Cement Sector Anand Rathi

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

India I Equities Cement

Sector Report

Jaspreet Singh Arora+9122 6626 6727

[email protected]

Manish Valecha +9122 6626 6552

[email protected]

Macro Section

Sujan Hajra +9122 6626 6720

[email protected]

4 June 2010

India Cement Sector

The unfolding demand story; Buy Ambuja, Shree, Birla Corp

Overweight

Nifty/Sensex: 5110/17022

4 June 2010 India Cement Sector – The unfolding demand story; Buy Ambuja, Shree, Birla Corp

Anand Rathi Research

Segmental use of cement (million tons) FY08 FY09 FY10 FY11e FY12e FY13e

Residential buildings 48.5 50.7 54.6 60.7 64.2 69.6

New buildings 32.4 33.6 35.7 40.1 41.9 45.0

Rural 19.1 19.9 21.1 23.7 24.6 26.2

Urban 13.3 13.7 14.5 16.5 17.3 18.8

Repair & maintenance 16.1 17.2 18.9 20.6 22.2 24.6

Rural 8.6 9.2 10.1 11.0 11.7 12.9

Urban 7.6 8.0 8.8 9.7 10.5 11.7

Non-residential buildings 56.5 61.3 68.2 74.2 82.1 90.6

Shops and offices-mixed use with residential 0.7 0.8 0.9 1.0 1.0 1.2

Traditional shops and offices 10.4 11.4 12.3 13.2 14.6 16.4

Modern shops and offices 4.6 4.8 5.2 5.5 6.6 7.8

School, College, etc. 3.7 4.3 4.9 5.3 5.9 5.8

Hotel, Lodge, Guest House, etc. 5.2 5.6 6.9 7.2 7.8 8.9

Hospital, Dispensary, etc. 5.3 6.1 6.9 7.7 8.0 9.5

Factory, Workshop, Workshed, etc. 21.4 22.1 24.4 27.0 30.0 32.7

Place of worship 1.9 2.3 2.5 2.6 2.9 3.0

Other non-residential use 3.3 3.9 4.0 4.8 5.3 5.2

Other construction 36.2 40.7 47.3 53.8 65.1 78.3

Electricity 8.0 9.4 10.8 11.2 13.5 17.2

Roads and bridges 5.8 5.8 6.1 6.2 7.0 8.2

Telecommunications 1.7 2.0 2.4 3.0 4.1 5.5

Railways 4.0 4.6 5.4 6.3 7.1 9.2

Irrigation 5.9 7.3 9.3 12.0 14.7 16.2

Water supply and sanitation 5.4 6.0 7.0 8.0 10.0 12.3

Ports 2.9 3.3 3.7 4.2 5.2 5.9

Airports 1.2 1.2 1.3 1.4 1.7 2.1

Storage 1.1 1.1 1.1 1.2 1.4 1.5

Gas 0.2 0.2 0.3 0.3 0.3 0.3

Repair & maintenance other than residential 5.4 6.1 7.1 8.1 9.2 10.6

Non-construction demand 17.9 19.4 21.6 24.0 26.9 30.4

Total domestic demand 164.4 178.2 198.8 220.8 247.5 279.5

Foreign trade 3.4 1.8 3.1 3.2 3.2 3.2

Exports 3.8 2.9 3.5 3.5 3.5 3.5

Imports 0.4 1.1 0.4 0.3 0.3 0.3

Total final demand 167.8 180.0 201.9 224.0 250.7 282.7

Source: CSO, NSSO, CoI, ITC, Industry and Anand Rathi Research.

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

India I Equities Cement

Sector Report


[email protected]


[email protected]

Macro Section

Sujan Hajra +9122 6626 6720

[email protected]

4 June 2010

India Cement Sector


Structural improvement. Strong growth and better than expected capacity utilization relative to the current consensus view are likely to improve market perception on the cement sector over the next 6-9 months. Our top picks are Ambuja, Shree and Birla Corp.

Cement & Macro Story: Concrete Base. In India, discretionary spending is rising, consumers’ leverage is increasing and consumption getting broad-based. High investment rates are also sustaining and the share of infra in the overall capex going up. These are boosting construction activities and thereby cement demand.

Cement demand: Recasting underway. With the aid of rich array of official data, which so far remained largely unexplored, we provide a detailed cement demand model. We estimate cement demand CAGR of 12% in FY11-13 – far ahead of consensus’ 8-9%. Infra and non-residential construction would drive cement demand.

Surviving the perceived glut. While utilization levels in the cement industry are likely to worsen in FY11, we argue that the turnaround would be faster and sharper than the consensus expectation. Companies from East, Central and West are likely to benefit the most.

M&A picking up. We expect the continued M&A activity and higher consolidation levels to protect downside.

Top picks. We prefer Ambuja (for strong growth, attractive valuation), Shree Cement (cost leadership, venture into power) and Birla Corp (in high-growth regions, attractive valuation).

Overweight

Nifty/Sensex: 5110/17022

Sensex vs Cement universe

Cement Sector

Sensex

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150

May

-09

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9

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10

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10

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0

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Source: Bloomberg

India Cement Sector – Valuation matrix

Key Data ACC Ambuja UltraTech Shree India Birla Corp Orient Grasim

Rating Buy Buy Buy Buy Buy Buy Buy Buy

Price (Rs) 826 110 951 2,015 108 367 57 1,778

Target Price (Rs) 1,125 148 1,255 2,730 142 490 85 2,375

Difference (%) 36.2 34.8 32.0 35.5 31.1 33.6 49.3 33.6

Market Cap (US$bn) 3.4 3.7 2.6 1.6 0.7 0.6 0.2 3.6

PER- FY12 (x) 10.5 10.3 11.1 5.2 8.9 5.0 4.5 5.0

P/BV- FY12 (x) 1.9 2.0 1.9 2.0 0.8 1.0 1.0 1.0

EPS CAGR FY10-12 (%) (4.0) 15.7 (4.4) 10.7 9.7 0.9 23.9 5.5

Tgt EV/EBITDA (x) FY12 7.5 7.5 7.5 5.0 6.0 4.0 4.5 -

Tgt EV/ton (USD) FY12 135 159 138 124 81 69 57 -

RoCE- FY10 (%) 31.9 23.3 23.4 28.4 9.4 20.3 23.4 22.0

RoE- FY10 (%) 29.4 20.1 26.6 44.4 10.8 23.1 26.6 25.6

Source: Company, Anand Rathi Research PE: Grasim (Consol); Shree (Normalised)


Anand Rathi Research 2

India Cement Sector


Investment Argument & Valuation ................................................................ 3

Cement & Macro Story: Concrete Base........................................................ 9

Cement demand: Recasting underway....................................................... 15

Surviving the perceived glut........................................................................ 35

Cost increases to be passed on.................................................................. 47

M&A to protect downside ............................................................................ 49

Company Section ....................................................................................... 51

ACC............................................................................................... 52

Ambuja .......................................................................................... 59

UltraTech ....................................................................................... 67

Shree Cement................................................................................ 75

India Cement ................................................................................. 83

Birla Corp....................................................................................... 91

Orient............................................................................................. 98

Grasim ......................................................................................... 107

Annexures................................................................................................. 114



Investment Argument & ValuationA key beneficiary of the changing patterns in domestic consumption and investment will be the cement industry. Our unique macro model indicates strong cement demand – 12% CAGR over FY11-13 compared with consensus’ 8-9%. Our analysis also shows that slower effective capacity addition/ optimization than generally anticipated would mitigate the fear of sharp deterioration of capacity utilization and unit realizations. We thus expect market perception of the sector to improve over the next 6-9 months. Our top picks in the sector are Ambuja, Shree and Birla Corp.

Structural tailwind for the cement industry

Strong and resilient domestic absorption – both private consumption and investment – is the very essence of India’s growth story. India’s private consumption is undergoing structural changes – discretionary spend is increasing, consumers’ asset-backed leverage is rising and inclusive growth is making consumption demand more broad-based. On the investment side, high investment rates are sustaining and the share of infra in the overall capex going up.

We feel the cement sector would be a key beneficiary of this transformation as these changes are boosting demand for construction and also making construction more cement-intensive. This is already apparent.Despite the global financial crisis cement demand grew by 8.4% in FY09 and 11.6% in FY10.

We expect the process to gather momentum during FY11-13. The key drivers:

Rising discretionary spend, greater consumer leverage and percolation of fruits of growth across income categories would increase housing demand.

Discretionary consumption in India is rising fast, especially those relating to areas such as education, healthcare, hospitality, travel and entertainment. These require more educational institutes, hospitals, dispensaries, hotels, restaurants and theaters. Rising retail spending requires more shops. Strong consumer demand also calls for more factories and office space.

The rising share of infrastructure in the overall capex implies more construction work for facilities such as power plants, irrigation, water supply, sanitation, roads, bridges, ports and airports.

Concrete growth, beyond myths on cement demand

There is a clear void of authentic cement demand estimates in India. Our detailed macro approach tries to bridge this gap with the aid of rich publicly available official statistics, which so far remained largely unexplored. We estimate 12% CAGR of cement demand during FY11-13, far ahead of back-of-the-envelop consensus estimate of 8-9% growth.

Our top-down and bottom-up analyses of cement demand punctures many myths about India’s cement demand:

We expect strong growth in infrastructure investment during FY11-13 and this in turn would lead to strong growth in cement demand from infrastructure activities. Our cement demand estimates show that the



share of infrastructure in total domestic demand for cement has increased from 18% in FY05 to 24% in FY10 and likely to increase to 28% by FY13. Irrigation and power are two large users of cement. Within the infrastructure sector, irrigation, power and urban infrastructure are expected to be the main sources of growth during FY11-13.

The conventional perception of the housing, in particular, urban housing being the main source of cement demand is invalidated by the available data. During FY08-10, on average, housing, non-residential buildings and infrastructure accounted for 29%, 34% and 23%, respectively, of overall domestic cement demand. Our estimates suggest that their shares would become 26%, 33% and 26%, respectively, during FY11-13. Indirect use by construction and repairs account for the rest of cement use.

Shops and offices, another perceived big sources of cement demand, account for only 9% of the overall cement demand. The same amount of cement demand in fact comes from building used for education, healthcare and hospitality.

The supply overhang – more fear than substance

During the course of the current year, at the state/regional levels, capacity utilization levels would fall – often significantly – but would improve considerably in the next two years. The Central, East and West zones would continue to remain excess demand zones while excess capacity concerns in the North and South is likely to continue even beyond FY11.

Fall in capacity utilization concerns in the cement industry is likely to linger but turnaround could be far ahead of the current consensus expectations. We expect the actual capacity utilization levels in FY11 to be better than what is being anticipated now based on estimates of planned capacity additions. Yet, such concerns are unlikely to disappear quickly. Our view of much stronger cement demand and slower pace of effective capacity addition/ optimization of installed capacity suggest that market perception on the sector is likely to improve over next 6-9 months.

Pricing power to be regained

The additional installed capacity of 62m tons coming up during FY11-13, together with the current demand-supply gap, is expected to be absorbed by additional demand of around 83m tons. Thus, in line with the expected trend in utilization rates (bottom out in FY11 followed by pick-up in FY12 and FY13), we believe that prices would start looking up only from 4QFY11 (volatile till then) and strengthen thereafter. Also we see the trend of correction/firmness in prices varying across regions due to local demand-supply conditions. Overall, the regions of Central, East and West would be our preferred spots based on estimated trends on demand-supply and likely price outcomes.

Our new capacity estimates (62m tons) over the next three years vs the past three years addition (100m tons) are based on information received from equipment suppliers, companies and industry consultants. We do not see too much risk to our estimate of capacity additions during FY10-13 given the three to four years of commissioning time required for a greenfield project. Our channel checks suggest that 85% of the fresh enquiries with the equipment suppliers are for greenfield projects.



Cost increases to be passed on

Sourcing of quality coal (for cement or captive power plant) at reasonable prices has been and would continue to be a challenge for the industry. Nevertheless, we believe that any cost pressures could be handled through hike in cement prices. With most cement companies running on captive power units vs state grids earlier, the risk of high power tariff and erratic supply has gone down. The open-market sale of power would also help cross-subsidise the cost of generating captive power. In addition, if the quantum of power sold is reasonably large, it throws up a new and diversified revenue stream.

We believe that freight-price hikes (road or railways) could be passed on to consumers at least in phases. Freight increases are also likely on account of increase in lead distances on selling outside core markets. This, however, is unlikely to impact naked realizations (net less freight) as the higher realizations would offset the increase in freight charges.

Consolidation/M&A to protect downside

The top five groups currently contribute 55% to capacity vs 40% in FY00. In view of the greater degree of consolidation/M&A in the last decade, we expect no major price decline during FY11 despite a dip in utilization rates. Also with the balance sheets of most of the companies being in a much better shape (leverage of 0-1.5x) than in the past, we do not expect distress sales depressing the overall realizations. We expect prices to move up starting FY12 backed by strong demand.

M&A deals struck in the past two years have been priced at around US$170-220 per ton. We expect the recent pick-up in M&A activities to continue thereby protecting current valuations for the following reasons:

Large cash-rich Indian companies aim at a larger market share through inorganic growth and are hence ready to pay a premium over replacement cost in order to acquire quality assets.

The upswing in cement cycle affords better valuations to smaller players to exit than in past.

Heightening interest from foreign cement manufacturers to expand/ enter the fast-growing Indian cement market.

With the current replacement cost hovering around US$100-110 per ton and a lead time of 3-4 years for setting up a greenfield project, the number of companies (domestic and international) on the lookout for acquisition opportunities is increasing.

