corrections in sea freights (benchmark index Baltic Dry Index has corrected around 80% from its peak), we do not expect any significant saving in transportation cost of coal. Nevertheless, it will hedge the company from the volatility in sea freights. Exhibit 3: Power & fuel cost per tonne
1050 Rs per tonne 900 750 600 FY06 FY07 FY08 FY09E FY10E FY11E
Capacity additions to contribute to volume growth

ICL is in the process of increasing its cement capacity from 10.8 MT to 14.3 MT through debottlenecking and brownfield expansions. India Cement will be further adding 1.5 MT in Rajasthan. The company has deferred its 2 MT greenfield plant in Himachal Pradesh for the time being. On account of capacity additions, we expect India Cements volumes to grow at a CAGR of 10.7% between FY08 - FY11 period.
Exhibit 4: Cement sales volumes (in million tonnes)
14 Cement Sales volumes 12 10 8 6 4 2 0 FY08 FY09E FY10E 11.0 9.2 9.1
12.5
FY11E
44
Exhibit 5: Installed capacity (in million tonnes)

15.8
Exhibit 6: Cement prices in major cites in first week of March 09

City Jammu Trivandrum Cochin N S S S S W E N N E N N W W N E E N S C C Rs per 50 kg 293 280 280 268 265 259 250 242 236 235 233 232 228 227 223 219 219 219 217 206 205 240 233 262
16 Million tones 13 10 7 4 1 89-90 90-97 97-98 98-99 99-01 01-07 1.6 2.8 4.0 6.8 7.0 9.1
09-10E
Bangalore Chennai Mumbai Guwahati Simla Ludhiana Calcutta Chandigarh Delhi Ahmedabad Nagpur
Presence in high priced, high growth markets of South India

The company sells more than 91% of its production in the high-priced and high growth market of South India. As against an all-India cement consumption growth of 8%, South Indias consumption has grown by 10% in FY10. Apart from this, cement prices in South India are higher than in any other region in India by about Rs 29 per bag (13%). However, it may also be noted that historically cement prices have declined much more sharply in the southern region compared to other regions in the event of surplus due to it bigger size, presence of a number of small players and higher leverage of south-based players. Exhibit 7: YTD (Apr08-Feb09) cement consumption growth
Consumption Growth(%) 11% 9% 7% 5% All India Southern Region 8.0% 10.0%
Karnal Patna Bhubaneshwar Jaipur Hyderabad Lucknow Bhopal All India Average All India Average ex South South India Average
N-North, S-South, W-West, E-East, C-Central
45
Financials
ICLs revenue is expected to grow at 9.5% CAGR (FY08-FY11) to Rs 3998.4 crore in FY11 from Rs 3047.1 crore in FY08. OPM is expected to shrink by 1020 bps to 25.2% in FY11 from 35.4% in FY08 due to decline in cement realisations. The adjusted net profit is expected to decline at 7.3% CAGR (FY08-FY11) to Rs 527.1 crore in FY11 from Rs 661.3 crore in FY08.
Exhibit 8: Revenue to grow at CAGR of 9.5%

5000 Rs crore 4000 3000 2000 FY07 FY08 FY09E FY10E FY11E 55% 35% 25% 15% 5% Growth (%)
Growth (%)
45%
Revenue
Growth(%)
Exhibit 9: PAT to decline at a CAGR of 7.3%

700 600 Rs in crore 500 400 300 200 100 0 FY07 FY08 FY09E Net profit
1250% 1000% 750% 500% 250% 0% -250% FY10E Growth(%) FY11E
46
Exhibit 10: EBITDA margin (%) and adjusted net profit margin (%)
40% 30% 20% 10% FY07 FY08 EBIDTA Margin(%) FY09E FY10E FY11E
Adjusted Net Profit Margin (%)
47
Risks & concerns

Capacity additions to put pressure on cement prices
About 29 million tonnes of cement capacity is scheduled to be added in South India by the end of FY10. Historically, cement prices in South India have been more vulnerable than other region on account of its bigger size. Also, out of the seven plants of the company, three are located in Tamil Nadu while the balance is in southern Andhra Pradesh. Due to the location of its plants, India Cement will find it difficult to divert its volume to other regions.
Dependence on grid power

ICL does not have CPPs at any of its units except for a waste heat recovery power plant (of 8 MW) wind power (of 10 MW) and DG set, which in FY08 met about 11% of the companys power requirement. However, it has power supply arrangements with APGPCL and Coromondel Power Company for the rest of the requirement.
Exhibit 11: Sources of power and per unit cost

5 Rs per unit 4 3 2 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E 100% 75% 50% 25% 0% % of own generation
% of Own Generation (RHS) Own generation (LHS)
Power purchased from external sources (LHS) Average rate per unit (LHS)
Had lower EBITDA per tonne than efficient players in last down cycle
In the last down cycle, ICL reported net losses (on account of higher debt equity ratio) and had to undergo debt restructuring. Also, the company had earned EBITDA of only Rs 66 per tonne as compared to Rs 500 per tonne earned by efficient players. However, in the current down cycle, we do not expect the company to incur losses as it has lower gearing than the last down cycle. Apart from this, improvement in technology and increase in blended cement proportions have improved the cement to clinker ratio of the company, which, in turn, has reduced power consumption and made its cost structure more efficient compared to the last down cycle.
48
Exhibit 12: Net realisation and EBITDA per tonne

4050 3050 Rs per tonne 2050 1050 50 2058 2029 559 FY99 FY00 2346 2081 1689 610 FY01 FY02 341 FY03 179 FY04 FY05 1733 1806 236 FY06 2047 883 1226 1132 936 805 FY09E FY10E FY11E
40% 30% 20% 10% 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E Interestas a % of Sales
3591 3285 2667 3281 3117
496
354 FY07
66
Net Relisation per tonne

Source: Company,ICICIdirect.com Research
EBIDTA per tonne
Exhibit 13: Net debt equity ratio, interest cover and interest expenses as a % of sales
Net debt/Equity & InterestCoverage 25 20 15 10 5 0
Net Debt/Equity (LHS)
Net Interest Cover (LHS)
Interest exp as a % to Sales (RHS)
FY08
49
Valuations
At the CMP of Rs 121 per share, the stock is trading at 6.5x and 6.4x its FY09E and FY10E earnings, respectively. It is trading at an EV/tonne of $87 and $60 its FY09E and FY10E capacities, respectively. We are initiating coverage on the stock with a HOLD rating and a price target of Rs 110 per share. On EV-based multiples (EV per tonne and EV/EBIDTA), ICL is available at the valuations of the last down cycle when it had incurred losses due to higher leverage as compared to the current down-cycle. In terms of P/BV and market cap to sales (Mcap/sales), it is still trading at 118% and 442% premium, respectively, to its last down-cycle valuations. In the last downcycle, the company was trading at the lowest multiple of 0.46x its book value and 0.17x Mcap to sales. As the company had reported losses in the last down cycle, on a P/E base it cannot be compared to its last down-cycle valuation. Thus, we have used normalised P/E (we have calculated EPS for each year by multiplying book value with RoNW) for determining if the company is available at trough valuations. In terms of normalised P/E, ICL is trading at 96% premium to the last down-cycle. In terms of relative valuations, ICL is available at a premium to efficient North Indian players. We expect an oversupply situation in South India, similar to North India (witnessed in H1FY09). Thus, we believe, going ahead, the valuation gap between North Indian and South Indian players will get reduced. Exhibit 14: Movement of EV/tonne with change in RoCE & RoNW (%)
170 150 EV/tonne (in USD) 130 110 90 70 50 30 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E 40 30 20 10 0 -10 -20 -30 -40 -50 %
EV/Tonne(USD)
ROE(%)
ROCE (%)
50
Exhibit 6: Valuations Ratios 15: Valuation ratios

4.5 4.0 Source: ICICIdirect Research P/BV & Mcap/ Sales 3.5 3.0 2.5 2.0 1.5 1.0 0.5 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY09E FY10E FY11E 0.0 70 60 50 40 30 20 10 0 P/CEPS & EV/EBITA
Price to Book Value ( P/BV)
Market Cap/Sales
Price/Cash EPS (P/CEPS)
EV/EBIDTA
Exhibit 16: Normalised P/E

76.0 64.0 Normalized P/E 52.0 40.0 28.0 16.0 4.0 FY94 FY96 28.6 50.4 28.8 12.1 9.5 FY98 8.6 8.5 19.6 5.6 FY00 FY02 FY04 FY06 13.2 FY08 51.5 49.3 28.4 12.6 11.0 FY10E 9.8 18.8 70.8
51