Valuations

Strong case for long term out-performance

In the past ten years, on a one-year forward PE, the cement sector (ACC and Ambuja) has traded at an average 21% discount to the Nifty. Being a cyclical sector, variation at the extremes is huge – from a 60% discount to a 60% premium. At present, the discount is around 25%. During FY09-10, cement companies on an average traded at greater discount to the Nifty (40%), reflecting the not-so-great outlook.

We believe that strong demand growth would be the key in the sector’s re rating. We expect capacity utilization to bottom out in FY11 and improve gradually over next two years leading to valuation expansion. With price outlook improving (starting 4Q11), we are likely to see the sector discount



to the Nifty narrowing (in FY12), as in the peak years of FY02, FY05 and FY08 (see Fig 1).

Fig 1 – One-year-forward PE: the Nifty vs the Indian cement sector

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Nifty Cement Cement Avg Capacity Utilization (RHS)

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Source: Bloomberg, Anand Rathi Research Note: The cement sector relates to ACC and Ambuja

Valuation methodology – ten-year average EV/EBITDA

We have valued cement stocks on a one-year-forward EV/EBITDA, an appropriate valuation method for commodity industry. We assign a multiple in line with the average of the past ten years (see Fig 2). We test the target price with the implied EV per ton to compare the valuations with that of the average of last ten years (see Fig 3).

Fig 2 – Indian cement sector – One-year-forward EV/EBITDA trend

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Cement Sector Average Source: Bloomberg, Anand Rathi Research Note: Cement sector relates to ACC & Ambuja

We value ACC and Ambuja (large-cap pure cement plays) each at 7.5x CY11e EV/EBITDA. The implied EVs/ton are at a premium of around 30% to the average multiples for these companies for last ten years. This is justified keeping in mind the current/estimated low net leverage, low working capital and better or similar return ratios vs the average of last ten years. The other companies have been valued at an appropriate discount to ACC/Ambuja, bearing in mind their size, regional mix and their own valuation history. We believe the healthy balance sheets and greater consolidation would drive sector re-rating at the beginning of the next upturn (4Q11) (see Fig 4).



Fig 3 – One-year-forward EV per ton vs replacement cost

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Source: Bloomberg, Anand Rathi Research

Strong Balance Sheets and Cash flows

The last three years have seen strong demand growth. With few capacity additions cement prices rose, propping up balance sheets of companies. Coming after a four-year gap (FY01-FY05), this turned out to be a major relief. Enthused by the robust FY06-09 profits, most cement companies announced mega-capacity expansions. They have already added around 70m tons during FY08-10 and plan to add another 62m tons in FY10-13. Thus a major portion of their total capex has already been undertaken, leading to generation of free cash-flows in the next few years (unless other mega-expansion plans are announced) (see Fig 4).

Fig 4 – Net D/E – All companies at comfortable levels

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ACC Ambuja Grasim UltraTech IndiaCement

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Risks

Weak volume growth. A significant dampening of demand (our estimate: a 12% CAGR over FY11-13) would limit upside in utilization rates in FY12 and beyond.

Sustained subdued pricing environment. Quicker ramp-up of fresh capacities beyond our assumptions, together with weak demand may hold down cement prices for longer than estimated, slashing earnings.

Steep hike in coal prices. Coal prices rising appreciably from levels now would cut into earnings, incongruent with our estimates. Also, a strong rupee depreciation would buoy up coal prices.



Fig 5 – India cement sector – Valuation matrix Key Data ACC Ambuja Ultratech India Shree* Birla Corp Orient Grasim #PER (x) FY10 9.7 13.8 10.8 10.7 6.7 5.1 6.9 5.4FY11e 10.9 11.8 11.9 15.0 6.6 5.8 5.5 5.5FY12e 10.5 10.3 11.1 8.9 5.2 5.0 4.5 5.0EV / EBITDA (x) FY10 5.7 8.2 5.9 6.4 4.8 2.9 4.9 FY11e 6.2 6.8 6.2 8.4 5.0 3.3 3.6 FY12e 5.2 5.2 5.5 5.8 3.4 2.7 3.1 EV / ton (US$) FY10 121 155 112 84 128 73 46 FY11e 104 123 108 80 103 58 43 FY12e 94 111 102 78 83 46 42

Source: Anand Rathi Research #Consolidated PE, * Based on normalized EPS

Top Buys

Ambuja. We rate Ambuja a Buy with a target price of Rs148 based on a target EV/EBITDA of 7.5x on CY11e, the average for past ten years. We like the stock due to the resurgence of its cost leadership status, expansion in high-growth regions and de-leveraged balance sheet.

Shree Cement. We rate Shree a Buy with a sum-of-parts target of Rs2,730: Rs2,150 for cement at 5x FY12e EV/EBITDA and Rs580 for power at 1x P/BV. It implies a normalized PE of 7x and an EV/ton of $125. We like the stock due to industry leading efficiency in cement production, power venture diversification and growth plans.

Birla Corp. We rate Birla Corp a Buy with a target price of Rs490 based on a target EV/EBITDA of 4x on FY12e, the average for past ten years. We are positive on the stock given its low cost structure, de-leveraged balance sheet, capacity expansion and presence in high-growth regions.

Fig 6 – Anand Rathi Research vs consensus (Rsm) PAT ACC Ambuja Ultratech India Shree Birla Corp Orient Grasim FY11e ARG 14,222 14,259 9,971 2,216 8,005 4,836 2,005 23,930 Consensus 13,800 12,115 8,926 2,825 7,302 4,840 1,718 20,443 Diff. (%) 3.1 17.7 11.7 (21.6) 9.6 (0.1) 16.7 17.1 FY12e ARG 14,812 16,300 10,669 3,741 9,599 5,676 2,446 26,755 Consensus 12,710 12,703 9,560 3,209 8,544 5,288 1,818 23,430 Diff. (%) 16.5 28.3 11.6 16.6 12.4 7.3 34.6 14.2

Note: Grasim figures – Consolidated Source: Bloomberg, Anand Rathi Research



Cement & Macro Story: Concrete BaseIndia’s private consumption is undergoing structural changes –discretionary spend is increasing, consumers’ asset-backed leverage is rising and inclusive growth is making consumption demand more broad-based. On the investment side, high investment rates are sustaining and the share of infra in the overall capex going up. All these changes are boosting demand for construction and also making construction more cement-intensive. We expect sustained high growth in cement demand in India in the coming years. This is a major positive for domestic cement manufacturers as scope of cement imports remains marginal, globally as well as in India.

India’s consumption, investment on the move. Strong and resilient domestic absorption – both private consumption and investment – is the very essence of India’s growth story. Patterns of domestic consumption and investment in India are currently undergoing major structural changes with significant implications at the sectoral level. This section explains why we feel that India’s cement industry would be a key beneficiary of this process.

Changing facets of private consumption

Changing facets of India’s consumption story. Three key trends of the current consumption story in India are – (a) rising share of discretionary consumption in the overall private consumption as well as GDP; (b) rising financial leverage of the Indian consumer backed by rising private wealth and (c) widening of consumption base with percolation of the benefits of higher growth even to the lower income groups.

Rising discretionary spend. Despite generally accelerating growth in private consumption over the decades, the growth trailed the overall GDP growth. As a result, contribution of private consumption to GDP growth and its share in overall GDP is falling (see Fig 7). Sharp decline in the non-discretionary consumption led this process. On the contrary, the share of discretionary consumption in GDP is rising fast (see Fig 8).

Fig 7 – Share of private consumption falling

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Source: Government of India and Anand Rathi Research.

Rising asset backed household leverage. Coterminous with the falling share of the overall private consumption in GDP, there has been marked increase in savings rate – savings to GDP ratio – in India. This has been contributed mainly by rise in household savings – both in physical and



financial assets (see Fig 9 and 10). While Indian households remain net savers, i.e. rise in household assets far exceeds increase in household liabilities, increased savings and thereby greater wealth have allowed them to increase gross financial leverage (see Fig 10).

Fig 8 – Discretionary consumption of the rise

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Fig 9 – Strong growth in domestic savings

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Source: Government of India, RBI and Anand Rathi Research.

Inclusive growth driving consumption. A key factor behind robust domestic consumption and, in particular, sharp jump in discretionary consumption has been strong improvement in per capita income in the



country (see Fig 11). While there is no official data in India depicting the growth in income within different income strata, indirect evidences suggest that the benefits of rising overall income are percolating across income groups. For example, growth rates in wages in the organized and unorganised sector have largely moved in tandem. In fact, during the last decade, wage rates in the unorganised sector have grown faster than the organized sector (see Fig 12). Inclusive income growth in India is making private consumption broad-based.

Fig 11 – Rapid rise in per capita income

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Fig 12 – Well dispersed income growth

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Transformation of the investment cycle

Manufacturing capex driven growth during FY04-08. Despite the fact that the share of investment in GDP India remains much lower than that of private consumption, the country’s tryst with high growth, especially the 9% growth during FY04-08, has been driven by strong capex cycle. Between FY04 and FY08, on an average, over 50% of the growth in India’s GDP was contributed by investment and consequently the investment to GDP ratio jumped from 23% in FY02 to 37% in FY08 (see Fig 13). During the same period, manufacturing investment was the single largest driver of the overall investment – accounting for more than 50% of the incremental investment. In contrast, infrastructure contributed just over 20% of the incremental investment in this period (see Fig 14).

India moving towards infra-driven capex cycle. The prominence of manufacturing capex is, however, on the wane and that of infrastructure



capex is on the rise (see Fig 15). After recording over 50% real growth in FY05, manufacturing capex has decelerated till FY08 and suffered 22% decline in FY09. In contrast, after hitting a low in FY05, infra capex has gathered momentum. While India’s overall investment recorded a decline in FY09, infra capex growth remained positive, albeit low. We expect infra capex to play an increasingly prominent role in India’s investment and overall growth story in the current decade.

Fig 13 – Investment main driver of high growth

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Fig 14 – Manufacturing drove capex in FY03-08

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All-round signs of strong acceleration in infra capex. Rising prominence of infrastructure capex is evident from various spheres. Policy makers in India are promoting the sector with various inducements. Both private and public sector units have rolled out aggressive expansion plans in most spheres of infrastructure including power, roads, ports and communication. Various schemes have been launched to improve urban and rural infrastructure. Since late 2006, growth in bank credit to infrastructure has generally been much stronger than the same to the industry (see Fig 16). The share of infrastructure in the outstanding bank credit has jumped from 7.7% in Dec’06 to 12.7% in Feb’10.

Fig 16 – Bank lending to infra growing fast

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Changing absorption pattern: Cement a key beneficiary

Boost in construction activities. The ongoing structural changes in private consumption and investment in India is likely to result in strong growth in construction activities across all verticals – housing, non-residential buildings and infrastructure-related construction.

Housing. Rising discretionary spend, greater consumer leverage and percolation of fruits of growth across income categories would increase housing demand.

Non-residential buildings. Discretionary consumption in India is rising fast, especially those relating to areas such as education, healthcare, hospitality, travel and entertainment. These require more educational institutes, hospitals, dispensaries, hotels, restaurants and theaters. Rising retail spending requires more shops. Strong consumer demand also calls for more factories and office space.

Infrastructure. The rising share of infrastructure in the overall capex implies more construction work for facilities such as power plants, irrigation, water supply, sanitation, roads, bridges, ports and airports.

Cement intensity of construction going up. Within the housing space, the share of katcha and semi-katcha housing are falling and that of pucca houses are increasing. Similar changes in the structure type are happening for shops, especially in rural areas. From almost zero-base a decade back, Grade A offices, modern retail space and multiplexes are now emerging even beyond the limits of metropolitans and tier I cities. Greater share of infrastructure in the overall capex also means greater cement usage as infra capex is nearly 5 times more cement intensive than manufacturing capex.



Strong cement demand outlook. Construction activities account for almost all cement demand both directly and indirectly through demand for construction materials manufactured through the use of cement. Therefore, both robust growth in construction activities and rising cement-intensity of construction bode well for sustained and high cement demand growth in India.

Cement: a near perfect domestic story. For most products, a considerable part of robust domestic demand can get ‘leaked’ to rest-of-the-world through rising imports. This is especially pertinent if the rising domestic demand starts pushing up the domestic prices. Mainly because of high transportation cost, import, however, is generally not a large scale viable option to meet cement demand and this result in wide variation in cement prices across the world (see Fig 17). These considerations suggest that Indian cement companies should be one of most prominent beneficiaries of the changing patterns of India’s growth story in the next 2-3 years.

Fig 17 – Limited international trade in cement Net exports (% of domestic production) Import price (US$ per ton)

2002 2005 2008 2002 2005 2008

Brazil 0 3 1 50 55 63

China 0 2 2 23 29 40

Egypt 3 0 -15 30 .. ..

France -10 -9 -17 58 86 100

Germany 6 16 22 60 81 136

India 4 5 1 32 163 87

Indonesia 16 10 8 59 78 42

Iran 4 4 0 .. 70 43

Italy -4 -6 -2 49 60 88

Japan 10 13 16 43 51 54

Korea 4 5 8 37 41 44

Mexico 5 9 5 167 140 136

Pakistan 0 11 24 .. 151 176

Russia 5 6 -14 60 82 109

Saudi Arabia 11 2 1 72 56 104

Spain -14 -18 -12 41 50 72

Thailand 51 41 45 478 224 464

Turkey 32 23 26 50 44 67

US -26 -33 0 49 58 78

Vietnam -8 -8 0 39 51 ..

Source: International Trade Centre and Anand Rathi Research.



Cement demand: Recasting underwayThere is a clear void of authentic cement demand estimates in India. Our detailed macro approach tries to bridge this gap with the aid of rich publicly available official statistics, which so far eluded cement analysts. We estimate 12% growth in cement demand during FY11-13, far ahead of back-of-the-envelope consensus estimate of 8-9%. Not housing but infrastructure and non-residential building constructions would be the main drivers.

Groping in the dark

Modeling cement supply. Cement supply estimates in India are largely based on information on company-specific current capacity and future capacity expansion plans. The high level of concentration of cement production in India whereby nearly 70% of the supply comes from the top 20 manufacturers allows reasonably good approximation of the current and the future capacity. Yet getting the appropriate current production and future expansion data on small and non-listed cement companies is a challenge. Execution delays in installation of new capacities and delays in optimum usage of newly installed capacities often result in overestimation of cement capacity in the near term future. This problem becomes particularly acute in the periods of strong expansion of cement capacities as is happening in the last few years. The problem is likely to persist in the foreseeable future as well. Notwithstanding our skepticism about such cement supply estimates, we have far greater reservations on the existing cement demand estimates – both top-down as well as bottom-up.

Top-down GDP based estimate. Current top-down cement demand forecasts assume a stable relationship between cement demand and GDP growth and apply multiples on real GDP growth – ranging from 1-1.5 – to derive growth in cement demand. Actual data, however, does not suggest the existence of any stable and strong relationship between cement demand and GDP growth (see Fig 18). Just look at the correlation coefficient between the two over 1982-2009: just 0.2. The relationship somewhat gets stronger when it is measured from the mid-’90s (FY93-09), probably reflecting the dismantling of the license-permit raj in the cement industry and thereby greater interplay of market forces. The relationship gets even better when measured with quarterly data from 2000 to now. Yet, the correlation coefficient continues to remain below 0.4.

Fig 18 – Cement demand and GDP: weak link

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Predictive power undermined. Irrespective of the values of “correlation coefficient”, “statistical significance” or “goodness of fit” in the relationship between two variables, the predictive power of a model depends on the stability of the relation between these variables. In the context of top-down cement demand estimate using GDP growth outlook, the question is whether the past relationship between cement demand and GDP growth has been stable. The unambiguous answer is, it has not been so. This is reflected in the large variation of cement usage intensity per unit of GDP. Cement usage intensity dropped between FY96 and FY06 and rose sharply thereafter (see Fig 19).

Fig 19 – Changing cement usage intensity

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Bottom-up sum-of-parts demand estimate. Bottom-up cement demand estimates are derived using (a) segmental cement usage intensity, (b) current size of these segments and (c) likely growth in those segments. The problem with the existing bottom-up cement estimates is that none of these use authentic data on the size of segments of the real estate or the infrastructure sectors in terms of yearly value of output, investment or any other measure of activity. Similarly, segmental shares in all-India cement demand are largely anecdotal. In view of this, we feel that the current bottom-up estimates of cement demand often end up deriving results that are actually the assumptions they started with.

Demystifying Cement demand: A top-down view

Strong cement demand growth. We estimate India’s cement demand is poised for compounded annual growth rate (CAGR) of 12% over FY11-13 compared with consensus’ 8-9%. Given that demand from construction – direct and indirect – accounts for nearly the whole of cement demand, we first analyze and estimate construction growth.

Data sources

Finding relevant official data sources. In our bid to avoid the pitfalls of the top-down GDP-based and bottom-up anecdotal segmental demand-based forecasting methods, we scoured a mind-numbing stack of official data to find those relevant in building our unique macro forecasting model. To our knowledge, no one else has done this. The key source of our top-down cement demand estimate is India’s National Account Statistics 2010 by the Central Statistical Organisation (CSO), which estimates construction activity as part of overall national income. We also draw on liberally from a large array of other official data sources. These include inter alia the input-out transaction table (IOTT) of the CSO,



housing condition surveys and consumer expenditure surveys by the National Sample Survey Organisation (NSSO), census of residential and non-residential structures by the Census of India, infrastructure investment data estimated by the Planning Commission and State-level GDP and construction activity estimates by the CSO.

Methodology and assumptions

Encompass of construction activities. Construction includes myriad activities, from building roads, rail-beds, residences, shops and offices, bridges to water reservoirs, power plants, hydro-electric projects. India’s national income data captures all such activities within value of output and investment in construction activities. According to the latest IOTT published by the CSO, direct cement consumption by the construction sector accounts for 89.13% of overall cement consumption in India. The rest of cement also goes mainly into construction activities, although indirectly through the use of cement-based construction materials.

Cement usage intensity. We start of by estimating the rupee value of pucca (brick, concrete) construction from the national income data and derive its direct cement consumption in tons for the period FY05-10. We see that this coefficient has largely remained stable over FY05-10 – the difference between the minimum and the maximum being 5%, likely arising from changes in construction technology and slight variations in structure types.

Segmental cement usage intensity. To arrive at segmental cement usage intensity, we use National Account Statistics Sources and Methods, 2007 data that show the proportion of cement and other major construction materials used in different types of pucca construction. We then estimate annual segmental cement usage intensities for the period FY05-10, which show the intensity remained stable even at the segmental levels. The only exception was ‘other construction’ (mainly infrastructure), which showed rising usage intensity, most probably because of technology changes and the fact that many infra projects were in relatively early stages of commissioning, which requires high cement usage as compared to the later part of project implementation.

Sectoral growth assumptions. The national income data on construction activities at the granular level coupled with cement demand intensities provide us the break-up of the past cement demand from these segments. In addition, we need segmental growth for the construction sector for deriving cement demand estimates during FY11-13. While growth of almost all segments of construction slumped during FY09-10, we anticipate a smart recovery during FY11-13. Yet, with the exception of residential buildings, we assume the growth in all verticals of construction to be slower than the peak rates achieved during FY06-08 (see Fig 20).

Fig 20 – Assumptions on real growth rate (%) FY06 FY07 FY08 FY09 FY10e FY11e FY12e FY13e

Residential buildings 3.3 4.4 3.2 2.2 2.5 4.6 5.7 5.8

Non-residential buildings 16.8 11.0 14.6 6.9 7.4 11.2 10.2 9.1

Other construction 17.5 16.9 7.8 8.5 9.8 12.8 14.8 16.0

Total new construction 15.0 11.9 11.0 6.8 7.6 11.0 11.2 11.1

Repair and maintenance 6.7 10.8 12.6 6.3 8.0 10.5 11.0 12.0

Total construction 13.3 11.7 11.3 6.7 7.6 10.9 11.2 11.3

Construction value added (GDP) 12.4 10.6 10.0 5.9 6.5 8.5 10.5 13.0




Conservative assumptions. Our construction sector growth assumptions are broadly in line with growth rates achieved during the pre-global financial crisis years (FY06-08). At the overall level, we assume construction sector real GDP growth of 10.7% over FY11-13, which is lower than the 11% recorded over FY06-08. We, in fact, expect much stronger growth in construction sector both at the overall and segmental levels during FY11-13 than what we have used for our calculations. Given this, our cement demand estimates (see Fig 21) are at the lower end of rates at which we expect the cement sector to grow in the medium term.

Bottom-up cement demand: Myths and realities

Validation and granular inferences. For our bottom-up approach, we analyze and estimate demand from the segments: residential, non-residential and others-mainly infrastructure facilities. These estimates use data, which are largely different from those used for top-down estimates. There are two key purposes for the bottom-up estimates. First, these estimates enable us to compare and thereby cross-validate the top-down inferences. Second, we derive cement demand at more granular levels with the bottom-up estimates, which allows us to question many of the conventional views about the sources of cement demand in India. This, in turn, brings to the fore the reasons for consensus’ pessimism and our optimism on future cement demand in India.

Fig 21 – Domestic cement demand estimate FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e

(million tons)

1 Residential buildings 31 32 32 34 36 40 42 45

2 Non-residential buildings 46 50 56 61 68 74 82 91

3 Other construction 27 32 36 41 47 54 65 78

4 Total new construction Sum (1)-(3) 103 114 125 136 151 168 189 214

5 Repair and maintenance 18 19 22 23 26 29 31 35

6 Total construction (4)+(5) 121 133 147 159 177 197 221 249

7 Non-construction 15 16 18 19 22 24 27 30

8 Total demand (6)+(7) 136 150 164 178 199 221 247 280

(Share in total, %)






Total construction 89.1 89.1 89.1 89.1 89.1 89.1 89.1 89.1

Non-construction 10.9 10.9 10.9 10.9 10.9 10.9 10.9 10.9

Total demand 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

(growth, %)






Total demand 10.2 10.1 9.8 8.4 11.6 11.1 12.1 12.9Note: Cement demand by the construction sector includes only direct demand. Indirect cement demand by construction through demand for building/related material manufactured using cement is clubbed with non-construction demand. Source: Government of India and Anand Rathi Research.



Demand from residential buildings

Housing accounts for far less cement demand than consensus’ view. Available statistics that show each segment’s share of overall cement demand are largely anecdotal and vary widely. The consensus view is that housing, i.e., residential buildings, account for 40-60% of overall domestic cement demand. We beg to differ. Our top-down analysis (conducted above) shows that in FY13 new residential buildings would account for just 16.1% of overall cement demand, down from 17.9% in FY10 and 22.7% in FY06. Even if we include repair and maintenance of residential structures (discussed separately subsequently) along with new construction, the share of housing in overall domestic cement demand declined from 35.7% in FY05 to 27.5% in FY10 and expected to decline to 24.9% by FY13. Two important points need flagging here. First, our estimate of share of housing, taking both new construction and repair and maintenance is well below even the lower end of consensus estimate of 40-60%. Second, as a source of cement demand, the role of the housing sector is declining sharply. To substantiate our top-down estimates, we also did a bottom up analysis, which showed broadly similar results.

Our housing, consensus’ housing. Prior to moving into the bottom up analysis of cement demand from the housing sector, we have to point out that there are clear differences between our definition of housing and that of consensus. There are two major differences:

1. Consensus’ definition of housing implicitly includes all kinds of housing construction activity – new house construction, extension/alteration /improvement/repair/maintenance of existing homes. We separately estimate cement demand from (a) new construction and major repair and (b) maintenance and repair activities. In this section we only discuss new housing construction. Repair and maintenance has been discussed separately in a subsequent section.

2. Many residential buildings in India are mixed use – residential as well as commercial and/or industrial. Our data sources – CSO and NSSO – have very granular statistics and segregate residential and non-residential buildings with one exception: residential buildings owned by public sector units are included within non-residential buildings.

Sharp jump in number of housing units. To understand cement demand from the housing sector, we first look at housing growth. India had 156m residential buildings in ’93, which jumped to 207m in ’02 and further to 222m in ’08. Off those, pucca houses more increased dramatically, from 67m in ’93 to 98m in ’02 and 135m in ’08. On the other hand, katcha houses have been declining since 1993, while the number of semi-pucca structures grew fast during ’93-’02 and declined even faster during ’02-’08 (see Fig 22 and 23).

Rise in housing units misleading indicator of cement demand. We say so because of several reasons.

Partitioning a house. Partitions can increase the number of houses as joint families disintegrate into nuclear families. Nevertheless, this increase in housing units does not add to residential plinth/floor area, which is the real driver of cement demand.

Structure type. The share of katcha houses in overall housing stock declined from 26% in ’93 to 14% in ’08. Yet, katcha houses’ share remains large, particularly in rural areas. More importantly, the share



of semi-pucca houses jumped from 31% in ’93 to 36% in ’02 before drastically dropping to 25% in ’08. Katcha construction by definition does not use cement and the intensity of cement use by per unit of semi-pucca construction is, on an average, just around 35% of that of a pucca construction. Therefore, any cement demand estimate based on the growth in overall number of houses without taking into account the composition of housing stock in terms of structure type is likely to lead to erroneous estimates of cement demand from the housing sector.

Fig 22 – ‘Structural’ change in housing stock

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Fig 23 – Pucca houses growing strongly

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Construction area. Rather than the number of houses, our bottom up estimate of cement demand from residential buildings is based on the plinth area of pucca and semi-pucca houses. While the details of the bottom up estimates have been discussed below, it is sufficient to state here that over time, there has generally been a marked decline in the size of dwelling units. Given this, a housing unit-based cement demand estimate is likely to overstate cement demand from residential buildings.

Conversion between structure classes less cement intensive. The absolute decline in the number of katcha houses and the jump in pucca and semi-pucca houses during 1993-2002 and the absolute decline in both katcha and semi-pucca houses and sharp jump in pucca houses during 2002-08 suggest part of the katcha houses are being converted into semi-pucca/pucca houses and part of semi-



pucca houses are getting converted into pucca houses. While in terms of number, these would be counted in new construction within that category, the intensity of cement use for converting a semi-pucca house into a pucca house would be lower than building a totally new pucca house.

Estimate of residential space addition. We utilize NSSO information on frequency distribution of India’s existing houses by plinth area and average area for new construction. These data are available in terms of rural and urban residential buildings and each category is further classified by construction type – pucca and semi-pucca. Our estimates show that in 2002 India had 7.8bn square meter (sqm) of pucca and 4.7bn sqm of semi-pucca residential structures. The outstanding pucca residential area jumped to 8.9bn sqm in 2008 while the area in semi-pucca category remained virtually unchanged (see Fig 24). New constructions during 1998-2002, on an average, resulted in addition of 77.7m sqm of pucca and 15.9m sqm of semi-pucca residential building space per year. During 2003-2008, new construction added 180.1m sqm of pucca and 8.2m sqm of semi-pucca residential structures per year (see Fig 25).

Fig 24 – 14 bn sq. meter of housing space

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Fig 25 – New addition of 180mn sqm a year

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Our top down and bottom up housing cement demand estimates validate each other. Using data of new housing construction (in square meters) and cement intensity of construction, we got our bottom up cement demand estimates from new residential construction, which works



Housing growth acceleration likely. Ourassumptions for new housing construction growth during FY11-13 factors in the strong acceleration witnessed over FY09-10 and the average during the last decade (see Fig 26). We have been conservative in our view on housing growth and think actual growth could be higher. Nevertheless, housing construction growth is likely to continue to lag overall construction growth (see Fig 27). Our optimism about strong housing sector growth springs from several factors.