Year Ending March 31 Net Sales % Growth Total Expenditure EBITDA Other income Depreciation Interest Expenses Extra ordinary items PBT Taxation RPAT EO (net of tax) Adj. PAT EBITDA margin (%) NPM (%) Shares O/S (crore) EPS (Rs) FY07 2255.3 1521.0 734.3 10.1 102.6 149.8 0.0 492.0 13.1 478.8 0.0 478.8 32.6 21.2 26.0 18.4 FY08 3047.1 35.1 1967.7 1079.4 41.0 127.9 109.9 38.0 844.6 207.1 637.5 23.8 661.3 35.4 21.7 28.2 23.5 FY09E 3392.9 11.3 2363.1 1029.8 45.9 201.8 106.8 64.5 702.6 237.1 465.5 58.3 523.8 30.4 15.4 28.2 18.6 FY10E 3700.2 9.1 2669.9 1030.3 46.3 221.1 67.7 0.0 787.8 252.1 535.7 0.0 535.7 27.8 14.5 28.2 19.0
Rs Crore
FY11E 3998.4 8.1 2991.8 1006.6 53.7 233.2 51.9 0.0 775.2 248.1 527.1 0.0 527.1 25.2 13.2 28.2 18.7
Rs Crore
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Revaluation Reserves Free Reserves Secured Loans Unsecured Loans Deferred Tax Liability Total Liabilities Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Current Assets Less: Current Liabilities & Provisions Net Current Assets Miscellaneous Expenditure Deferred Tax Asset Total Asset FY07 260.4 782.0 1166.2 1166.0 892.8 60.3 4327.6 2795.8 142.8 55.1 230.2 260.2 248.5 978.6 1717.5 434.0 1283.5 33.1 17.3 4327.6 FY08 281.9 724.3 2314.9 971.0 840.5 225.7 5358.3 3464.5 574.9 129.3 425.6 311.1 350.6 1062.1 2149.4 983.5 1165.9 23.8 0.0 5358.3 FY09E 281.9 724.3 2687.3 672.8 898.8 225.7 5490.8 3812.6 140.0 129.3 663.9 346.4 418.3 1062.1 2490.6 1095.1 1395.5 13.4 0.0 5490.8 FY10E 281.9 724.3 3115.9 551.6 898.8 225.7 5798.1 3991.5 70.0 129.3 902.7 377.7 456.2 1062.1 2798.7 1194.3 1604.4 2.9 0.0 5798.1
FY11E 281.9 724.3 3537.6 430.3 898.8 225.7 6098.6 3958.3 80.0 129.3 1258.4 408.2 492.9 1062.1 3221.6 1290.6 1931.0 0.0 0.0 6098.6
52
Cash Flow Statement

Year Ending March 31 Profit Before Tax Depreciation Others Cash flow from Operations before WC Change Changes In Working Capital Cash flow from operations Capex Inc/Dec in Investment Others Cash Flow from Investing activities Inc/Dec in Loan Funds Inc/Dec in capital Others Cash flow from Financing Net Cash Inflow / Outflow Taken over on Amalgamation Op Bal Cash & Cash equivalents Closing Cash/ Cash Equivalent FY07 492.0 102.6 86.0 680.6 -37.5 643.1 -139.2 0.2 -100.6 -239.6 -58.4 125.2 -289.3 -222.4 181.1 5.5 43.6 230.2 FY08 892.8 127.9 -39.6 981.1 35.7 1016.9 -918.2 -74.2 -24.9 -1017.3 -191.7 583.3 -195.8 195.9 195.5 0.0 230.2 425.6 FY09E 767.1 201.8 -225.0 744.0 8.6 752.6 -115.1 0.0 40.6 -74.5 -239.9 0.0 -199.9 -439.8 238.3 0.0 425.6 663.9 FY10E 787.8 221.1 -214.7 794.2 29.9 824.2 -330.0 0.0 40.7 -289.3 -121.2 0.0 -174.8 238.8 0.0 663.9 902.7
Rs Crore
FY11E 775.2 233.2 -241.4 767.1 29.0 796.1 -210.0 0.0 48.1 -161.9 -121.2 0.0 -157.3 -278.5 355.7 0.0 902.7 1258.4
Ratios
Year Ending March 31 EPS Cash EPS EBIDTA margin (%) NPM (%) Net Debt Equity RoNW (%) RoCE (%) Valuation Ratios P/E (x) P/BV (x) EV/EBIDTA (x) EV/tonne in US$ Turnover ratios Asset Turnover Inventory turnover ratio Debtors turnover ratio FY07 18.4 22.3
32.6
FY08 23.5 26.8

35.4
FY09E 18.6 25.7

30.4
FY10E 19.0 26.8

27.8
FY11E 18.7 27.0

25.2
21.2 1.3 37.4 20.2 6.6 2.2 6.6 111.6
21.7 0.5 32.9 24.3 5.2 1.3 4.2 105.7
15.4 0.3 18.8 18.6 6.5 1.1 3.9 86.8
14.5 0.2 16.8 17.4 6.4 1.0 3.6 59.4
13.2 0.0 14.6 15.8 6.5 0.9 3.2 47.0
0.7 40.2 42.1
0.7 42.0 37.3
0.7 45.0 37.3
0.8 45.0 37.3
0.8 45.0 37.3
53
Initiating Coverage
Orient Paper & Industries (ORIPAP)

Regional champ
We are initiating coverage on Orient Paper & Industries Ltd (OPIL) with an OUTPERFORMER rating and a price target of Rs 36.2. We believe that OPIL being a cost-efficient cement player will be able to leverage its cost structure by cutting prices and pushing volumes in a down cycle. New CPPs coming on stream in Q1FY10 will enable OPIL to maintain its cost leadership while new cement capacity additions will drive the sales volume. Despite having highest return ratios margins and low earning risk, OPIL is trading at a steep discount to it peers and its replacement cost.
Current Price Rs 28 Potential upside 28%
Target Price Rs 36.2 Time Frame 12-15 months
OUTPERFORMER
2,000 Rs Crore 1,500 1,000 500 0 FY07 FY08 FY09E FY10E FY11E 12 10 8 6 4 2 0
Growing three time faster than the industry

On account of capacity addition in the recent past, OPIL has been growing three times faster than the industry. In FY09 it had reported dispatch growth of 20.2% as compared to 7.9% of the industry. With another 1.6 million tonnes (MT) of capacity, which is expected to come onstream by the end of Q1FY10, OPIL will continue to grow faster than the industry.
Net Sales
EPS (Rs)
Highest margins in the industry

Despite having lower realisation as compared to its peers, OPILs cement division has highest EBIT per tonne (Rs 1118 per tonne) and EBIT margin (37.9%) in the industry due to low cost of production.
Stock Metrics
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes OPI IN ORPP.BO 1 37 590 51.95/16.9 10947 102540
Diversifying into related businesses

On account of lower fixed cost, higher efficiency and diversified revenue stream, OPILs earnings are least sensitive to price decline. A 1% decline in cement prices reduces the companys EPS by 3.3% as compared to 4.2%-8.1% for its peers.
Valuations
At the CMP of Rs 28 per share, the stock is trading at 2.5x and 3.0x its FY09E & FY10E earnings, respectively. It is trading at an EV/tonne of $33.5 & $17.7 its FY09E and FY10E capacities, respectively. We are initiating coverage on OPIL with OUTPERFORMER rating and a price target of Rs 36.2 per share.

Stock return (%) Orient Paper Jk Cem Shree Cem Dalmia Cem 3M 56 36 69 28 6M 46 -18 74 1 12M -33 -62 -24 -65
Exhibit 1: Key Financials

FY07 FY08 Net Profit 138.5 209.8 EPS 9.3 10.9 % Growth 16.7 P/E (x) 3.0 2.6 P/BV (x) 2.5 1.2 EV/EBITDA (x) 3.0 1.9 OPM% 22.9 26.9 NPM % 12.6 16.2 RoNW % 153.2 66.9 RoCE % 49.2 59.7 Source: Company,ICICIdirect.com Research FY09E 215.9 11.2 2.9 2.5 0.8 1.9 25.3 14.9 38.5 39.7 FY10E 179.2 9.3 -17.0 3.0 0.7 1.7 19.8 10.7 24.3 27.0 FY11E 160.4 8.3 -10.5 3.4 0.6 1.4 15.5 8.6 18.2 23.1
Price Trend
65 45 25 5
Aug-
Oct-
Apr-
Dec-
Feb-
Jun-
Close Price
Target Price
54
Apr-
Rs
Company Background
OPIL is the flagship company of the CK Birla Group with business segments viz. cement, paper and electric fans. OPIL has a cement capacity of 3.4 MT.
Share holding pattern (Q3FY09)

The company has a clinker unit of 2.1 MT & grinding unit of 2.4 MT at Promoter & Institutional holding trend (%) Devapur in the Chandrapur cement cluster of Andhra Pradesh. It also has 40% 35% 36% 37% 37% 32% 31% 31% 31% a split grinding unit of 1 MT at Jalgaon, Maharashtra. The locations of cement plants give access to key consumer markets in Maharashtra, Andhra Pradesh and Gujarat. 20% Exhibit 2: Cement plant and markets
0%
Q4
Q1
Q2
Q3
Promoter Holding
Exhibit 3: Cement volume break up (FY08)

1%
37%
57%
5%
Andhra Pradesh
Gujarat
Maharashtra
Others
55
OPIL has two paper manufacturing plants at Amlai (Madhya Pradesh) and Brajrajnagar (Orissa). The operations at the Brajrajnagar plant, which has an installed capacity to produce 76,000 TPA of paper, have been suspended since 1999. The plant had made a loss of Rs 12.8 crore at the EBIT level in FY08. OPIL currently has around 850 acres of land in this unit along with fully developed townships, educational institutions and recreational centres. The Amlai plant has a capacity of 95,000 TPA (including 10,000 tonnes of tissue paper capacity). It produces writing, printing and tissue paper. The company sells paper under the brands Orient and Peacock. OPILs fans division is located in Kolkata and Faridabad (in Haryana) with an installed capacity of 3.5 million units per annum. The division sells ceiling fans, portable fans and exhaust fans under the brand name of Orient Fan and Orient PSPO and also exports to countries in the Middle East and the US. OPIL also has 15.5 lakh shares of Century Textiles and 9 lakh shares of Hyderabad Industries. The market value of the companys investment is approximately Rs 50.8 crore. Exhibit 4: Revenue break-up (FY08)
0% 22% 21%
57%
Paper
Cement
Fans
Knowhow & Services
56
Exhibit 5: EBIT break up (FY08)
6% 0% 7%
87%
Paper
Cement
Fans
Knowhow & Services
Exhibit 6: EBIT margins (%) (FY08)