Cyclical factors suggest housing revival. Housingconstruction is cyclical. Typically, two to three years of low/negative growth results in strong expansion over the next few years as pent up demand is executed in subsequent years. For example, the lull during FY82-84 was followed by strong growth over the next three years – FY85-87. A slowdown in FY88-91 was followed by robust growth over the next eight years – FY92-99. Compared with this, the sector has been much more volatile over the past decade. From FY00 to FY06, growth and decline alternated every other year. Given that housing construction was subdued during FY09-10, we expect pent-up demand to lead to a boost in housing construction during FY11-13.

Fig 26: Expect housing demand to rise

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Improvement in rural and lower income groups’ disposable income. In the past few years, disposable incomes of rural and low- and middle-income groups in urban areas have improved. Rural income growth was helped by higher agricultural commodity prices, loan waivers, and introduction of the National Rural Employment Guarantee Scheme (NREGA). Urban low- and middle-income groups’ income growth was supported by salary hikes for nearly 20m government employees and the

reduction in income tax rates. Such improvements are likely to boost housing demand in coming years.

Policy thrust on housing. In recent years, the government has initiated many policies to improve housing, especially for the poor. The Indira Awaas Yojana was started in FY86 to provide financial assistance to rural households living below the poverty line (BPL) to construct/upgrade their houses. In the FY11 budget, the unit cost of houses was extended and Central government allocation was increased. Another scheme, the Rajiv Awas Yojana, was initiated in the FY11 budget, with focus on rehabilitating/providing property rights to urban slum dwellers. The current budget also extended by a year the scheme introduced last year that provided a 1% interest subvention on housing loans up to Rs1m where the house cost does not exceed Rs2m. All these measures are likely to foster growth in the housing sector.

Should we be concerned about interest rates/land values? Many are of the view that rising land values could erode affordability and thereby limit housing demand. Another worry is rising interest rates, which would impact mortgage rates and dampen housing demand.

Fig 27: Housing to trail total construction growth

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Relatively low impact of rising urban land values on housing construction. As rural areas account for 86% of overall pucca and semi-pucca housing construction, the strong appreciation of urban land values since 2004, especially in Tier I and II cities, has a relatively small impact on new housing demand and thereby new housing construction. Anecdotal evidence suggests that rural land values in some areas, too, have appreciated since 2004. This could have been driven by realty

Strong housing growth While housing would continue to lag other segments of construction, growth in the sector during

FY11-13 is poised to surpass the recent highs.



companies’ aggressive attempts to build-up land bank around major cities and to build special economic zones/industrial parks. Such moves, however, are on the wane if not reversing. Though high land prices are likely to remain an overhang on housing demand in various urban areas, this may not be a major factor in rural areas. Moreover, rising policy focus on promoting affordable housing in urban areas and slum rehabilitation programs are likely to substantially boost mass housing projects. Therefore, while we expect growth in residential construction to continue to lag overall construction growth, we do expect residential demand to gather momentum during FY11-13.

Banks and NBFCs. Past data suggest that organized financial institutions – banks as well as non-banking financial institutions (NBFCs) – played only a modest role in funding new homes. In most cases, home owners used own funds. Borrowing from money lenders, friends and relatives also played a large role. Funding from other sources including cooperatives, organized financial and non-financial institutions (both government and private), taken together, rose perceptibly during 1993-2002. Yet, the total contribution from such sources in overall home finance remained relatively modest, especially in rural areas (see Fig 28). The situation changed significantly in the last decade. Outstanding mortgage funding by banks and NBFCs jumped by over eight times between FY02 and FY10 (see Fig 29), while yearly value of residential construction (excluding land value) doubled. In this sense, the sensitivity of new home demand to home loan conditions (including housing interest rates) has risen over the past decade.

Fig 28: Predominance of own funds

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Own Friends and relatives Moneylenders Others

Note: ‘Others’ include cooperatives, organised financial and non-financial institutions. Source: NSSO and Anand Rathi Research.

Rising interest rates unlikely to dampen housing demand. Notwithstanding the rising influence of home loans from banks and NBFCs in shaping new housing demand, the following factors suggest that a rising interest rate scenario is unlikely to seriously dampen residential housing demand.

Fig 29: Strong growth in organised home loans

0102030405060708090

FY01

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FY06

FY07

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(cre

dit g

row

th a

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(Hou

sing

cre

dit,

Rs

billio

n)

Housing credit Growth in housing creditShare of banks in housing credit

Note: Housing credit data relates to home loans by commercial banks and housing finance companies. Source: RBI, NHB and Anand Rathi Research.

Falling share of organized funding. After hitting a high 90% in FY06, the ratio of yearly net housing loan disbursal by banks and NBFCs to cost of housing construction cost (excluding land value) has dropped over the years to 40% in FY09 and FY10.

Strong competition in mortgage finance market. There is strong competition between banks and NBFCs in the residential mortgage market. While banks’ share of residential mortgages jumped from 52% in FY01 to 67% in FY08, since then it has declined to 62% in FY10 (see Fig 29). Given the intense competition for market share – reflected in promotional activities such as low ‘teaser’ rates – we believe mortgage interest rates are unlikely to rise too much even in an overall rising interest rate scenario.

Attractiveness of mortgage funding for banks. The priority sector status extended to home loans up to Rs2m provides additional incentive to banks to expand their mortgage portfolio, either directly through extending home loans or indirectly by buying such loan portfolios from other banks or NBFCs.

Government’s funding support including interest subsidy. In the case of Indira Awaas Yojana, the government directly funds eligible rural houses and the amounts – both the overall allocation and assistance to individual housing units – have been increased substantially. The current budget has extended by a year the scheme introduced last year that provided a 1% interest subvention on housing loans up to Rs1m where the house cost does not exceed Rs2m.



out to be 24m tons during 2002 and 32m tons for 2008 – broadly the same as our top down estimates. Therefore, our independent top down and bottom up estimates of cement demand from new residential buildings are similar. We expect strong growth in cement demand from the housing sector during FY11-13. In fact, this is the only segment of construction activity where we expect the growth during FY11-13 to surpass the highs reached in the previous cycle (for details see Box).

Implications of housing cement demand estimates. There are a few interesting implications of our estimates of cement demand from residential buildings:

Relatively minor role of housing in overall cement demand. Our estimates dispel the popular perception of a large share of housing in overall cement demand. While the growth of the housing sector would definitely have a bearing on overall cement demand, the influence is much lower than what the consensus suggests.

Greater role of rural housing. New construction in rural areas accounted for 73% of the new pucca and 87% of the new semi-pucca construction during 2002 and this jumped to 86% and 96%, respectively, by 2008 (see Fig 25). Therefore, within cement demand from residential buildings, growth in rural housing construction seems to play a much bigger role than growth in new urban housing construction. This holds true even if one incorporates the fact that intensity of cement use in rural residential construction is somewhat lower than the same in urban areas. Adjusting for lower cement usage intensity in rural housing construction, rural housing accounts for 60% of the overall cement demand from the new housing.

Demand from non-residential buildings

Limited granular data on non-residential buildings. One of the key findings of our top down cement demand estimate is the very high share (over 30%) of non-residential buildings in overall cement consumption in India (see Fig 21). This is clearly not in line with conventional perception about sources of cement demand. While we could cross-validate our top down cement demand of the housing sector with rigorous official bottom up data, non-availability of such detailed official data constrains us from doing a similar exercise for non-residential buildings. We, therefore, supplement limited official data with industry estimates to get a bottom-up view on cement demand from non-residential buildings.

Census reports non-residential buildings. The main source of detailed data on non-residential buildings in India is the decennial census. The census in India covers every building in the country irrespective of its occupancy/usage status – purely residential, residential cum non-residential, purely non-residential or vacant. The census provides purpose-wise classification of census houses (see Fig 30).

Higher proportion of katcha structures for non-residential buildings.While a precise estimate of structure type for non-residential structures (by pucca, semi-pucca and katcha categories) is not possible, our indirect measures suggest that nearly 28% of these structures were katcha in 2001. This is higher than the corresponding proportion of katcha residential structures (16%). The higher proportion of katcha structures within non-residential buildings seem to be on account of the large number of cattle-sheds and go-downs in rural areas. In 2001, out of all structures in India, 20% were non-residential buildings. The share of non-residential buildings



in overall pucca and semi-pucca constructions were 18% and 17%, respectively.

New construction/size of construction key drivers. Our analysis of residential buildings brought out the fact that only half of the increase in the number of houses over the past two decades happened due to new construction. The other half of the increase in the number of residential buildings took place because of factors such as partition of existing housing structures. On top of it, the plinth areas of new houses across categories (pucca and semi-pucca) and location (rural and urban) are by and large half of comparable existing houses. The combined impact of these two factors explains the reason why conventional domestic cement demand estimates suggest a very high share of residential construction in overall cement demand. The situation, however, is considerably different for non-residential buildings.

Key differences between residential and non-residential buildings.Our estimates of new construction and cement use by non-residential building in 2008 are represented in Fig 31 and Fig 32, respectively. These estimates, based on official data, suggest that there are three key differences between residential and non-residential buildings in India:

1. High share of new construction. The proportion of new construction in the overall increase in number of structures during the past two decades has been much higher for non-residential compared

Fig 30 – Purpose-wise distribution of census houses in India 1981 1991 2001

Total Rural Urban Total Rural Urban Total Rural Urban (Number of units,'000)

Number of census houses 153,652 117,170 36,483 199,379 145,133 54,246 249,096 177,538 71,558 Vacant census houses 8,185 5,847 2,339 12,717 8,084 4,633 15,811 9,359 6,452 Occupied census houses 145,467 111,323 34,144 186,663 137,049 49,613 233,285 168,178 65,106 of which - - - - - - - - -Residence 109,086 82,804 26,282 143,194 104,598 38,596 179,276 129,053 50,223 Residence-cum-other use 4,511 3,234 1,277 7,296 5,501 1,796 7,887 6,047 1,840 Non-residential with mixed use 36,381 28,519 7,862 43,469 32,452 11,017 54,009 39,126 14,883 Pure non-residential 31,870 25,285 6,585 36,173 26,951 9,222 46,123 33,079 13,044 Shop, Office 5,094 2,168 2,926 7,683 3,251 4,432 13,390 5,567 7,824 Places on entertainment 200 152 47 299 218 81 - - -School, College, etc. - - - - - - 1,502 1,229 273 Hotel, Lodge, Guest House, etc. 213 129 84 330 189 141 522 267 255 Hospital, Dispensary, etc. - - - - - - 604 340 264 Factory, Workshop, Workshed, etc. 2,341 1,148 1,193 3,533 1,596 1,937 2,211 987 1,224 Place of worship 1,555 1,336 219 1,822 1,524 298 2,399 1,983 416 Other non-residential use 22,468 20,352 2,116 22,506 20,174 2,333 25,495 22,707 2,788

(Share on overall number of units,%) Residence 71.0 70.7 72.0 71.8 72.1 71.2 72.0 72.7 70.2 Residence-cum-other use 2.9 2.8 3.5 3.7 3.8 3.3 3.2 3.4 2.6 Non-residential with mixed use 23.7 24.3 21.6 21.8 22.4 20.3 21.7 22.0 20.8 Pure non-residential 20.7 21.6 18.1 18.1 18.6 17.0 18.5 18.6 18.2 Shop, Office 3.3 1.9 8.0 3.9 2.2 8.2 5.4 3.1 10.9 Places on entertainment 0.1 0.1 0.1 0.2 0.2 0.2 - - -School, College, etc. - - - - - - 0.6 0.7 0.4 Hotel, Lodge, Guest House, etc. 0.1 0.1 0.2 0.2 0.1 0.3 0.2 0.2 0.4 Hospital, Dispensary, etc. - - - - - - 0.2 0.2 0.4 Factory, Workshop, Workshed, etc. 1.5 1.0 3.3 1.8 1.1 3.6 0.9 0.6 1.7 Place of worship 1.0 1.1 0.6 0.9 1.1 0.6 1.0 1.1 0.6 Other non-residential use 14.6 17.4 5.8 11.3 13.9 4.3 10.2 12.8 3.9 Vacant 5.3 5.0 6.4 6.4 5.6 8.5 6.3 5.3 9.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Categorization of non-residential buildings into different groups across different Census is not uniform. Source: Census of India, Government of India and Anand Rathi Research.



to residential buildings.

Fig 31 – Non-residential area added of 300 mn sqm in 2008

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Shop

s an

d of

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-mix

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e w

ith re

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l

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ition

al s

hops

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es

Mod

ern

shop

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ol, C

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el, L

odge

, Gue

st H

ouse

,et

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ory,

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orks

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.

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e of

wor

ship

Oth

er n

on-re

side

ntia

l use(N

ew c

onst

ruct

ion,

mn

sq m

)Rural Urban

Source: Census of India, industry and Anand Rathi Research.

Fig 32 – 55mt non-residential cement demand

02468

10121416

Shop

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ouse

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ispe

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ory,

Wor

ksho

p,W

orks

hed,

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.

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e of

wor

ship

Oth

er n

on-re

side

ntia

l use

(Cem

ent u

se, m

n to

nnes

)

Rural Urban

Source: Census of India, industry and Anand Rathi Research.

2. Larger plinth area. Our estimates suggest that on an average, the size of new non-residential buildings in 2008 was 230 sqm in rural and 215 sqm in urban areas. The average area of construction for most types of non-residential buildings apart from traditional shops is much larger than the average size of residential buildings. For example, a medium to large manufacturing unit requires 120,000-800,000 sqm of covered area compared to 40-50 sqm for residential buildings. Despite a relatively small number of new large and medium factory additions each year, because of their large size such structures account for nearly one-third of overall cement use by non-residential buildings. In contrast, modern offices and retail space, the most visible part of non-residential construction, accounted for only 8% of cement demand by non-residential building in 2008.