50% 40% 30% 20% 10% 0% Paper Cement Fans Knowhow & Services 9.8% 42.6% 43.4%
7.7%
Exhibit 7: Segmental RoCE & RoNW (%)(FY08)
100% 80% 60% 40% 20% 0% Paper & Board 19.5%
99.3%
29.7% 6.8% Cement Electric Fans Know-How & Service Fees
57
Investment Rationale
Has been growing three time faster than industry
OPIL has increased its cement capacity from 2.4 MT at the end of FY07 to 2.7 MT at the end of H1FY08. On account of capacity additions, OPIL has been growing three times faster than the industry. In FY09 OPIL has reported dispatch growth of 20.2% as compared to 7.9% for the industry. With another 1.6 MT of capacity expected to come on stream by the end of Q1FY10, OPIL is expected to continue to grow faster than the industry. Apart from this, OPIL has added capacity at a cost of only Rs 1538 per tonne. On account of its higher EBITDA per tonne and low capex, the payback period for OPIL will be less than one and a half year. Exhibit 8: Capex Schedule Exhibit 9: YTD (Apr-Mar09) Cement dispatches (%)
Birla Corp JK Cem India Cem Dalmia Ambuja Cem Century Textiles ACC
FY07 Cement capacity (in million tonne) Cement Capex (Rs Cr) Devapur CPP (MW) CPP capex(Rs in Cr) Fan mn units CFL facility (Rs in Cr) Tissue paper-Amlai- (tpa) Photocopying & office paper category Amlai (tpa) Paper Capex(Rs in Cr) Total Capex (Rs Crore)
Sep07 2.7
FY08 3.4 170
Q1FY10 5 230 50 200
Grasim Ultratech Industry JP Madras Cem Orient
2.4
2.58
2.58
2.58 40
3.58
10000
10000
10000
25000
Shree Cem
-3.0% 7.0% 17.0% 27.0%
85,000
85,000
85,000 210
85,000 100 530
58
Highest margins in the industry

Despite having lower realisations as compared to its peers, OPIL has the highest margins and EBIT per tonne in the industry due to the low cost of production. The company has a low cost of production on account of the following reasons: The limestone mines are located at distances of 2 km from its plant. It has a stripping ratio (quantity of waste rock required to be removed for mining 1 tonne of limestone) of 0.09:1, one of the lowest in the region. Its landed cost of limestone is only Rs 92 per tonne as compared to 150 per tonne for its peers It is 100% dependent on domestic coal, prices of which are less volatile as compared to imported coal and petcoke. It sources the coal requirement from Singareni Collieries, which is merely 68 km from its Devapur plant. Thus, it has power & fuel cost of Rs 514 per tonne as compared to about Rs 700 per tonne for its peers Has an average lead distance to market of 350 km as compared to 600 km for its peers in FY08. It sources fly ash from NTPC Ramagundam plant and Bhusawal thermal power station, which are 40 km and 20 km from its Devapur and Jalgaon plant, respectively. Hence, due to its location advantage, its landed cost of fly ash is Rs 202 per tonne as compared to more than Rs 300 per tonne for its peers. Has an average raw material cost per tonne of Rs 198 per tonne in FY08 as compared to Rs 255 per tonne for its peers as it procures all major raw material within a radius of 68 km. OPIL is in the process of setting up a 50 MW CPP, which is expected to come on stream by the end of Q1FY10. The new CPP will meet 100% power requirement of the cement division and OPIL will be able to save Rs 27 crore in FY10. Thus, we believe that, going ahead, OPIL will be able to maintain its cost leadership. Exhibit 10: Peer comparisons (as per December 08 quarter)
Cost (Including Depreciation) EBIT 2843 2890 3121 2801 2282 3084 2887 1834 EBIT Margins (%) 17.7 19.9 17.1 21.5 25.2 15.6 25.8 37.9
Company ACC Ambuja Cement India Cement Ultra Tech Shree cement *JK cement Dalmia Cement Orient Paper
Realisations 3455 3606 3765 3568 3049 3654 3891 2952
612 716 644 767 767 570 1004 1118
59
Has a presence in high cement growth states of AP

OPIL has a plant in the high growth Andhra Pradesh market. Cement consumption in Andhra Pradesh has reported YTD growth of 22% as compared to the all-India growth of 8%. It may also be noted that the OPIL plant is located in northern Andhra Pradesh, which will enable it to divert the surplus volume to the eastern and central region in the event of a surplus. Exhibit 11: YTD (Apr08-Feb09) Cement consumption growth
States Andhra Pradesh Maharashtra Gujarat All India
Growth(%) 22 6 4 8
Earnings of OPIL less sensitive to cement price declines

On account of lower fixed cost, higher efficiency and a diversified revenue stream, OPILs earnings are least sensitive to price declines. Exhibit 12: Earnings sensitivity to cement price decline
Company Orient Paper Ambuja Cement Shree Cement UltraTech India Cement ACC JK Cement % Decline in earnings 3.3 4.2 4.4 4.4 4.7 7.6 8.1
Presence in high cement consuming states

There are only six states in India, which have monthly cement consumption of more than 1 MT per month. Orient has a plant in two of these states (Andhra Pradesh and Maharashtra). Andhra Pradesh and Maharashtra account for 22% of the total cement demand in India. Gujarat accounts for another 7%. Thus, OPIL caters to more than one-fourth of the all-India cement market. Exhibit 13: Monthly cement consumption of major states
State Maharashtra Andhra Pradesh Uttar Pradesh Tamil Nadu Karnataka Gujarat India Monthly Cement Consumption 1.8 1.5 1.4 1.3 1.0 1.0 14.4
60
Financials
Going ahead, we expect OPILs revenues to grow at 12.9% CAGR (FY08FY11) to Rs 1862.9 crore in FY11 from Rs 1295.8 crore in FY08 on account of growth in cement volumes. The EBITDA margin is expected to dip by 1140 bps due to the decline in cement realisation. Thus, the net profit of OPIL is expected to decline at 8.6% CAGR (FY08-FY11) to Rs 160.4 crore in FY11 from Rs 209.9 crore in FY08. Exhibit 14: Revenues to grow at a CAGR of 12.9%
2000 Rs Crore 1500 1000 500 0 FY07 FY08 FY09 FY10 FY11
150% 90% 60% 30% 0% Growth(%)

600% 400% 200% 0% -200% FY07 Net Profit FY08 Growth(%) FY09E FY10E FY11E
120%
Revenue
Growth(%)
Exhibit 15: Net profit to decline at a CAGR 8.6%

250 200 150 100 50 0
61
Exhibit 16: Margins to remain under pressure

30% 20% 10% 0% FY07 FY08 FY09E FY10E FY11E
EBIDTA Margin(%)
Net Profit Margin (%)
Exhibit 17: Return ratios to decline

200% 150% 100% 50% 0% FY07 FY08 FY09E RoCE(%)
FY10E RoNW(%)
FY11E
62
Risks & concerns

Total 8.4 MT of cement capacity to be added in AP
Out of 62 MT capacity additions that are scheduled to come on stream by FY10, around 47% of the capacity will come on stream in the south and close to 24% capacity is likely to be added in Andhra Pradesh.
Usage of domestic coal to restrict cost savings

Due to usage of domestic coal, the company is unlikely to benefit from the sharp decline in imported coal prices and sea freight.
May write off Rs 10 crore receivables from its JV

OPILs joint venture company at Kenya, Panafrican Paper Mills (E.A) Ltd, Kenya (Panpaper), in which OPIL holds 29.34% equity and has a technical and management agreement, have stopped due to poor financial conditions. In view of these developments, the company has decided to write off a sum of Rs 48.4 crore receivable from Panpaper against management fees, interest and loan (arising out of conversion of fees) due from Panpaper, subject to approval of the Reserve Bank of India. However, the company had already made provisions aggregating to Rs 38.3 crore up to the end of Q3FY09. Thus, we expect the company to take a hit of the remaining Rs 10 crore in Q4FY09.
63
Valuations
Despite having the highest return ratios & margins, low earning risk, OPIL is trading at a steep discount to it peers and replacement cost. At the CMP of Rs 28 per share, the stock is trading at 2.5x and 3.0x its FY09E and FY10E earnings, respectively. It is trading at an EV/tonne of $33.5 and $17.7 its FY09E and FY10E capacities, respectively. We are initiating coverage on the stock with an OUTPERFORMER rating and a price target of Rs 36.2 per share. We have valued the company on an SOTP basis. We have valued the companys paper division at EV/EBIDTA multiple of 2.3X, 15% discount to the industry despite the fact that OPILs operating paper plants (Amlai Plant) margins are better than the industry. We have valued the fan division of the company at an EV/EBIDTA multiple of 0.8x (i.e. 40% discount to Bajaj Electrical) We have valued the cement division at EV per tonne of $42 of its present capacity. It is the lowest valuation assigned to a loss making cement company in M&A deal over last decade. Also, in the first half of FY09, when the northern region had a surplus, north-based cement players were trading at an EV per tonne of $42. We have valued the equity quoted investments of the company at 40% discount to the CMP and non-quoted investments at book value. Exhibit 18: Target price on SOTP basis Paper EBIDTA EV/EBITDA(X) Paper EV Fan EBIDTA EV/EBITDA(X) Fan EV Value of non cement business Cement Capacity(MT) EV/tonne(US$) USD EV/tonne(Rs) Cement EV Total EV Less: Debt Add:Cash Add: Investment Mcap Nos Shares
Target Price
26.7 2.3 61.3 25.8 1.7 43.5 104.8 3.4 42.0 51.5 2163.0 735.4 840.2 415.3 244.7 28.2 697.8 19.3 36.2 28.0 29%
CMP Upside(%)
64
Exhibit 19: Trailing multiple & margins of paper and fan companies
Company AP Paper Ballarpur Inds JK Paper Mysore Paper Pudumjee Pulp Seshasayee Paper Shreyans Inds. Star Paper Mills T N Newsprint West Coast Paper Average Orient Paper (Paper Division) Orient Paper (Amlai Paper Plant) Bajaj Electrical Orient Paper (Fan Division)
EBIT EV/EBITDA Margin(%) TTM Q3FY08 1.4 6.4 4.9 15.9 1.2 9.0 5.0 -0.8 2.5 4.4 1.9 5.8 1.9 12.3 3.7 8.5 2.1 18.0 2.4 17.4 2.7 9.7 7.1% 10.0% 2.6 9.5 4.4%
Exhibit 20: Valuations band

13 12 11 10 9 8 7 6 5 4 3 2 1 0 90 80 60 50 40 30 20 10 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E 0 EV/EBIDTA & P/CEPS 70
P/BV & MCap/Sales
P/BV(RHS)
MCap/Sales(RHS)
P/CEPS(LHS)
EV/EBIDTA(LHS)
65

Year Ending March 31 Net Sales % Growth Total Expenditure EBITDA Other income Depreciation Interest Extra ordinary items PBT Taxation Reported PAT Extra ordinary items(net of tax) Adjusted PAT EBITDA margin (%) NPM (%) Shares O/S (crore) EPS (Rs) FY07 1,102.2 850.0 252.2 14.4 26.2 32.7 -11.7 196.0 65.3 130.7 -7.8 138.5 22.9 12.6 14.84 9.3 FY08 1,295.8 17.6 947.0 348.8 17.5 27.1 17.5 -8.1 313.5 109.0 204.5 -5.3 209.8 26.9 16.2 19.27 10.9 FY09E 1,450.6 11.9 1,084.1 366.4 10.8 34.0 28.2 10.0 325.1 102.4 222.7 6.8 215.9 25.3 14.9 19.27 11.2
Rs Crore
FY10E 1,675.4 15.5 1,342.9 332.5 11.4 52.9 27.4 0.0 263.6 84.3 179.2 0.0 179.2 19.8 10.7 19.27 9.3
FY11E 1,862.9 11.2 1,573.7 289.1 11.9 53.6 8.1 0.0 239.3 79.0 160.4 0.0 160.4 15.5 8.6 19.27 8.3
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Preference Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability Total Liability Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Other current Assets Current Assets Less: Current Liabilities & Provisions Net Current Assets Miscellaneous Expenditure Total Asset FY07 14.8 20.0 139.2 256.2 67.9 37.7 535.7 285.7 65.6 13.4 17.1 123.6 92.6 92.3 16.0 341.6 182.7 158.8 12.1 535.7 FY08 19.3 7.0 467.8 43.8 121.5 45.5 704.9 334.0 199.7 9.2 26.0 135.8 99.0 80.5 0.7 342.1 185.5 156.6 5.4 704.9 FY09E 19.3 0.0 653.5 293.8 121.5 45.5 1,133.5 320.0 477.0 9.2 244.7 152.1 110.9 80.9 0.7 589.2 267.3 321.9 5.4 1,133.5 FY10E 19.3 0.0 805.7 193.8 71.5 45.5 1,135.7 817.1 0.0 9.2 222.1 175.6 128.1 81.3 0.7 607.8 303.8 304.0 5.4 1,135.7
Rs Crore
FY11E 19.3 0.0 939.0 93.8 21.5 45.5 1,119.0 783.5 0.0 9.2 235.0 195.3 142.4 81.7 0.8 655.2 334.3 320.9 5.4 1,119.0
66
Cash Flow Statement

Capex
Rs Crore
FY07 196.0 26.2 (14.8) 24.5 232.0 0.0 (65.6) 2.6 (62.9) 0.0 (115.3) (54.1) (169.4) (0.4) 17.5 17.1
FY08 313.5 27.1 (37.9) (29.2) 273.6 0.0 (204.6) 4.2 (200.5) 144.8 (163.6) (45.4) (64.2) 8.9 17.1 26.0
FY09E 305.1 34.0 53.8 (74.7) 318.2 0.0 (297.3) 1.2 (296.1) (7.0) 250.0 (56.4) 186.6 208.7 26.0 234.7
FY10E 263.6 52.9 (4.7) (56.9) 254.9 0.0 (73.0) 2.5 (70.5) 0.0 (150.0) (57.0) (207.0) (22.6) 244.7 222.1
FY11E 239.3 53.6 (4.0) (70.9) 218.1 0.0 (20.0) 5.4 (14.6) 0.0 (150.0) (40.5) (190.5) 12.9 222.1 235.0
Ratios Year Ending March 31 EPS Cash EPS EBITDA margin (%) NPM(%) Debt/Equity RoCE (%) RoNW (%) Valuation Ratios P/E (x) P/BV (x) EV/EBITDA (x) EV/Tonne (US$) Turnover ratios Fixed asset turnover ratio inventory turnover ratio Debtors turnover ratio
FY07 9.3 10.6 22.9 12.6 1.9 49.2 153.2 3.0 2.5 3.0 59.5 2.3 30.7 40.9
FY08 10.9 12.0 26.9 16.2 0.3 59.7 66.9 2.6 1.2 1.9 33.6 2.3 27.9 38.3
FY09E 11.4 12.8 25.3 14.9 0.3 39.7 38.5 2.5 0.8 1.9 36.8 1.7 27.9 38.3
FY10E 9.3 12.0 19.8 10.7 0.1 27.0 24.3 3.0 0.7 1.7 17.7 1.6 27.9 38.3
FY11E 8.3 11.1 15.5 8.6 -0.1 23.1 18.2 3.4 0.6 1.4 10.3 1.7 27.9 38.3
67
Company Update
ACC (ACC)
Back ended capacity addition
ACC is Indias largest cement company with a present installed capacity of 22.6 million tonnes (MT). The company is in the process of increasing its capacity by 7.8 MT to 30.4 MT by the end of CY10. However, due to back-ended capacity additions, volumes of ACC are expected to grow at a CAGR of only 4.7% Apart from this, limited usage of imported coal and higher dependence on rail to dispatch cement, will result in marginal savings in cost for the company. We reiterate coverage on ACC with UNDERPERFORMER rating and a price target of Rs 500 per share.
Target Price Rs 500 Time Frame 12-15
UNDERPERFORMER
8000 Rs Crore 7000 6000 5000 CY06 CY07 CY08 CY09E CY10E Sales 85 45 25 Rs 65
Capacity additions to result in modest revenues increase

ACC is in process of increasing its cement capacity by 7.8 MT to 30.4 MT by the end of CY10. However, the major expansion of the company, 3 MT each in Karnataka and Maharashtra, is expected to come on stream only by the end of CY09 and CY10, respectively. Hence, the company will be unable to reap the full benefits of capacity additions as the demand-supply scenario is likely to be adverse at that time.
No major cost saving expected

ACC currently meets only 15% of its coal requirements through import. Thus, though imported coal prices have corrected sharply from their peaks, cost savings for ACC will be marginal. Apart from this, about 50% of ACCs dispatches are through rail. Rail freight was revised upwards by 7-8% in December 2008.
Stock Metrics
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes
EPS
Earnings highly sensitive to price declines

ACCs earnings are highly sensitive to cement prices due to low EBITDA per tonne and high fixed cost. A 1% decline in cement prices will reduce the EPS of the company by 7.6%
ACC IN ACC.BO 10 46.2 11529 855/369 10947 159472
Valuations
At the CMP of Rs 617 per share, the stock is trading at 12.0 x and 15.8x its CY09E and CY10E earnings, respectively. It is trading at EV/tonne of $88.4 and $74.8 of its CY09E and CY10E capacities, respectively. We reiterate coverage on ACC with UNDERPERFORMER rating and a price target of Rs 500 per share. Exhibit 1: Key Financials
Year to March 31 Net Profit (Rs Cr) EPS (Rs) % Growth P/E (x) Price/Book (x) EV/EBIDTA (x) OPM(%) NPM (%) RoNW (%) RoCE (%) CY06 1102.8 58.8 10.5 4.4 6.9 28.0 19.0 41.8 39.1 CY07 1308.4 67.5 14.7 9.1 3.2 5.4 27.4 18.7 34.8 39.7 CY08 1173.7 62.5 -7.5 9.9 2.6 6.0 23.7 16.1 25.9 32.8 CY09E 969.5 51.6 -17.4 12.0 2.2 7.3 21.4 13.5 18.7 23.9 CY10E 735.4 39.1 -24.1 15.8 2.1 8.2 18.1 9.9 13.1 17.2
Comparative return metrics (%)
Stock return (%) ACC Ambuja Cements India Cement Ultratech Cement
Price Trend
1000 800 600 400 200 JunAugApr-
3M 25 18 18 53
6M 28 47 35 52
12M -23 -25 -30 -28
Dec-
Feb-
Close Price
Target Price
68
Apr-
Oct-
Company Background
Established in 1936 by the merger of 10 cement companies, ACC is one of Indias oldest cement manufacturing companies. The companys current capacity stands at 22.6 MT. Swiss cement major Holcim has taken over the control and management of ACC through Ambuja Cement India Pvt Ltd (ACIL). With its stakes in Ambuja Cement and ACC, Holcim controls about 44.6 MT of cement capacity (approximately 20% of the Indias capacity). Exhibit 2: Capacity Share (as on Mar09)
Share holding pattern (Q4CY08)