3. High usage of cement. Per square meter cost of construction of various types of non-residential structures are often much higher than residential structures leading to lower share of cement in overall construction expenditure. This, however, does not mean that the usage of cement per square meter of non-residential buildings is much lower than residential buildings. Usage of cement per square meter of construction for non-residential structures such as shops, offices, schools, colleges, hotels, lodges, guest houses, hospitals, dispensaries and places of worship are either similar or higher than residential



structures. Overall, the average cement usage by residential construction at 180kg/sqm of plinth area is only marginally higher than that for non-residential buildings.

Growth momentum of non-residential buildings likely to continue

Expect double digit growth for non-residential buildings. Growth of non-residential building construction has been more volatile than overall construction. More often than not, growth of non-residential building construction, however, surpassed that of overall construction (see Fig 33). In the past three decades, the average growth of non-residential buildings has accelerated. In particular, during the six year period FY03-08, apart from in FY05, non-residential buildings maintained double digit real growth rates each year. The CAGR in this period has been 12.8%. The growth decelerated in FY09 and FY10 to 6.9% and 7.4%, respectively. We expect such construction to grow at a CAGR of 10.2% during FY11-13 (see Fig 34).

Fig 33 – Volatile non-residential growth

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Fig 34 – Expect buoyant non-residential growth

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Non-residential buildings Decadal CAGR


Reasons for growth revival. The major reasons why we expect 10% growth in non-residential construction during FY11-13 are (a) likely acceleration of construction of factories, (b) resumption of commercial projects stalled during FY09-10, (c) broad-basing of commercial construction beyond tier-I cities and (d) strong growth in education sector related construction.



Spurt in new industrial plant construction. Strong contraction in manufacturing capex during FY09-10 depressed construction of new industrial plants, the single largest user of cement within the non-residential category. While across-the-board revival of industrial capex is yet to materialize, business confidence is on the upswing. The tight demand-supply situation in many sectors also indicates a likely jump in industrial capex. Moreover, project delays in the last two years have also increased the projects currently under implementation.

Past execution delays to boost commercial real estate executions.The global slow down and oversupply of commercial space in various micro markets of the major cities led to almost across-the-board collapse in occupancy rates, rentals and capital values. These in turn led to serious project delays in commercial real estate in most cities during 2H08 and 1H09. The situation has changed since then and many of the stalled projects have started activity and new project announcements have also started.

Percolation of commercial construction beyond tier I cities. The supply overhang in various micro markets of tier I cities is likely to contain new construction in such areas, especially for modern retail space. Similarly, land acquisition constraints and policy changes have led to scaling down of office space development at the special economic zones. Yet, such commercial real estate development during FY04-08 was mostly limited to tier I and a few tier II cities. The process currently is getting more broad-based. High land value and rental in larger cities and increased purchasing power in tier II, III and smaller cities is pushing a lot of commercial development towards such centers and we expect the process to continue. On the demand side, life style consideration and increased income levels in the smaller cities would sustain demand for commercial real estate development – both traditional and modern.

Construction demand from education, healthcare and hospitality.India’s education sector is facing several tailwinds. First, the policy resolve towards education for all has led to the enactment of the Right of Children to Free and Compulsory Education Act, 2009. There has been substantial increase in government outlays towards education. Second, there has been a major increase in demand for tertiary and professional education in India. Third, there has also been a sharp increase in demand for institutes offering foreign educational courses in India. All these factors are likely to keep construction demand from the educational sector strong. As such, a large part of the rising discretionary spending by consumers is being channelised towards education, healthcare and hospitality. As a result, construction activities linked to these sectors, which account for over 25% of the overall non-residential buildings is likely to remain strong.

Demand from infrastructure sector

Infrastructure to be a major driver of cement demand. We expect strong growth in infrastructure investment during FY11-13. This is one of the key reasons for us to expect a major increase in cement demand during this period. Our top down cement demand estimates show that the share of infrastructure (other construction) in total domestic demand for cement has increased from 18% in FY05 to 24% in FY10 and likely to increase to 28% by FY13 (see Fig 21). Our bottom up estimate of cement demand from the infrastructure sector is in line with the top-down estimate (see Fig 35).



Fig 35 – Infrastructure sector and cement demand

FY08 FY09 FY10 FY11e FY12e FY13e

(Investment, Rs billion, FY05 prices)

Electricity 712 882 1,043 1,104 1,242 1,524

Roads and bridges 450 476 515 539 562 634

Telecommunications 296 360 458 582 742 946

Railways 359 430 519 619 653 819

Irrigation 294 384 505 666 759 805

Water supply and sanitation 168 198 237 276 323 381

Ports 150 179 210 242 277 305

Airports 63 67 71 80 93 107

Storage 33 36 39 42 45 47

Gas 24 26 29 31 32 32

Total 2,549 3,038 3,627 4,181 4,729 5,601

(Cement demand, million tons)

Electricity 8.0 9.4 10.8 11.2 13.5 17.2



Railways 4.0 4.6 5.4 6.3 7.1 9.2

Irrigation 5.9 7.3 9.3 12.0 14.7 16.2


Ports 2.9 3.3 3.7 4.2 5.2 5.9

Airports 1.2 1.2 1.3 1.4 1.7 2.1

Storage 1.1 1.1 1.1 1.2 1.4 1.5

Gas 0.2 0.2 0.3 0.3 0.3 0.3

Total 36.2 40.7 47.3 53.8 65.1 78.3

Source: Planning Commission, CSO, industry and Anand Rathi Research.

Several drivers of cement demand from infrastructure activities. Our optimism of strong cement demand from the infrastructure sector is based on three key factors – (a) rising share of infra capex in the overall investment, (b) improvements in funding arrangements for infrastructure and (c) policy liberalisation relating to infrastructure aimed at creating enabling conditions for greater participation of the private sector including foreign investment.

Strong growth in infra capex already underway. A wide range of indicators including contribution of infrastructure in overall capex (see Fig 14), real growth capex in infrastructure (see Fig 15) and bank lending to infrastructure sector (see Fig 16) show that a large increase in infrastructure capex in India is already underway.

Better funding. The need for drastic improvement in India’s infrastructure facilities was never disputed. The real issue has been to induce adequate investment into such activities. While infra funding continues to remain a challenge, considerable progress is being made in this respect. Bank funding of infra projects is rising fast (see Fig 16). Recently, there has been considerable liberalisation of norms governing foreign debt and equity funding of infra projects. The budget FY11 has provided special avenues for the issuance of tax-exempt infrastructure fund. Efforts are underway for channeling large amounts of long-term savings (such as insurance and pension funds) into infrastructure projects. These efforts are likely to boost infra capex in the future.

Regulatory liberalization. The role of private including foreign capital in infrastructure projects has been enhanced substantially. Considerable regulatory reforms including establishment of independent segment specific infrastructure regulators are underway to provide long-term



visibility in infrastructure development and maintenance. Risk sharing through public-private partnership is also being promoted.

Acceleration in infra construction to continue. In the ’80s, infra construction remained highly volatile. Since then there has been an upward trend in infra construction growth (see Fig 36). The decadal CAGR of infra construction show continuous improvements in the last three decades with a strong jump in the last decade. We expect an equally impressive jump in the current decade as well (see Fig 37).

Fig 36 – Infra construction accelerating

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Fig 37 – Strong infra construction CARG

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Demand from repair and maintenance

The missing link. Cement demand from repair and maintenance is often ignored. Both top down and bottom up estimates generally miss out on cement demand emanating from repair and maintenance of existing structures. This happens because cement demand is generally derived from capex data while repair and maintenance is part of current/revenue expenditure. Our estimates suggest that nearly 13% of overall domestic demand for cement comes from repair and maintenance.

Housing accounts for large part of repair and maintenance.Historically, a large part of repair and maintenance relate to residential buildings. This is because major repairs and alterations are included in new construction. Most of repair and maintenance relating to non-residential buildings and infrastructure are major and therefore, qualify for new construction. NSSO survey data allows us to separately estimate repair and



maintenance for residential buildings in terms of area, number and cost. These estimates suggest that in FY06 repair and maintenance of residential buildings accounted over three-fourths of the overall cement consumption on account of repair and maintenance. This ratio, however, declined to 73% by FY10 and we expect the same to decline to 70% by FY13.

Falling share of housing in repair and maintenance. Cement demand for the repair and maintenance of residential buildings grew by a CAGR of only 6.5% during FY06-10. We expect these activities to gather further momentum and maintain CAGR of 9% during FY11-13. Yet, our estimates suggest the share of repair and maintenance of residential buildings in overall repair and maintenance would continue to fall. This seems to reflect two factors. First, the emphasis on maintaining infrastructure facilities and non-residential structures has increased in recent years. Second, improvement in quality of construction of infrastructure and non-residential construction over time is requiring less of alteration and major repair and maintenance. As a result, the proportion of relatively minor repair and maintenance is increasing for infrastructure facilities and non-residential structures.

Non-construction demand

Indirect cement demand by construction activities. Cement demand from various segments of construction activities discussed earlier relate to direct demand for cement by such activities. Beyond this, construction activities also indirectly use cement through the usage of construction materials such as asbestos sheets, hume pipes, ready-made concrete bricks and slabs, ceramic tiles, etc. Almost the whole of non-construction use of cement, therefore, comes from the construction sector, albeit indirectly. In addition, according to the latest IOTT of CSO, a relatively minor proportion of cement usage in India takes place for non-construction activities in industries such as paints, varnishes and lacquers, petroleum products, iron and steel foundries and non-ferrous basic metals.

External demand

Little global trade. Cement is a rare example of a sparsely traded undifferentiated manufactured product with a large domestic market (see Fig 17). Cement exports by India (see Fig 38) accounts for only around 0.2% of India’s overall exports. Interestingly, however, India’s share in world cement trade is often better than India’s position in the overall global exports (see Fig 39). In volume terms, India’s cement exports in the last decade varied in the range of 3-7m tons or 2-6% of the overall domestic production. India’s cement exports are largely concentrated towards neighbouring south Asian and middle-east countries (see Fig 40). India undertakes very small quantum of cement imports as well mainly from south Asian neighbouring countries (see Fig 41).

Low volume cement exports to continue. As evident from these data, exports are not a major source of cement demand for India. High transportation cost and lack of facilities to handle bulk volume of cement at most Indian ports are major reasons for exports not being a large scale option for most cement manufacturers in India. Moreover, export realization for cement is often less attractive than domestic realization. In view of these we expect India’s cement exports to remain flat at the FY09 level during FY10-13.



Fig 38 – Little cement export from India

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Fig 39 – India’s share in world trade remain high

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Fig 40 – India’s country-wise cement export 000 tons 2001 2002 2003 2004 2005 2006 2007 2008

United Arab Emirates 392 775 2,010 1,356 861 530 283 379

Sri Lanka 1,028 1,009 1,084 778 676 526 145 63

Nepal 146 336 778 777 924 826 653 684

Kuwait 149 307 617 924 876 502 37 142

Qatar 125 94 280 385 711 252 1,076 479

Iraq - - - 2 552 1,369 831 424

Bangladesh 388 283 491 646 813 162 6 9

Yemen 142 386 287 147 116 620 433 319

Spain 352 331 461 76 38 0 0 1

Others 544 1,085 937 728 1,295 492 312 426

World 3,267 4,605 6,945 5,819 6,863 5,280 3,776 2,927




Fig 41 – India’s country-wise cement import 000 tons 2001 2002 2003 2004 2005 2006 2007 2008

Pakistan - - - - - - 93 943

Bangladesh - 2 15 - 6 18 38 108

Indonesia 28 - - - - 38 83 10

China - 0 0 0 2 38 61 7

Japan 0 0 0 0 0 0 37 0

Saudi Arabia 30 - - - - - - -

United Arab Emirates 1 2 2 5 4 4 2 6

Thailand - - - - 0 - 0 25

Morocco - - - - - - 18 -

Others 1 1 5 4 7 6 41 8

World 60 5 22 10 19 105 374 1,108


International comparison of domestic cement consumption

Distant second. Our conviction about strong cement demand growth in India in the medium-term also finds support from international comparison of domestic cement consumption. Despite being world’s second largest producer and consumer of cement (see Fig 42), per capita cement consumption in India is one of the lowest among the large economies of the world (see Fig 43). At 156kg per capita, cement consumption in India is also less than half the global average. Prevalence of high proportion of houses with no/low cement usage, limited rural-urban migration, low levels of infrastructure development and as such low levels of per capita income are factors, which seem to have contributed to low per capita cement consumption in India. The situation, however, is already on the mend.

Fig 42 – Second largest cement producer

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1,385

Source: USGS, ITC, World Bank and Anand Rathi Research.

Rising per capita cement usage. India’s per capita cement demand jumped from less than 30kg in the early ’80s to 50kg in the early ’90s and further to 90kg by 2000. It has nearly doubled during 2001-09. If India just repeats this performance in the next nine years, it would mean 10% CARG of cement consumption growth during this period. With major improvements in per capita income, reasonably inclusive growth and rising infrastructure development, we expect cement consumption in India to do far better. In this sense, too, our top down as well as bottom up estimate of 12% CAGR of cement consumption during FY11-13 looks likely.



Fig 43 – India’s share in world trade remain high

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)

Per capita cement use World average


The simile between per capita cement consumption in India and China. We identified strong growth in investment, especially infrastructure capex, and sustained high investment to GDP ratio as the major catalyst for cement demand in India. It is interesting to note that in the respect of both investment rate and per capita cement consumption, India seems to be following China’s path albeit with a 20 year lag (see Fig 44). China maintained 17% CAGR of cement consumption during 1975-85 and a CAGR of 12% during the whole of 1975-2009. During 2003-09, the trajectory of per capita cement consumption in India was almost identical with the same in China during 1983-89. The period 2003-09 is also the first instance when with the sharp jump in the domestic investment rate India has considerably narrowed down the gap with investment rate in China. In 2009, investment rate in India remained slightly ahead of the Chinese investment rate in 1989. If India’s cement consumption continues to follow China’s with a 20 year lag, then we are at the threshold of an over 20% growth.