60% 40% 43% 43% 30% 46% 32% 46% 33%
38%
11% 9%
20% 0% Q1 Q2 Q3 Q4
Promoter Holding
80%
ACC
Ambuja Cement
Others
ACC, through its 14 plants, is the only cement company with a presence in all major regions. Out of its total capacity of 22.6 MT, 26% is in the North, 28% in South, 22% in East, 4% in West and 20% in Central India. Exhibit 3: Region wise capacity (as on Mar09)
26%
22%
4%
28%
20%
East
West
Central
South
North
Since the entry of Holcim, ACC has decided to focus on its core cement business and has divested most of its non-core businesses including its refractory and asbestos business. The company has also transferred its RMC business to a wholly-owned subsidiary, ACC Concrete Ltd, with effect from January 1, 2008.
69
Exhibit 4: Historical valuations

7 6 5 4 3 2 1 0 10 30 50
40 EV/EBIDTA & P/CEPS
P/BV &MCAP/Sales
20
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
CY06
CY07
CY08
CY09E
MCap/Sales(LHS)
P/BV(LHS)
P/CEPS(RHS)
EV/EBIDTA(RHS)
Exhibit 5: EV/tonne, RoNW and RoCE

250 200 EV/tonne (in US$) 150 100 50 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 CY05 CY06 CY07 CY08 CY09E CY10E 50 40 30 20 10 0 -10 %
EV/Tonne in USD (LHS)
RoNW (RHS)
RoCE (RHS)
70
CY10E

Year Ending December 31 Net Sales % Growth Total Expenditure EBIDTA Other income Depreciation Interest Expenses EO PBT Taxation RPAT EO (net of tax) Adj. PAT Profit/(loss) after tax from Discontinued Operation Adj. PAT with discontinuing Operations EBIDTA margin (%) NPM (%) Shares O/S (crore) EPS (Rs) CY06 5803.5 4180.3 1623.2 164.8 254.3 75.2 160.9 1619.5 387.7 1231.8 128.7 1103.1 0.3 1102.8 28.0 19.0 18.78 58.8 CY07 6990.7 20.5 5072.1 1918.6 177.5 305.1 73.9 213.1 1930.3 491.7 1438.6 170.5 1268.1 -40.3 1308.4 27.4 18.1 18.78 67.5 CY08 7308.6 4.5 5575.4 1733.2 288.7 294.2 40.0 48.9 1736.6 523.8 1212.8 39.1 1173.7 0.0 1173.7 23.7 16.1 18.79 62.5 CY09E 7165.0 -2.0 5634.1 1530.9 234.1 335.3 44.7 0.0 1385.0 415.5 969.5 0.0 969.5 0.0 969.5 21.4 13.5 18.79 51.6
Rs Crore
CY10E 7435.1 3.8 6091.8 1343.3 185.0 435.2 42.4 0.0 1050.6 315.2 735.4 0.0 735.4 0.0 735.4 18.1 9.9 18.79 39.1
Rs Crore
Balance Sheet
Year Ending December 31 Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability(Net) Total Liabilities Application of Funds Net Block Capital WIP Investments Net Current Assets Miscellaneous Expenditure Total Asset CY06 187.8 2955.2 721.0 50.2 320.7 4234.8 2922.5 558.4 503.5 249.4 0.9 4234.8 CY07 187.9 3964.8 266.0 40.4 331.5 4790.6 3314.7 649.2 844.8 -18.1 0.0 4790.6 CY08 187.9 4739.9 450.0 32.0 335.8 5745.5 3469.7 1602.9 679.1 -6.1 0.0 5745.6 CY09E 187.9 5277.2 400.0 26.0 335.8 6226.9 5306.4 1015.0 679.1 -773.6 0.0 6226.9
CY10E 187.9 5580.5 350.0 20.0 335.8 6474.1 6421.1 0.0 679.1 -626.1 0.0 6474.2
71
Cash Flow Statement

Year Ending December 31 Profit Before Tax Depreciation Others Cash flow from Operations before WC Change Changes In Working Capital Cash flow from operations Inc/Dec in Investment Capex Others Cash from Financing Activities Inc/Dec in Loan Funds Others Inc/Dec in capital Cash flow from Financing Net Cash Inflow / Outflow Taken over on Amalgamation Op Bal Cash & Cash equivalents Closing Cash/ Cash Equivalent CY06 1458.6 254.3 -322.5 1390.4 31.3 1421.7 -158.6 -369.3 45.2 -482.7 -185.5 -257.0 19.0 -423.4 515.6 1.8 102.8 620.2 CY07 1717.2 305.1 -185.2 1837.1 185.7 2022.8 -292.1 -621.3 89.1 -824.3 -458.8 -620.4 4.0 -1075.2 123.3 0.0 620.2 743.5 CY08 1687.8 294.2 -349.4 1632.5 75.8 1708.3 301.7 -1476.2 4.0 -1170.4 175.6 -474.1 1.4 -297.1 240.8 0.0 743.5 984.2 CY09E 1385.0 335.3 -462.0 1258.3 16.2 1274.5 0.0 -1584.1 91.2 -1492.9 -56.0 -476.9 0.0 -532.9 -751.3 0.0 984.2 233.0
Rs Crore
CY10E 1050.6 435.2 -307.7 1178.1 -123.5 1054.6 0.0 -535.0 35.0 -500.0 -56.0 -474.6 0.0 -530.6 24.0 0.0 233.0 257.0
Ratios
Year Ending March 31 EPS Cash EPS EBIDTA margin (%) NPM (%) RoNW (%) RoCE (%) Net Debt Equity (X) Valuation Ratios P/E (x) P/BV (x) EV/EBIDTA (x) EV/tonne in US$ Asset Turnover Inventory turnover ratio Debtors turnover ratio CY06 58.8 79.3 28.0 19.0 41.8 39.1 0.0 CY07 67.5 92.8 27.4 18.7 34.8 39.7 -0.1 CY08 62.5 80.2 23.7 16.1 25.9 32.8 -0.1 CY09E 51.6 69.4 21.4 13.5 18.7 23.9 0.0 CY10E 39.1 62.3 18.1 9.9 13.1 17.2 0.0
10.5 4.4 6.9 116.1 1.5 54.5 13.5
9.1 3.2 5.4 94.8 1.5 52.6 15.1
9.9 2.6 6.0 94.9 1.3 51.9 15.5
12.0 2.2 7.3 88.4 1.2 51.9 15.5
15.8 2.1 8.2 74.8 1.1 51.9 15.5
72
Company Update
JK Cement (JKCEME)
Macro conditions turn favourable
With softening interest rates, a sharp decline in petcoke prices and firming up of cement prices due to strong demand in key markets, we believe the near term macroeconomic conditions of JK Cement have improved significantly. In terms of P/E and P/BV multiples, it is among the cheapest stocks in our universe. With a new greenfield plant expected to come onstream in Q1FY10, the EV based multiples of the company are also expected to reduce significantly. We reiterate coverage on JK Cement with PERFORMER rating with a price target of Rs 62 per share.
PERFORMER
2000
Rs Crore
To increase cement capacity by 68%

JK Cements 3 million tonne (MT) greenfield plant at Karnataka is likely to be commissioned in Q1FY10. The new plant will increase grey cement capacity by 68% (from 4.4 MT at present to 7.4 MT at the end of Q1FY10). On account of capacity additions, JK Cements grey cement volumes are expected to grow at a CAGR of 19.6% between FY08 and FY10.
45
R
1500 1000 500

FY07 FY08 FY09E FY10E FY11E
35 25 15
Enters high priced, high growth market of South India

As the company is entering the high priced and high growth markets of South India, its blended realisations are expected to decline only by 3.6% in FY10.
Stock Metrics
Sales
EPS
Decline in pet coke prices to cushion margins

JK Cement meets 90% of its fuel requirement through petcoke and 10% from linkage coal and the open market. With a sharp correction in crude oil prices, petcoke prices have also declined by 49% from their peak. Thus, we expect, JK Cements power & fuel cost per tonne to decline sharply to Rs 775 per in Q4FY09 from Rs 972 per tonne in Q3FY09.
JKCE IN JKCE.BO 10 62 392 165/34.8 10947 50253
Valuations
At the CMP of Rs 54 per share, the stock is trading at 2.9x and 2.4x its FY09E and FY10E earnings, respectively. It is trading at EV/tonne of $67.6 and $36.1 of its FY09E and FY10E capacities, respectively. We reiterate coverage on JK Cement with a PERFORMER rating with a price target of Rs 62 per share. Exhibit 1: Key Financials
Year Ending March 31 Net Profit (Rs Cr) EPS (Rs) % Growth P/E (x) P/BV (x) EV/EBIDTA (x) OPM (%) NPM (%) RoNW (%) RoCE (%) FY07 178.9 25.6 2.1 0.7 2.3 26.7 14.5 41.1 23.3 FY08 265.2 37.9 48.2 1.4 0.5 1.8 28.5 18.2 41.5 26.0 FY09E 129.0 18.4 -51.4 2.9 0.4 5.4 19.9 8.7 15.7 12.5 FY10E 156.0 22.3 20.9 2.4 0.4 3.3 21.7 8.1 16.3 13.5 FY11E 154.0 22.0 -1.3 2.5 0.3 2.9 19.0 7.4 13.9 12.3

Stock return(%) Jk Cem Shree Cem Orient Paper Dalmia Cem 3M 36 69 56 28 6M -18 74 46 1 12M -62 -24 -33 -65
Price Trend
180 140 100 60 20
JunAugAprDecFebAprOct-
Close Price
Target Price
73
Company Background
Shareholding pattern (Q3FY09)

JK Cement, a part of the JK group, was incorporated by acquiring the assets of the cement division of JK Synthetics in November 2004. Currently, JK Cement has grey cement capacity of 4.4 MT and white cement capacity of 0.4 MT. The company is the second largest manufacturer of white cement in India. JK Cement sells cement under brand names Sarvashaktiman (43 grade OPC), JK Super (Blended cement) Promoter & Institutional holding trend (%) JK White Cement and JK Wall Putty. Exhibit 2: Cement volume break up (FY08)
60% 40% 23% 20% 62% 62% 62% 62%
23%
23%
22%
19%
21%
0% Q4 Q1 Q2 Q3 Promoter Holding Institutional Holding
27% 33%
Rajasthan
Haryana
Delhi & U.P
Punjab, M.P & Guj.
The JK Cement Works (Fujairah, UAE) FZC, a subsidiary of JK Cement, has signed an MoU with the Municipality of Fujairah. The company has been allotted limestone mines with reserves estimated at 150 MT.
74
Exhibit 3: Historical valuations

25 20 P/CEPS & EVEBIDTA 15 2.0 10 5 0 FY06 FY07 FY08 FY09E FY10E FY11E 1.0 4.0
0.0
P/CEPS(LHS)
EV/EBIDTA(LHS)
MCap/Sales(RHS)
P/BV(RHS)

100 EV/tonne (US 80 60 40 20 FY06 FY07 FY08 FY09E FY10E FY11E 45 35 25 15 5 %
EV/Tonne(US $) (LHS)
RoNW(%) (RHS)
ROCE (%) (RHS)
75
P/BV & MCap/Sales
3.0

Year Ending March 31 Net Sales % Growth Total Expenditure EBIDTA Other income Depreciation Interest Extra ordinary items PBT Taxation RPAT EO (net of tax) Adj. PAT EBIDTA margin (%) NPM (%) Shares O/S (crore) EPS (Rs) FY07 1233.3 903.8 329.5 10.7 33.2 34.7 0.0 272.3 93.4 178.9 0.0 178.9 26.7 14.5 7.0 25.6 FY08 1458.3 18.2 1042.6 415.7 7.9 41.1 35.9 0.0 346.6 81.4 265.2 0.0 265.2 28.5 18.2 7.0 37.9 FY09E 1475.6 1.2 1181.4 294.2 3.9 51.8 47.5 0.0 198.8 69.8 129.0 0.0 129.0 19.9 8.7 7.0 18.4 FY10E 1917.1 29.9 1501.1 416.0 4.1 92.8 97.9 0.0 229.4 73.4 156.0 0.0 156.0 21.7 8.1 7.0 22.3
Rs Crore
FY11E 2070.6 8.0 1677.4 393.2 4.3 93.4 70.8 0.0 233.4 79.3 154.0 0.0 154.0 19.0 7.4 7.0 22.0
Rs Crore
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Free Reserves Revaluation Reserves Secured Loans Unsecured Loans Deferred Tax Liability Total Liabilities Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Current Assets Less: Current Liabilities & Provisions Net Current Assets Miscellaneous Expenditure Total Asset FY07 69.9 445.4 304.7 429.9 127.8 43.2 1421.0 922.4 164.4 15.9 192.5 62.2 110.0 166.4 531.1 214.6 316.5 1.7 1421.0 FY08 69.9 692.3 291.2 382.8 127.7 51.0 1614.9 1089.1 133.8 9.5 145.4 57.3 114.5 353.8 671.1 290.6 380.4 2.0 1614.9 FY09E 69.9 814.3 291.2 1086.4 127.7 51.0 2440.5 2174.9 0.0 9.5 16.9 57.9 115.9 357.4 548.1 294.0 254.2 2.0 2440.5 FY10E 69.9 963.3 291.2 1015.0 127.7 51.0 2518.1 2092.0 0.0 9.5 154.3 115.5 150.6 360.9 781.3 366.8 414.6 2.0 2518.1
FY11E 69.9 1110.3 291.2 868.6 127.7 51.0 2518.7 2018.6 0.0 9.5 229.1 124.8 162.6 364.6 881.0 392.4 488.6 2.0 2518.7
76
Cash Flow Statement

Year Ending March 31 Profit Before Tax Depreciation Others Cash flow from Operations before WC Change Changes In Working Capital Cash flow from operations Capex Inc/Dec in Investment Others Cash Flow from Investing activities Inc/Dec in Loan Funds Inc/Dec in capital Others Cash flow from Financing Net Cash Inflow / Outflow Op Bal Cash & Cash equivalents Closing Cash/ Cash Equivalent FY07 272.0 33.2 -27.8 277.3 -63.6 213.8 -179.3 -15.4 13.7 -181.0 -26.0 -99.7 -125.7 -92.9 285.4 192.5 FY08 346.6 41.1 -64.8 322.9 57.6 380.5 -191.1 7.0 12.5 -171.7 -44.5 -211.4 -255.9 -47.1 192.5 145.4 FY09E 198.8 51.8 -29.3 221.3 -2.2 219.1 -991.2 0.0 0.0 -991.2 703.6 -60.1 643.5 -128.5 145.4 16.9 FY10E 229.4 92.8 17.5 339.7 -23.1 316.6 -10.0 0.0 0.0 -10.0 -71.4 -97.9 -169.3 137.4 17.0 154.3
Rs Crore
FY11E 233.4 93.4 -15.6 311.2 0.8 312.0 -20.0 0.0 0.0 -20.0 -146.4 -70.8 -217.2 74.8 154.3 229.1
Ratios
Year Ending March 31 EPS Cash EPS EBIDTA margin (%) NPM (%) Net Debt Equity RoNW (%) RoCE (%) Valuation Ratios P/E (x) P/BV (x) EV/EBIDTA (x) EV/tonne in US$ Turnover ratios Asset Turnover Inventory turnover ratio Debtors turnover ratio FY07 25.6 30.3 26.7 14.5 0.7 41.1 23.3 2.1 0.7 2.3 34.8 FY08 37.9 43.8 28.5 18.2 0.5 41.5 26.0 1.4 0.5 1.8 34.8 FY09E 18.4 25.9 19.9 8.7 1.4 15.7 12.5 2.9 0.4 5.4 67.6 FY10E 22.3 35.6 21.7 8.1 1.0 16.3 13.5 2.4 0.4 3.3 36.1 FY11E 22.0 35.4 19.0 7.4 0.7 13.9 12.3 2.5 0.3 2.9 30.3
0.9 32.6 18.4
1.0 28.7 14.3
0.7 28.7 14.3
0.8 28.7 22.0
0.8 28.7 22.0
77
Company Update
Shree Cement (SHRCEM)

Empowered by cash
Shree Cement is one of the largest cement manufacturers in North India. The company started its operations in 1985 with a total cement production capacity of 0.6 MTPA, which has now increased to 10.1 MTPA. The outlook for the cement sector is negative. However, taking into account the fact that Shree Cement is the most efficient regional player and is available at a steep discount to its peers, we reiterate coverage on the stock with an PERFORMER rating.
PERFORMER
4,000 200 150
Timely capacity addition

Shree Cement has increased its sales volumes at 30% CAGR (FY07-FY09) to 8.1 MTPA in FY09. During the same period, cement prices in the northern region have increased by a CAGR of 11%. We believe that as Shree Cement has the worlds lowest gestations period for adding cement capacity, it will be able to capitalise the most when the demandsupply conditions turn favourable for the cement industry.
Rs Crore
3,000 2,000 1,000 0 FY07 FY08 FY09E

Net Sales
50 0 FY10E FY11E
EPS (Rs)
High cash per share reduces downside risk

At the end of Q3FY09, Shree Cement had cash and liquid investments of Rs 1000 crore, which works out to Rs 287 per share (36% of CMP). We believe that high cash per share will result into low downside risks for investors in the current scenario.
Stock Metrics
Correction in petcoke prices to reduce fuel cost

Shree Cement meets 100% of its fuel requirement through pet coke. Pet coke prices have corrected by 49% from their peaks. Due to the decline in pet coke prices we expect Shree Cements power and fuel costs to reduce from Rs 705 per tonne in Q3FY09 to Rs 600 per tonne in Q4FY09.
Valuations
At the CMP of Rs 796 per share, Shree Cement is trading at 5.2x and 6.0x its FY09E and FY10E earnings, respectively. On an EV/tonne basis, it is trading at $60/tonne and $45/tonne of its CY09E and CY10E capacities, respectively. Thus, we reiterate coverage on Shree Cement with a PERFORMER rating on the stock and target price of Rs 900 per share.
Stock returns (%) Shree cement ACC Ambuja Cement India Cement 3M 69 25 18 18
SRCM IN SHCM.BO 10 64% 2890 1139 / 330 10947 10413