Fig 44 – India seems to be following Chinese trajectory with a 20 year lag

0

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PC cement consumption - China PC cement consumption - India

Investment rate - China Investment rate - India




Surviving the perceived glut Our cement demand estimates debunks a few myths including the primacy of urban housing and modern commercial construction in the overall cement demand. While capacity utilization levels in the cement industry are likely to worsen in FY11, the turnaround could be faster and sharper than the current consensus expectation. Cement companies from East, Central and West seems to be better poised to benefit from the emerging demand-supply scenario.

Cement demand: Myths and realities. Our top-down and bottom-up analyses of cement demand punctures many myths about India’s cement demand (see Fig 45). The main observations:

Fig 45 – Segmental use of cement (million tons) FY08 FY09 FY10 FY11e FY12e FY13e

Residential buildings 48.5 50.7 54.6 60.7 64.2 69.6

New buildings 32.4 33.6 35.7 40.1 41.9 45.0

Rural 19.1 19.9 21.1 23.7 24.6 26.2

Urban 13.3 13.7 14.5 16.5 17.3 18.8

Repair & maintenance 16.1 17.2 18.9 20.6 22.2 24.6

Rural 8.6 9.2 10.1 11.0 11.7 12.9

Urban 7.6 8.0 8.8 9.7 10.5 11.7

Non-residential buildings 56.5 61.3 68.2 74.2 82.1 90.6

Shops and offices-mixed use with residential 0.7 0.8 0.9 1.0 1.0 1.2

Traditional shops and offices 10.4 11.4 12.3 13.2 14.6 16.4

Modern shops and offices 4.6 4.8 5.2 5.5 6.6 7.8

School, College, etc. 3.7 4.3 4.9 5.3 5.9 5.8

Hotel, Lodge, Guest House, etc. 5.2 5.6 6.9 7.2 7.8 8.9

Hospital, Dispensary, etc. 5.3 6.1 6.9 7.7 8.0 9.5

Factory, Workshop, Workshed, etc. 21.4 22.1 24.4 27.0 30.0 32.7

Place of worship 1.9 2.3 2.5 2.6 2.9 3.0

Other non-residential use 3.3 3.9 4.0 4.8 5.3 5.2

Other construction 36.2 40.7 47.3 53.8 65.1 78.3

Electricity 8.0 9.4 10.8 11.2 13.5 17.2



Railways 4.0 4.6 5.4 6.3 7.1 9.2

Irrigation 5.9 7.3 9.3 12.0 14.7 16.2


Ports 2.9 3.3 3.7 4.2 5.2 5.9

Airports 1.2 1.2 1.3 1.4 1.7 2.1

Storage 1.1 1.1 1.1 1.2 1.4 1.5

Gas 0.2 0.2 0.3 0.3 0.3 0.3

Repair & maintenance other than residential 5.4 6.1 7.1 8.1 9.2 10.6

Non-construction demand 17.9 19.4 21.6 24.0 26.9 30.4

Total domestic demand 164.4 178.2 198.8 220.8 247.5 279.5

Foreign trade 3.4 1.8 3.1 3.2 3.2 3.2

Exports 3.8 2.9 3.5 3.5 3.5 3.5

Imports 0.4 1.1 0.4 0.3 0.3 0.3

Total final demand 167.8 180.0 201.9 224.0 250.7 282.7

Source: CSO, NSSO, CoI, ITC, Industry and Anand Rathi Research.

Housing cement demand not as predominant as assumed.During FY08-10, on average, housing, non-residential buildings and infrastructure accounted for 29%, 34% and 23%, respectively, of



overall domestic cement demand. Our estimates suggest that their shares would become 26%, 33% and 26%, respectively, during FY11-13. That is, housing’s share would drop 3 percentage points (pp), while the share of infrastructure would rise by 3pp and non-residential construction’s would fall by 1pp. At the same time, the share of non-construction demand would remain unchanged at 11% while that of repair and maintenance of structures other than houses would increase by 1pp to 4%.

Rural cement demand for housing far higher than urban demand. Cement demand from rural housing accounts for 60% of cement demand from the overall housing sector. This is despite the fact that on an average per sqm cement use by urban houses are higher than those of rural houses.

Shops and offices only 28% of non-residential building. All formats of shops and offices – shops and offices-mixed use with residential, traditional shops and offices and modern shops and offices – together account for only 9% of the overall cement demand and 28% of the cement demand from non-residential structures. Interestingly, building used for education, healthcare and hospitality account for almost identical cement demand.

Fastest growth of cement demand from infrastructure sector. Irrigation and power are two large users of cement. Within the infrastructure sector, irrigation, power and urban infrastructure (water and sanitation) are expected to be the source fastest growth in cement demand during FY11-13.

The sub-national scenario

Fragmentation of cement market. The high cost of transporting cement not only limits its cross-border movement, but also within India given its continental size. Generally, cement mobility is limited to 500km from the cement factory. Given this, demand-supply and pricing have distinct regional characteristics.

Regional cement supply-demand. Our year-end installed cement capacity estimates are based on scheduled plans of capacity addition by cement companies. We estimate the effective capacity for a year based on our assessment of the trajectory of feasible utilization of new capacities (see Fig 46). To capture market fragmentation in the cement industry and the implications thereof, we apportioned our all-India cement demand estimates at the state and regional levels. Once again, we utilized macro data – mainly state GDP, state-wise construction activity and past data on state-wise cement consumption – to derive state-level cement demand estimates. We also derive the state/region-wise capacity utilization by comparing the state/region-wise demand and effective capacities (see Fig 47). To get a clear perspective on demand relative to capacity at the state and regional levels, we derived the increment new installed capacity, new effective capacity and additional demand (see Fig 48).

Back-loaded capacities. Installed capacity refers to end-year capacity, while demand pertains to the whole year. Monthly state-wise cement capacity addition data since FY98 show that on an average as much as 40% of the capacity addition takes place during the last four months of a financial year (Dec-Mar) and over 20% of the capacity addition takes place during April alone. Industry sources suggest that such high capacity addition during April reflects late reporting of capacity addition (which took place during the closing months of the previous financial year).



Therefore, nearly 60% of the capacity addition seems to happen during the end of a financial year.

Reasons for back loading plant commissioning. First, a plant already commissioned but undergoing trial runs would result in expenditure, especially interest expenditure on the borrowed fund used for the capex but would not lead to commensurate revenues. By delaying announcement of plant commissioning a company can capitalize interest expenses in the balance sheet and thereby largely avoid the impact on the profit and loss account for that year. Second, in order to take the depreciation benefit, however, the company needs to fix the date of plant commissioning before the fiscal year end. These two factors taken together seem to result in bunching of capacity addition close to the end of a financial year.

Fig 46 – Sub-national installed and effective cement capacity FY09 FY10 FY11e FY12e FY13e FY09 FY10 FY11e FY12e FY13e

Effective cement capacity, mn tn Installed cement capacity (year end), mn tn

Central Zone 25.76 29.06 34.05 38.06 40.73 28.16 36.53 41.33 41.33 46.21

Madhya Pradesh 18.27 19.37 21.73 24.15 26.04 19.89 21.89 26.69 26.69 29.00

Uttar Pradesh 7.50 9.69 12.32 13.91 14.68 8.27 14.64 14.64 14.64 17.22

East Zone 26.74 29.97 33.72 36.55 38.11 29.90 36.12 39.32 39.32 41.85

Arunachal Pradesh - - - - - - - - - -

Assam 0.19 0.19 0.19 0.19 0.19 0.20 0.20 0.20 0.20 0.20

Bihar 0.95 0.95 0.95 0.95 0.95 1.00 1.00 1.00 1.00 1.00

Chhattisgarh 11.12 11.86 13.41 15.05 15.85 12.01 13.49 16.69 16.69 16.69

Jharkhand 4.68 4.81 4.89 4.89 4.89 5.14 5.14 5.14 5.14 5.14

Manipur - - - - - - - - - -

Meghalaya 1.25 1.48 1.48 1.48 2.05 1.55 1.55 1.55 1.55 3.48

Mizoram - - - - - - - - - -

Nagaland - - - - - - - - - -

Orissa 3.79 5.33 7.05 7.99 7.99 4.66 8.41 8.41 8.41 8.41

Tripura - - - - - - - - - -

West Bengal 4.76 5.36 5.76 6.01 6.19 5.33 6.33 6.33 6.33 6.93

North Zone 39.54 48.88 56.78 61.06 61.77 48.34 63.24 64.64 64.64 65.84

Chandigarh - - - - - - - - - -

Delhi 0.48 0.48 0.48 0.48 0.48 0.50 0.50 0.50 0.50 0.50

Haryana 1.77 2.35 2.35 2.35 2.35 2.47 2.47 2.47 2.47 2.47

Himachal Pradesh 5.89 7.32 9.22 10.40 10.40 6.20 10.95 10.95 10.95 10.95

Jammu & Kashmir 0.19 0.19 0.19 0.19 0.19 0.20 0.20 0.20 0.20 0.20

Punjab 4.37 4.51 4.51 4.51 4.51 4.75 4.75 4.75 4.75 4.75

Rajasthan 26.13 32.73 38.24 41.04 41.75 33.22 42.17 43.57 43.57 44.77

Uttarakhand 0.70 1.31 1.79 2.09 2.09 1.00 2.20 2.20 2.20 2.20

Southern Zone 58.81 71.04 85.97 99.20 109.12 73.03 90.39 105.19 115.09 122.61

Andaman & Nicobar - - - - - - - - - -

Andhra Pradesh 26.99 30.71 36.98 44.98 52.02 32.62 36.12 47.92 55.94 58.91

Goa - - - - - - - - - -

Karnataka 12.59 15.62 19.17 21.69 23.24 15.37 20.62 23.62 23.62 26.29

Kerala 0.59 0.59 0.59 0.59 0.59 0.62 0.62 0.62 0.62 0.62

Puducherry - - - - - - - - - -

Tamil Nadu 18.65 24.13 29.24 31.95 33.27 24.43 33.04 33.04 34.92 36.79

Western Zone 29.68 32.07 35.66 39.62 43.04 32.38 37.18 42.28 44.68 48.64

Gujarat 17.56 18.99 20.54 22.38 24.80 19.28 21.98 23.08 25.48 29.44

Maharashtra 12.12 13.08 15.12 17.24 18.24 13.10 15.20 19.20 19.20 19.20

Total 180.53 211.01 246.17 274.49 292.76 211.81 263.47 292.77 305.07 325.15

Source: CSO, Industry and Anand Rathi Research.



Installed and effective capacity. New capacity addition does not become fully operational on the first day of the commissioning of a plant. Industry sources suggest that 12-18 months are required to make new capacity fully operational. More time is generally required for Greenfield as compared to Brownfield plants. Major part of the capacity addition in the recent years and bulk of the capacity additions during FY11-13 are under Greenfield projects. Given this and the fact that 60% of capacity addition takes place in the last four months of a financial year, we need to distinguish between year end capacity and effective production capacity in a year. As indicated before, we estimated future installed capacities using the scheduled plans of capacity addition by individual cement companies.

Fig 47 – Sub-national cement demand and effective capacity utilization FY09 FY10 FY11e FY12e FY13e FY09 FY10 FY11e FY12e FY13e