6M 74 28 47 35 12M -24 -23 -25 -30
Exhibit 1: Key financials

Net Profit EPS % Growth P/E (x) P/BV (x) EV/EBITDA (x) OPM% NPM % RoNW % RoCE % FY07 157.1 45.1 0.0 17.7 5.5 5.6 43.1 11.5 34.6 12.4 FY08 287.9 82.6 83.2 9.6 4.1 3.5 41.7 13.9 51.1 26.6 FY09E 530.3 152.2 84.2 5.2 2.5 2.9 33.8 19.9 59.1 35.5 FY10E 458.5 131.6 -13.6 6.0 1.8 2.4 34.3 16.5 34.7 26.9 FY11E 415.9 119.4 -9.3 6.7 1.5 1.9 29.3 13.3 24.4 22.4
Price Trend
1050 850 650 450 250
Aug-08
Apr-08
Jun-08
Close Price
Dec-08
Target Price
78
Feb-09
Apr-09
Oct-08
Rs
100
Shareholding pattern (Q3FY09)
Company Background
Shree Cement, promoted by the Bangur Group, is Indias leading cement manufacturer in North India and largest manufacturer in Rajasthan. The company has two manufacturing units located at Beawar, Rajasthan, four manufacturing units at Ras and two grinding units at Khushkhera, Rajasthan with a total capacity of 9.1 MT, which contributes to around 20% of the total north region capacity. Shree Cement sells its products across Rajasthan, Uttar Pradesh, Uttarakhand, Delhi, Haryana and Punjab. The cement is marketed under the three brand names, Shree Ultra Jung Rodhak Cement, Bangur Cement and Tuff Cemento.
Shareholder Promoters Institutional investors Other investors General public
% holding 63.78 14.17 11.00 11.05

100% 80% 60% 40% 20% 0% Q4 Q1 Q2 Q3 64% 64% 64% 64%
14%
15%
15%
15%
Promoter Holding
Exhibit 2: P/CEPS, EV/EBITDA, MCap/sales, P/BV
79

Year Ending March 31 Net Sales % Growth Total Expenditure EBITDA Other income Depreciation Interest Extra ordinary items PBT Taxation Reported PAT Extra ordinary items(net of tax) Adjusted PAT EBITDA margin (%) NPM % Shares O/S (crore) EPS (Rs) FY07 1,368.0 778.3 589.7 21.3 433.1 10.4 -21.2 188.8 11.8 177.0 -19.9 157.1 43.1 11.5 3.5 45.1 FY08 2,065.9 51.0 1203.5 862.4 73.3 478.8 49.7 38.9 368.3 107.9 260.4 27.5 287.9 41.7 13.9 3.5 82.6 FY09E 2,666.6 29.1 1764.5 902.1 78.9 206.0 67.1 22.6 685.3 171.9 513.4 16.9 530.3 33.8 19.9 3.5 152.2 FY10E 2,773.7 4.0 1823.0 950.7 142.7 420.3 61.8 0.0 611.3 152.8 458.5 0.0 458.5 34.3 16.5 3.5 131.6
Rs Crore
FY11E 3,127.8 12.8 2212.1 915.7 104.0 403.1 46.9 0.0 569.7 153.8 415.9 0.0 415.9 29.3 13.3 3.5 119.4
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability Total Liability Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Current Liabilities & Provisions Miscellaneous Expenditure Total Asset FY07 34.8 468.9 848.3 83.1 0.0 1,435.1 548.2 343.8 50.0 353.3 26.3 156.1 238.4 284.6 3.7 1,435.1 FY08 34.8 638.0 1,167.1 163.6 0.0 2,003.5 760.0 18.0 591.0 467.4 49.4 176.6 402.6 479.9 18.5 2,003.5 FY09E 34.8 1,087.1 1,078.1 163.6 0.0 2,363.6 604.0 0.0 591.0 765.4 63.8 391.2 519.7 590.0 18.5 2,363.6 FY10E 34.8 1,488.1 958.1 163.6 0.0 2,644.7 633.7 0.0 991.0 589.2 66.3 407.0 540.6 601.5 18.5 2,644.7
Rs Crore
FY11E 34.8 1,852.0 808.1 163.6 0.0 2,858.5 330.6 0.0 991.0 1,053.0 74.8 458.9 609.6 677.8 18.5 2,858.5
80
Cash Flow Statement

Capex
Rs Crore
FY07 188.8 433.1 (38.0) (123.3) 460.5 (49.3) (597.4) 4.2 (642.5) 0.0 558.6 (42.4) 516.3 334.2 19.1 353.3
FY08 368.3 478.8 (53.9) (130.6) 662.6 (536.9) (423.4) 60.1 (900.2) 0.0 399.3 (47.6) 351.7 114.1 353.3 467.4
FY09E 685.3 206.0 (236.0) (183.7) 471.6 0.0 (32.0) 78.9 46.8 0.0 (89.0) (131.4) (220.4) 298.0 467.4 765.4
FY10E 611.3 420.3 (27.7) (233.7) 770.2 (400.0) (450.0) 142.7 (707.3) 0.0 (120.0) (119.2) (239.2) (176.3) 765.4 589.2
FY11E 569.7 403.1 (53.1) (210.9) 708.8 0.0 (100.0) 104.0 4.0 0.0 (150.0) (99.0) (249.0) 463.8 589.2 1,053.0
Ratios
Year Ending March 31 EPS Cash EPS OPM (%) NPM (%) Debt/Equity RoCE (%) RoNW (%) Valuation Ratios P/E (x) P/BV (x) EV/EBITDA (x) EV/Tonne (US$) Turnover ratios Fixed asset turnover ratio inventory turnover ratio Debtors turnover ratio FY07 45.1 175.1 43.1 11.5 1.16 12.4 34.6 17.7 5.5 5.6 151.3 0.8 5.0 29.6 FY08 82.6 212.2 41.7 13.9 0.40 26.6 51.1 9.6 4.1 3.5 69.0 0.9 6.8 24.4 FY09E 152.2 206.5 33.8 19.9 -0.10 35.5 59.1 5.2 2.5 2.9 60.2 1.2 4.5 27.7 FY10E 131.6 252.2 34.3 16.5 -0.30 26.9 34.7 6.0 1.8 2.4 45.0 1.0 4.5 27.5 FY11E 119.4 235.1 29.3 13.3 -0.57 22.4 24.4 6.7 1.5 1.9 33.1 1.1 4.8 29.6
81
Company Update
UltraTech Cement (ULTCEM)

Powered by savings
Historically, UltraTech Cement has been trading at about 30% discount to ACC, despite having better return ratios, better margins and lesser earnings sensitivity to cement price decline. This was primarily on account of its dependence on expensive sources of power. With CPPs (Captive Power Plants) coming onstream, we believe, the valuation gap between ACC and UltraTech to reduce. Also UltraTech, on account of its high dependence on imported coal than ACC, will have a higher savings in fuel cost. We reiterate coverage on Ultra tech with PERFORMER rating with price target of Rs 630.
Current Price Rs 546 Potential upside 15.4%
PERFORMER
6500 5500 4500 3500 2500
FY07 FY08 FY09E FY10E FY11E
Power & fuel cost to decline per tonne

Imported coal constitutes 43% of UltraTechs fuel requirement. The prices of imported coal have decline by 67.8% from its peak. Apart from this, UltraTech to set up CPPs with total capacity of 225 MW, which are likely to be commissioned in phased manner by H1FY10E. Upon commissioning, 80% pf the power requirement of the company will be met by captive power. In FY08, UltraTech met only 23% of its electricity requirement by coal based CPP, 64% was from grid, 12% through DG set and 1% Waste Heat Recovery Plant. We expect CPPs to generate saving of Rs 167 crore in FY10.
Rs Crore
100
Rs
80 60
Sales
EPS
Stock Metrics
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes UTCEM IN ULTC.BO 10 54.8 6967 843/250 10947 25450
Increase in capacity to drive volumes

UltraTech has started commercial production of clinker from Andhra Pradesh Cement Works (APCW) and cement from the grinding unit at Ginigera in Karnataka. Upon commissioning of grinding capacity at APCW, the total capacity of the company will increase from 19.5 million tonnes to 23.1 million tonnes by the end of FY09. On account of capacity additions, we expect companys volume to grow at 7.5% CAGR (FY08-FY11).
Valuations
At the CMP of Rs 546 per share, the stock is trading at 7.2x and 8.0x its FY09E and FY10E earnings, respectively. It is trading at an EV/Tonne of $76.1 and $61.7 of its FY09E and FY10E capacities, respectively. We reiterate coverage on UltraTech with PERFORMER rating with price target of Rs 630 per share. Exhibit 1: Key Financials
Year Ending March 31 Net Profit (Rs Cr) EPS (Rs) % Growth P/E (x) P/BV (x) EV/EBIDTA (x) OPM Margin(%) NPM (%) RoNW (%) RoCE (%) FY07 782.3 62.8 8.7 3.9 5.5 28.9 15.9 55.8 43.0 FY08 1007.6 80.4 28.0 6.8 2.5 4.8 31.2 18.3 45.2 40.7 FY09E 950.3 75.9 -5.7 7.2 1.9 5.1 26.2 14.8 30.4 28.9 FY10E 860.0 68.7 -9.5 8.0 1.6 4.6 25.6 13.6 21.8 23.4 FY11E 782.7 62.5 -9.0 8.7 1.4 4.4 22.3 11.8 16.7 19.9

Stock return (%) Ultra Tech ACC Ambuja Cements India Cement 3M 53 25 18 18 6M 52 28 47 35 12M -28 -23 -25 -30
Price Trend
800 700 600 500 400 300 200

JunAprAugDecFebAprOct-
Close Price
Target Price
Source: ICICIdirect.com Research ICICIdirect.com| Equity Research
82
Company Background
UltraTech Cement, erstwhile L&T Cement, is Indias second largest cement company after ACC with a capacity of 19.5 million tonnes. Grasim had acquired 50.2% stake in UltraTech Cement in FY04, making it part of the AV Birla Group. The company was barely breaking even the time Grasim acquired it from L&T, however, over the last 4years, it has been transformed to one of the better managed companies in the industry. Ultra Tech is also the largest exporter of cement clinker from India. It has plant in three out of five regions in India Share holding pattern (Q3FY09)

55%
60%
54%
54%
54%
Exhibit 2: Capacity Breakup (as on Mar09)
40% 20% 16% 15% 15%
11%
23%
0%
Q4
Promoter Holding
Q1
Q2
Q3
56% 21%
West
East
South
83
Exhibit 3: Historical Valuations

8.5 7.5 EV/EBIDTA & P/CEPS P/BV & Mcap/Sales 6.5 5.5 4.5 3.5 2.5 1.5 0.5 FY05 FY06 P/BV (LHS)
20 16 12 8 4 0 FY07 FY08 FY09 P/CEPS(RHS) FY10 FY11
MCap/Sales(LHS)
EV/EBIDTA(RHS)

140 120 100 EV/tonne 80 60 40 20 0 FY05 FY06 FY07 FY08 FY09 FY10 ROCE (%) (RHS) FY11 60 50 40 30 20 10 0 %
EV/Tonne(US$) (LHS))
RoNW(%) (RHS)
84

Year Ending March 31 Net Sales % Growth Total Expenditure EBIDTA Other income Depreciation Interest Expenses Extra ordinary items PBT Taxation RPAT EO (net of tax) Adj. PAT EBIDTA margin (%) NPM (%) Shares O/S (crore) EPS (Rs) FY07 4910.5 3492.7 1417.8 61.5 226.3 86.8 0.0 1166.2 383.9 782.3 0.0 782.3 28.9 15.9 12.4 62.8 FY08 5509.2 12.2 3789.2 1720.1 99.9 237.2 75.7 0.0 1507.0 499.4 1007.6 0.0 1007.6 31.2 18.3 12.5 80.4 FY09E 6413.9 16.4 4732.1 1681.8 95.2 317.4 130.5 0.0 1329.1 378.8 950.3 0.0 950.3 26.2 14.8 12.5 75.9 FY10E 6308.9 -1.6 4690.8 1618.1 96.2 372.3 122.2 0.0 1219.8 359.8 860.0 0.0 860.0 25.6 13.6 12.5 68.7
Rs Crore
FY11E 6638.5 5.2 5156.8 1481.7 97.1 399.3 61.4 0.0 1118.1 335.4 782.7 0.0 782.7 22.3 11.8 12.5 62.5
Rs Crore
Balance Sheet
Year Ending March 31 Sources of funds Equity Share Capital Reserves Secured Loans Unsecured Loans Deferred Tax Liability Total Liabilities Application of Funds Net Block Capital WIP Investments Cash Sundry Debtors Inventories Loans & Advances Current Assets Less: Current Liabilities & Provisions Net Current Assets Miscellaneous Expenditure Total Asset FY07 124.5 1639.3 1151.3 427.4 560.3 3902.7 2517.3 697.0 483.5 89.6 183.5 433.6 253.5 960.2 755.2 205.0 0.0 3902.7 FY08 125.3 2571.7 982.7 757.8 542.4 4979.8 2500.5 2283.2 170.9 100.7 216.6 609.8 376.8 1303.9 1278.6 25.3 0.0 4979.8 FY09E 125.3 3437.5 1357.7 757.8 542.4 6220.6 4933.1 990.0 170.9 253.1 252.2 709.9 380.6 1595.8 1469.1 126.6 0.0 6220.6 FY10E 125.3 4205.9 882.7 557.8 542.4 6314.0 5660.8 0.0 170.9 600.0 248.1 698.3 384.4 1930.7 1448.5 482.3 0.0 6314.0
FY11E 125.3 4896.9 632.7 457.8 542.4 6655.1 5361.5 0.0 170.9 1257.3 261.0 734.7 388.2 2641.3 1518.7 1122.6 0.0 6655.1
85
Cash Flow Statement

Year Ending March 31 Profit Before Tax Depreciation Others Cash flow from Operations before WC Change Changes In Working Capital Cash flow from operations Capex Inc/Dec in Investment Others Cash Flow from Investing activities Inc/Dec in Loan Funds Inc/Dec in capital Others Cash flow from Financing Net Cash Inflow / Outflow Op Bal Cash & Cash equivalents Closing Cash/ Cash Equivalent FY07 1166.2 226.3 -356.1 1036.4 76.7 1113.1 -764.9 -311.0 30.4 -1045.5 131.2 0.0 -170.8 -39.6 28.0 61.6 89.6 FY08 1507.0 237.2 -439.3 1304.9 70.3 1375.3 -1798.9 312.3 44.8 -1441.8 166.7 0.0 -89.0 77.6 11.1 89.6 100.7 FY09E 1329.1 317.4 -248.3 1398.2 51.1 1449.3 -1456.9 0.0 0.0 -1456.9 375.0 0.0 -215.1 159.9 152.4 100.7 253.1 FY10E 1219.8 372.3 -237.7 1354.4 -8.8 1345.7 -110.0 0.0 0.0 -110.0 -675.0 0.0 -213.8 -888.8 346.9 253.1 600.0
Rs Crore
FY11E 1118.1 399.3 -274.0 1243.4 17.0 1260.4 -100.0 0.0 0.0 -100.0 -350.0 0.0 -153.0 -503.0 657.3 600.0 1257.3
Ratios
Year Ending March 31 EPS Cash EPS EBIDTA margin (%) NPM (%) Net Debt Equity RoNW (%) RoCE (%) Valuation Ratios P/E (x) P/BV (x) EV/EBIDTA (x) EV/tonne in US$ Turnover ratios Asset Turnover Inventory turnover ratio Debtors turnover ratio FY07 62.8 81.0 28.9 15.9 0.8 55.8 43.0 8.7 3.9 5.5 94.6 FY08 80.4 99.4 31.2 18.3 0.6 45.2 40.7 6.8 2.5 4.8 94.1 FY09E 75.9 101.2 26.2 14.8 0.5 30.4 28.9 7.2 1.9 5.1 76.1 FY10E 68.7 98.4 25.6 13.6 0.2 21.8 23.4 8.0 1.6 4.6 61.7 FY11E 62.5 94.4 22.3 11.8 0.0 16.7 19.9 8.7 1.4 4.4 53.4
1.7 32.2 13.6
1.4 40.4 14.4
1.3 40.4 14.4
1.1 40.4 14.4
1.1 40.4 14.4
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87

ICICI Direct Cement Sector Report

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ICICI Direct Cement Sector Report

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April 20, 2009 | Cement

Analysts Name Ravi Sodah ravi.sodah@icicidirect.com Vijay Goel vijay.goel@icicidirect.com

Indian Cement Sector

Demand growth accelerates

Subsiding cost pressure to cushion margins in near term

CMIE Cement Stock Index

ICICIdirect.com | Equity Research

Company Updates ACC JK Cements Shree Cements Ultratech Cements 68 73 78 82

Demand growth accelerates

Exhibit 2: Capacity utilisation (%)

86.3 81.6 83.3

Source: CMA, ICICIdirect.com Research

Source: CMA, ICICIdirect.com Research

2.5 2.0 1.5 1.0 0.5 0.0

Cement consumption growth(%) (LHS)

Cement consumption to GDP Multiple (RHS)

-1.0 GDP growth(%) (LHS)

Source: Bloomberg, CMA, ICICIdirect.com Research

Exhibit 5: Per capita consumption of cement of major countries

Source: ICICIdirect.com Research

Cement consumption to GDP Multiple

Exhibit 6: Estimated cement demand from infrastructure sector

Exhibit 7: Year-wise planned expenditure

Investment in infrastructure (Rs Crore) (LHS)

Investment as % of GDP (RHS)

FY07 166.7 155.7 93 149.0 9.0

FY08 175.7 168.3 95 164.0 6.0 0.4

FY09 206.5 181.4 88 177.0 6.1 0.7

FY10E 246.0 195.6 79 189.8 5.8 0.0

Exhibit 10: Region wise capacity addition in FY10

12% 11% 47%

Source: Industry, ICICIdirect.com Research

Exhibit 11: Capacity addition in FY09

Month of Commissioning May-09 Jun-09 Aug-09 Sep-09 Feb-09 Mar-09 Mar-09

Orissa A.P. T.N. KAR GUJ T.N. T.N.

TN KAR A.P. A.P. A.P. RAJ RAJ A.P. T.N.

Apr-09 Apr-09 Jun-09 Jun-09 Jun-09 Sep-09 Sep-09 Nov-09 Dec-09

1.2 3.7 1.0 0.5 2.8 0.5 0.1 1.2 3.5

Note: Cement WPI indicates movement of average cement prices in India

Exhibit 13: Cement price changes in major cities

Source: Capitaline, ICICIdirect.com Research

Exhibit 15: Herfindahl -Hirschman Index

India Cement Industry

Source: ICICIdirect.com Research

Source: CMA, ICICIdirect.com Research

Exhibit 17: Cement prices in major northern cities

Source: CMA, ICICIdirect.com Research

Exhibit 19: Cement stock price index and major developments

Source: CMIE, ICICIdirect.com Research

Subsiding cost pressure to cushion margins in near term

Baltic dry Index (RHS)

Coal price Richards Bay, South Africa (LHS)

Exhibit 21: Rupee US dollar exchange rate

Source: Reuters, ICICIdirect.com Research

Exhibit 22: Thermal coal prices spot prices, NCDEX

4200 3900 3600 3300 3000 Oct08 Oct08

33% decline from its Sept high of Rs 4560/tonne

Rs 3430/tonne Jan09 Nov08 Sep08 Dec08 Dec08 Feb09 Mar09

Source: NCDEX, ICICIdirect.com Research

Exhibit 23: Domestic petcoke prices

Source: Industry, ICICIdirect.com Research

Source: CMA, Crisil, Coal India, ICICIdirect.com Research

Exhibit 25: Pithead coal prices