Demand as % of effective capacity Cement demand, million tons

Central Zone 102.1 108.4 105.1 105.5 111.5 26.3 31.5 35.8 40.2 45.4

Madhya Pradesh 46.0 48.7 46.2 47.0 48.9 8.4 9.4 10.0 11.3 12.7

Uttar Pradesh 238.8 227.5 209.1 207.1 222.5 17.9 22.1 25.8 28.8 32.7

East Zone 105.7 113.6 113.3 119.1 128.7 28.3 34.0 38.2 43.5 49.1

Arunachal Pradesh .. .. .. .. .. 0.0 0.0 0.0 0.0 0.0

Assam 873.1 796.6 856.6 1,002.3 1,158.5 1.7 1.5 1.6 1.9 2.2

Bihar 538.3 755.7 890.1 1,026.3 1,157.5 5.1 7.2 8.5 9.7 11.0

Chhattisgarh 37.5 37.2 37.0 40.6 45.6 4.2 4.4 5.0 6.1 7.2

Jharkhand 66.6 80.5 89.5 106.7 121.0 3.1 3.9 4.4 5.2 5.9

Manipur .. .. .. .. .. 0.0 0.1 0.1 0.1 0.1

Meghalaya 53.7 49.3 52.5 56.9 44.0 0.7 0.7 0.8 0.8 0.9

Mizoram .. .. .. .. .. 0.1 0.1 0.1 0.1 0.1

Nagaland .. .. .. .. .. 0.1 0.1 0.1 0.1 0.1

Orissa 144.6 120.1 102.6 101.3 115.4 5.5 6.4 7.2 8.1 9.2

Tripura .. .. .. .. .. 0.1 0.1 0.2 0.2 0.2

West Bengal 161.1 178.0 179.0 185.0 194.8 7.7 9.5 10.3 11.1 12.1

North Zone 89.0 78.6 75.9 78.9 88.1 35.2 38.4 43.1 48.2 54.4

Chandigarh .. .. .. .. .. 0.4 0.5 0.5 0.7 0.9

Delhi 1,005.5 1,097.8 1,200.9 1,121.1 1,244.9 4.8 5.2 5.7 5.3 5.9

Haryana 409.6 332.1 358.2 397.0 442.1 7.3 7.8 8.4 9.3 10.4

Himachal Pradesh 32.8 38.2 34.6 34.7 38.2 1.9 2.8 3.2 3.6 4.0

Jammu & Kashmir 568.7 591.5 691.4 813.1 895.4 1.1 1.1 1.3 1.5 1.7

Punjab 143.1 157.3 173.8 196.0 220.7 6.3 7.1 7.8 8.8 10.0

Rajasthan 42.1 34.5 34.1 37.8 42.8 11.0 11.3 13.0 15.5 17.9

Uttarakhand 347.4 201.2 172.1 160.5 177.1 2.4 2.6 3.1 3.4 3.7

Southern Zone 92.5 79.9 70.6 68.6 71.2 54.4 56.7 60.7 68.0 77.7

Andaman & Nicobar .. .. .. .. .. 0.1 0.1 0.1 0.1 0.1

Andhra Pradesh 66.7 58.8 50.2 45.7 48.6 18.0 18.0 18.6 20.5 25.3

Goa .. .. .. .. .. 0.5 0.4 0.5 0.6 0.8

Karnataka 91.7 78.2 71.3 74.5 77.5 11.5 12.2 13.7 16.2 18.0

Kerala 1,343.5 1,390.7 1,489.9 1,589.6 1,687.9 7.9 8.2 8.8 9.4 9.9

Puducherry .. .. .. .. .. 0.4 0.4 0.4 0.5 0.6

Tamil Nadu 85.3 72.0 63.6 64.6 68.9 15.9 17.4 18.6 20.6 22.9

Western Zone 114.7 118.8 120.7 120.2 123.1 34.1 38.1 43.0 47.6 53.0

Gujarat 69.0 74.3 81.2 84.6 87.0 12.1 14.1 16.7 18.9 21.6

Maharashtra 181.0 183.5 174.3 166.4 172.0 21.9 24.0 26.4 28.7 31.4

Total 98.7 94.2 89.7 90.2 95.5 178.2 198.8 220.8 247.5 279.5




Estimation of effective capacity. Technically, running a cement plant at 100% utilization of the installed capacity is seldom possible. On an average, plants need to shutdown for 15-20 days for planned regular maintenance and repair. In addition, seasonality of demand often leads to lower utilization during certain months of the year. Moreover, there are often mismatches between new clinker and grinding capacity. The latter often gets commissioned prior to the former. Reflecting inter alia such gaps between installed and effective capacity utilization, the average production to installed capacity ratio of the Indian cement sector has been 76.5% during the past 30 years (FY81-FY10) and in none of these years production to installed capacity ratio crossed 93%. In view of these, we assume effective capacity of existing plants to be 95% of the installed capacities. For new capacity addition, the effective capacity is 30% during the year of commissioning, 70% in the next year and 95% in the third year.

Fig 48 – Incremental installed capacity, effective capacity and additional demand FY10 FY11e FY12e FY13e FY10 FY11e FY12e FY13e FY10 FY11e FY12e FY13e

Addition to installed capacity mn tn Addition to effective capacity mn tn Addition to cement demand mn tn

Central Zone 8.4 4.8 0.0 4.9 3.3 5.0 4.0 2.7 5.2 4.3 4.4 5.2

Madhya Pradesh 2.0 4.8 0.0 2.3 1.1 2.4 2.4 1.9 1.0 0.6 1.3 1.4

Uttar Pradesh 6.4 0.0 0.0 2.6 2.2 2.6 1.6 0.8 4.2 3.7 3.1 3.9

East Zone 6.2 3.2 0.0 2.5 3.2 3.8 2.8 1.6 5.8 4.1 5.3 5.5

Arunachal Pradesh 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Assam 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.1 0.3 0.3

Bihar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.1 1.3 1.3 1.2

Chhattisgarh 1.5 3.2 0.0 0.0 0.7 1.6 1.6 0.8 0.2 0.6 1.2 1.1

Jharkhand 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.7 0.5 0.8 0.7

Manipur 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Meghalaya 0.0 0.0 0.0 1.9 0.2 0.0 0.0 0.6 0.1 0.0 0.1 0.1

Mizoram 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Nagaland 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Orissa 3.8 0.0 0.0 0.0 1.5 1.7 0.9 0.0 0.9 0.8 0.9 1.1

Tripura 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

West Bengal 1.0 0.0 0.0 0.6 0.6 0.4 0.3 0.2 1.9 0.8 0.8 0.9

North Zone 14.9 1.4 0.0 1.2 9.3 7.9 4.3 0.7 3.2 4.7 5.1 6.2

Chandigarh 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2

Delhi 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.5 -0.4 0.6

Haryana 0.0 0.0 0.0 0.0 0.6 0.0 0.0 0.0 0.5 0.6 0.9 1.1

Himachal Pradesh 4.8 0.0 0.0 0.0 1.4 1.9 1.2 0.0 0.9 0.4 0.4 0.4

Jammu & Kashmir 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.2

Punjab 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.8 0.7 1.0 1.1

Rajasthan 9.0 1.4 0.0 1.2 6.6 5.5 2.8 0.7 0.3 1.7 2.5 2.4

Uttarakhand 1.2 0.0 0.0 0.0 0.6 0.5 0.3 0.0 0.2 0.4 0.3 0.3

Southern Zone 17.4 14.8 9.9 7.5 12.2 14.9 13.2 9.9 2.3 3.9 7.3 9.7

Andaman & Nicobar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Andhra Pradesh 3.5 11.8 8.0 3.0 3.7 6.3 8.0 7.0 0.0 0.5 2.0 4.7

Goa 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.1 0.1 0.1

Karnataka 5.3 3.0 0.0 2.7 3.0 3.6 2.5 1.6 0.7 1.4 2.5 1.8

Kerala 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.6 0.6 0.6

Puducherry 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1

Tamil Nadu 8.6 0.0 1.9 1.9 5.5 5.1 2.7 1.3 1.5 1.2 2.1 2.3

Western Zone 4.8 5.1 2.4 4.0 2.4 3.6 4.0 3.4 4.0 4.9 4.6 5.4

Gujarat 2.7 1.1 2.4 4.0 1.4 1.5 1.8 2.4 2.0 2.6 2.3 2.7

Maharashtra 2.1 4.0 0.0 0.0 1.0 2.0 2.1 1.0 2.1 2.4 2.3 2.7

Total 51.7 29.3 12.3 20.1 30.5 35.2 28.3 18.3 20.6 22.0 26.7 32.0




Exports add to capacity utilization. The capacity utilization discussed in our estimates relate to only domestic demand as bifurcating export demand at the state-wise/regional level is difficult. Therefore, if exports are factored in, capacity utilization levels would go up, albeit marginally.

Concentration of cement production. Cement capacities generally come up in the proximity of limestone. That is why there is a high concentration of cement production in five states – Madhya Pradesh, Chhattisgarh, Rajasthan, Andhra Pradesh and Gujarat. These five states account for less than 30% of all-India cement demand, but 55% of cement installed capacity.

Considerable inter-state/inter-region movements. Given the concentration of cement plants in a few states, capacity utilization at the state/regional levels needs to be interpreted with caution as there is considerable movement of cement across regional and state boundaries. For example, the large deficit state of Uttar Pradesh gets a sizable part of cement supply from Madhya Pradesh, Rajasthan and Haryana. Bihar gets cement supplies from Jharkhand. On the other hand, Andhra Pradesh, a state with large over-supply of cement (relative to cement demand in that state) caters to demand from Maharashtra, Karnataka and Orissa. Similarly, apart from Uttar Pradesh, Rajasthan also supplies to all the northern states.

Regional trends – our observations. Our regional cement demand-supply estimates suggest the following important points:

Fall in utilization in FY11. During the course of the current year, for almost all states/regions, capacity utilization levels would fall – often significantly – but would improve in the next two years, especially in FY13. The Central, East and West zones would continue to remain excess demand zones and the North and South excess supply zones through out FY11-13.

Capacity concerns could be deceptive. A key reason behind the consensus’ concern about capacity utilization in the cement sector and thereby realizations during the current year and beyond springs from 52 million tons installed capacity addition in FY10 and another 29 million tons scheduled addition in FY11. Our estimates, however, show that the effective capacity addition would be spread over FY10-12. The gap between effective capacity and demand at the all-India level would increase only marginally between FY10 and FY11. Incremental demand would largely catch-up with incremental effective supply in FY12 and incremental demand would exceed incremental supply by a large margin in FY13.

Capacity concerns to linger but turnaround could be quick. Our analysis shows that effective capacity utilization levels in FY11 would be better than what is being anticipated now based on estimates of new installed capacity in FY10 and planned capacity additions in FY11 and beyond. Yet, such concerns are unlikely to disappear quickly. In fact, our estimates also show dips in capacity utilization in FY11 and this is likely to further heighten concerns on over capacity and fall in realizations during FY11. Yet, we feel that lower than expected dip in effective utilization and stronger than expected demand is likely to lead to major turn around on the outlook for the cement sector.

Improvement in market perception. Our view of much stronger cement demand and sequenced effective capacity addition suggest that the market perception on the sector is likely to improve over next 6-9 months.



Pricing power to be regained The additional 62m tons (don’t see risk beyond what has been ordered) coming up in the next three years, together with the present surplus, is expected to be absorbed by greater demand (of around 83m tons over FY10-13). Thus, in line with the expected trend in utilization rates (pick-up in FY12 and FY13), we believe that prices would start looking up from 4Q11 (volatile till then) and strengthen thereafter. Overall, the Central, East and West would be our preferred spots.

62m tons capacity to be added in the next three years

We expect 62m tons to be added to capacity over the next three years, taking the total effective capacity to 325m tons by end-FY13. This addition is much less than the capacity commissioned in the past three years (~100m tons). The addition during FY11/12/13 is expected to be 29/13/20m tons. Our capacity addition estimates are based on orders received by key equipment suppliers such as KHD Humboldt, FL Smith, Polysius. This has been cross validated from information received through companies and industry consultants. To obtain a realistic picture, we have factored in a delay of 3-12 months in our forecast of commissioning schedules of new units, based on channel checks and past record. Our supply estimates include upto 18m ton from companies that may not become members of the CMA, leading to differences in capacity addition data as reported by CMA and ours.

Fig 51 – Utilization to hit bottom in FY11 and take off for the next up-cycle

75

125

175

225

275

325

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

e

FY12

e

FY13

e

(m tons)

75

80

85

90

95

100(%)

Effective Capacity Total Demand Cap Utilization (RHS) Source: CMA, Anand Rathi Research

Fig 49 – Regional distribution of additions (FY10-13 m tons)

North, 3

South, 32

East, 6

West, 11

Central, 10

Source: CMA, Anand Rathi Research, Company

Fig 50 – Pace of expansion to slow down

0

50

100

150

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250

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350

FY97

FY98

FY99

FY00

FY01

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25(%)

Capacity Capacity Growth (RHS) Source: CMA, Anand Rathi Research, Company



We believe that a 12% CAGR in demand over FY10-13 along with slower capacity addition would result in better utilization rates than originally envisaged (or consensus figures). We expect utilization rates to bottom out in FY11 at 81% and improve gradually to 90% by FY13.

Not much scope for de-bottlenecking/ brownfield expansion

The last round of expansion as well as the ongoing, has largely (two-thirds) been accomplished through de-bottlenecking and the brownfield route. With little scope left for expansion through such routes, the next round of organic expansion in the industry would have to come through the greenfield route. This would take three to four years to commission. Thus, we do not see too much risk in capacity additions during FY10-13 beyond what is ordered for.

Based on our channel checks, of fresh enquiries of 100m tons by all cement companies, more than 85% is for greenfield projects. These would therefore take a minimum three years to commissioning. Fresh projects, for which orders would be placed in the next six months, at the earliest would see the light of the day by 4QFY13. Key issues for greenfield projects would be availability of cement-grade limestone and coal and environmental clearances.

Blending ratio decline to cap surplus volumes

Availability of fly ash at a low cost (only freight) helped boost PPC (Portland Pozzolano cement) production in the past ten years. Its superior properties have helped in higher usage. The shift also benefited companies as PPC offered them higher margins than OPC (ordinary Portland cement).

Fig 53 – Product mix

0%

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O.P.C P.P.C. P.B.F.S Others

Source: CMA, Anand Rathi Research

Fig 54 – Blending ratio

1.25

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Fig 52 – All-India demand-supply equation m ton FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13eOpening Capacity 96.3 101.5 107.6 110.1 121.5 134.9 140.0 146.5 154.3 160.2 168.3 197.8 219.2 267.9 297.2 309.5 New Projects 5.2 6.1 2.5 11.4 13.4 5.2 6.4 7.8 5.9 8.1 29.5 21.4 48.7 29.3 12.3 20.1 Closing Capacity 101.5 107.6 110.1 121.5 134.9 140.0 146.5 154.3 160.2 168.3 197.8 219.2 267.9 297.2 309.5 329.5 Idle Capacity 3.5 4.6 5.7 6.1 6.5 7.4 7.4 7.4 7.4 7.4 7.4 7.4 4.4 4.4 4.4 4.4 Effective Capacity 98.0 103.0 104.4 115.4 128.3 132.6 139.0 146.9 152.8 160.9 190.4 211.8 263.4 292.7 305.0 325.1 Cap Utilization (%) 80.3 81.3 90.9 85.2 83.6 85.4 86.5 89.2 94.6 98.7 95.8 90.2 84.3 80.6 84.0 89.9 Production 76.7 81.7 94.2 93.6 101.9 111.5 117.5 127.6 141.8 154.7 168.3 181.4 200.4 224.2 251.2 283.3 Consumption- Domestic 73.9 79.8 92.1 90.3 98.9 107.4 113.9 123.1 135.6 149.0 164.0 177.7 197.6 221.5 248.1 279.6 Consumption growth (%) 8.4 8.0 15.4 (1.9) 9.5 8.7 6.0 8.1 10.1 9.9 10.1 8.4 11.2 12.1 12.0 12.7 Exports 4.4 3.5 3.1 5.2 5.1 6.9 9.0 10.2 9.2 8.5 6.0 6.1 5.1 5.1 5.1 5.1 Total Demand 78.3 83.3 95.2 95.4 104.0 114.3 122.9 133.2 144.8 157.5 170.0 183.8 202.6 226.6 253.2 284.7 Surplus / (Deficit) NA NA NA NA 4.2 4.0 3.3 3.5 (1.4) (9.4) (16.0) (16.3) (9.5) 0.5 9.2 10.1

Source : CMA, Anand Rathi Research Note: (1)Capacity Utilization is calculated based on average capacity for the year (2) Surplus/(Deficit) is calculated based on new capacity utilization assumptions of 30%/70%/90% for Year1/2/3



Increase in production of PPC resulted in the “blending ratio” (the amount of cement produced to clinker ground) increasing from 1.11x in FY99 to 1.33x in FY10 (FY09 was 1.36x). However, ahead, this is unlikely to rise, as companies use it as a means to maintain optimum utilization levels (especially in times of surpluses). With the addition of new clinker units, and consequent surpluses, it would be more economic for cement companies to produce OPC. The trend, therefore, of generating additional volumes by resorting to more blending would cease as companies would have to make a choice between higher volumes or higher realizations.

Cement prices to move up from FY12

Despite a drop in utilization rates in FY10 to 84% (from 90% the year before), all-India average prices have risen around 2% yoy. We estimate capacity utilization levels to bottom out in FY11 at 81% (from 84% the year prior) and prices to be firm. The additional 62m tons coming up in the next three years, together with the present surplus, is expected to be absorbed by greater demand (of around 83m tons over FY10-13). Thus, in line with the expected trend in utilization rates (pick-up in FY12 and FY13), we believe that prices would start looking up from 4Q11 and strengthen thereafter.

Nevertheless, we see the trend of correction/firmness in prices varying region-wise for most of FY11, depending on local demand-supply equilibriums. Also, there is a strong likelihood of prices being volatile over the next six to twelve months due to factors such as seasonality (monsoons), bunching up of capacities in a particular quarter or a sudden pick-up in demand due to events such as state elections.

Fig 55 – Capacity utilization vs price change

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Capacity Utilization % Change in Prices (RHS) Source: CMA, Anand Rathi Research

Of all the regions, the South is expected to record the lowest utilization rates during FY10-12, followed by the North. The Central and East region is expected to be the least affected, with rates continuing above 100%.



Fig 56 – Sensitivity of utilization to demand growth

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12%Base Case

Demand CAGR at 9%


Region-wise equation

Across the five cement markets of India (the North, South, East, West and Central regions), a fair amount of movement takes place. The high proportion of freight costs (in the final selling price) does not permit the distance typically traversed to exceed 600km consistently. Inter-region price differences, however, push companies to market output to as far as 1,000km, (for short periods of time) as the higher freight cost is more than offset by higher realizations.

Fig 57 – Price movements across regions

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Cement movements across regions have chiefly been within the two clusters: the North-Central-East and the South-West. Price movements in different regions within a cluster are therefore strongly co-related and would exhibit similar movements. Nevertheless, given the free movement, selling across clusters would continue till parity emerges.



Fig 58 – Inter-region movement: FY09

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North East South West Central


South to be surplus; West to the rescue?

In the next three years the South would see the maximum capacity additions. With 32m tons, the region would bring in 50% of all-India capacity additions. The surplus capacity built up in FY10 together with slackening demand led to a 10% yoy price correction in the region. Andhra Pradesh was the most affected as most of the new capacity in South was put up in the state. The surplus led to prices dropping Rs50-70 across the region within six to eight months. However, they have since rebounded (by Rs20-25), backed by revived demand and power shortages in AP and TN.

Ahead, we expect utilization rates and prices in the South to be suppressed (<70%) through FY10-12, with a pick up in FY13. Excess in the region could be absorbed by the West, given the strong inter-regional movement between the two and relatively high utilization rates in the West. Over FY10-13, we expect prices to rise by 7-9% cumulatively both in the South and West.

North to see rising utilization rates; Central, East steady

The Central region and Eastern belt are expected to continue operating at over 100% and 95% utilization rates, with robust demand and little capacity additions in the region. Over FY10-13, we expect prices to rise 9% and 14% cumulatively in the Central and Eastern regions, respectively.

With little capacity additions, the Northern belt is expected to see utilisation rates moving up, post FY12. Through FY10-13, we expect prices to rise 7% in the region.

Overall, the Central, East and West would be our preferred spots based on estimated trends on demand-supply equilibrium and likely price outcomes.



Fig 59 – Highest capacities addition in the South

72%

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Fig 60 – Demand-supply vs price hikes (FY07-10)

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Fig 61 – Demand-supply vs estimated price hikes (FY10-13)

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(m ton) 81 52

7% 7% 14% 9% 9% 9%

Source: Anand Rathi Research



Cost increases to be passed on Sourcing of quality coal (for cement and power plants) at reasonable prices has been and would continue to be a challenge for the industry. Nevertheless, we believe that any cost pressures (including freight hikes) could be handled through a hike in cement prices. Availability of captive power, besides lowering costs, has also lowered dependence on grids. Also surplus power being sold in the open market has opened up a diversified revenue stream.

Coal costs to remain high

Most of the coal consumed by Indian cement companies comes through government-assigned linkages, at long-term supply agreements with Coal India, Ltd. CIL produces nearly 85% of coal in India (though the cement sector, not falling under “priority status”, gets a mere 3% of the coal produced). From FY07 to FY09, coal linkages to the industry have increased from 15.5m tons to 18.4m. However, receipts of coal have not risen in line with allocations. This is due to the fact that the industry was able to obtain better coal (with a higher calorific value) from international markets at lower prices.

International coal prices fell 35% in FY10 and now show signs of an upturn. We expect prices to be up around 15-20% on an average in FY11. However, the appreciating rupee (against the US dollar, our house call) next year is expected to lessen the impact to around 10-15%. Also, the unutilized amount of linkage coal available would come in handy. With Coal India raising prices by around 10% in Dec ’09, another hike in the short term is not likely.

Sourcing of quality coal at reasonable prices has been and would continue to be a challenge for the industry. Nevertheless, we believe that any cost pressures could be handled through a hike in cement prices.

Captive power to reduce grid dependence and cost

In the last five years most cement companies have shifted from obtaining through state grids more than 80% of the power required (high charges and erratic supply in certain states). They now enjoy similar amounts of power generated by their own plants. This lowers their power costs as well as avoids production disruptions. The percentage of captive power is likely to be

Fig 62 – Coal prices - Australia Newcastle port prices

Coal Prices

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Fig 63 – Coal linkages and actual supply

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(m tons)

Reciepts Linkages

Source: CMA



maintained or increased. This leaves the companies grappling only with the issue of sourcing quality coal (or pet coke) consistently and at reasonable prices. This should not be a horrendous task, given that, all this while (processes and relationships in place), they have been sourcing coal for cement production as well.

Surplus power to add to their kitty

Many cement companies now have surplus power to sell in the open market or intend to do so in future. Accordingly, they plan to expand power capacity to more than their eventual requirement. The open-market sale of power would help cross-subsidise the cost of generating captive power. Alternatively, if the quantum of power sold is reasonably large, it throws up a new and diversified revenue stream.

Freight costs to be passed on through cement price hikes

With a 63% share in freight, roads have been the preferred mode of transport over the years chiefly due to their last-mile connectivity. In FY10, the railways have lost a two-percentage-point market share to roads, mainly due to wagon shortage and freight-rate hikes during the year. Diesel prices rose 6.5% in Mar ’10. Further hikes appear unlikely, as international crude prices have softened in the last two months. However, any increase in diesel prices in the long term would up road freight costs. And a freight hike, if implemented by the railways, would also raise rail-freight costs.

We believe that freight-price hikes (road or railways) could, in time, be passed on to consumers. (This might be possible immediately if the demand-supply situation at that time favors manufacturers, as has been seen in the past.)

With the continuing disparity in prices in different regions in India and commissioning of fresh capacities, freight increases are also likely (due to lead distances increasing on selling outside core markets). This, however, is unlikely to impact naked realizations (net less freight) as the higher realizations would offset the increase in freight charges.

Fig 64 – Freight mix

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Rail Road Sea


Fig 65 – Avg. Freight cost vs Diesel prices

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Freight Cost Avg.Diesel prices (RHS)

(Rs/ton) Rs/lit.

Source: CMIE, Anand Rathi Research



M&A to protect downsideHigher degree of consolidation and improved balance sheets are expected to prevent a major crash in prices. We expect the recent pick-up in momentum in M&As (priced at around US$170-220) to continue thereby protecting current valuations. With current replacement cost hovering around US$100-110 and a lead time of three-four years to set up a greenfield project, more and more companies (domestic and international) are on the lookout for acquisition opportunities.

Greater consolidation level to prevent price crash

The fallout of big ticket M&A activity has been that the Indian cement sector is far more consolidated than before. The top five groups contributed 40% to capacity in FY2000, which in FY10 is around 55%. We expect the greater degree of consolidation to prevent a major crash in prices in FY11 despite a dip in utilization rates. Except in AP, the industry has not seen major pressure on prices in the past one year, indicating a greater degree of understanding and cohesiveness among industry participants.

With the balance sheets of most in the industry in a much better shape (leverage of nil to 1.5x) than in the past (leverage of 1.5x to 5x in FY03 when prices fell 7%), companies including tier-two ones are expected not to behave irrationally on the pricing front. We expect prices to move up, starting FY12 (and much more in FY13) backed by strong demand.

Fig 66 – Consolidation climbs from 41% to 55%

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Consolidation increases from

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M&A activity to gain momentum

The equity market turmoil in FY09 had led to valuation gaps widening as sellers’ expectations had not gone down in line with the crash in stock prices. This led to no major deals being struck during FY09.

We are now seeing some pick-up in M&As based on a spate of deals recently struck. French cement major Vicat bought a majority stake in Bharati Cement (a South-based private cement company) in Apr ’10 to expand its footprint in India at valuations of over US$170 a ton. In May ’10 KKR (a leading private equity investment firm) bought a 20% stake in Dalmia’s cement business at a valuation of US$100 a ton. Equivalently, as Indian companies are expanding operations outside India, UltraTech has acquired a stake in a UAE-based cement company at valuations of ~US$125 a ton.



We believe momentum in M&A would be maintained for the following reasons.

Large cash-rich Indian companies aim at a larger market share through inorganic growth and are hence ready to pay a premium over the replacement cost in order to acquire quality assets.

The upswing in the cement cycle offers better valuations to smaller players to exit than in the past

Heightening interest from foreign cement manufacturers to expand/ enter the fast-growing Indian cement market.

Fig 67 – Recent deals Acquired Company Acquirer EV / Ton (US$) Year

Dalmia * KKR 100 2010

Bharthi Vicat 170 2010My Home Cements CRH 215 2008

Shree Digvijay Cements Cimpor 162 2007

Ambuja Cements Holcim 200 2006

Mysore Cements Heidelberg 117 2006

ACC Holcim 100 2005

Source: Anand Rathi Research * PE investment

Replacement cost and lead time to keep valuations high

Replacement costs of a cement plant, measured by the capex required to set up a greenfield unit, have been increasing over the past five years due to a surge in prices of all constituent elements, primarily land and machinery. The cost of a greenfield cement plant per ton has gone up from US$75 in 2004 to US$125 in 2008. Since then, with the reduction in land cost and steel, copper prices have led to replacement cost slipping to more reasonable levels of US$110 per ton. However, the lead time to set up a greenfield composite plant is today a minimum of three years.

Mid-caps basket, selective outperformance

Most midcap companies are now available at EV/ton valuations of less than replacement cost. As we enter the next upturn in the cement sector, some of these should be re-rated based on size, leverage, operational efficiency, return ratios and growth strategy.

Fig 68 – Valuations mid-caps (FY10)

Company Current Capacity

(m tons) Price (Rs/share) PE (x) EV/EBITDA (x) EV/ton ($) Debt/equity (x)Binani Cement 6.3 79.6 5.5 4.2 86 1.4

Birla Corp. 5.8 367.0 5.1 2.9 73 (0.4)

JK Lakshmi 5.6 63.0 3.2 1.5 26 0.7

JK Cement 7.9 182.7 7.2 5.5 63 1.0

OCL India 4.0 125.8 5.5 3.7 54 0.7

Sanghi Industries 3.3 23.1 9.4 5.8 185 3.1

Dalmia 7.8 217.5 12.8 7.1 56 1.6

Heidelberg Cement 3.1 50.9 8.6 3.2 47 -

Chettinad Cement 8.2 479.4 15.5 4.7 64 1.0

Orient Cement 5.0 57.0 6.9 4.9 46 0.7

Mangalam Cement 2.0 155.0 3.5 1.6 33 -

Kesoram Cement 7.3 323.3 6.2 6.1 48 1.7

Madras Cement 11.5 103.0 6.9 5.1 85 1.5

Source: Companies, Anand Rathi Research.



Company Section

Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

India I Equities


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Key financials

Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Sales (Rsm) 69,907 72,829 80,272 84,641 94,479

Net profit (Rsm) 12,255 11,639 16,067 14,222 14,812

EPS (Rs) 65.2 62.0 85.5 75.7 78.8

Growth (%) 14.4 (5.0) 38.0 (11.5) 4.1

PE (x) 10.8 12.8 9.7 10.9 10.5

EV/EBITDA (x) 7.5 8.4 5.7 6.2 5.2

EV/Ton (US$) 142 143 121 104 94

RoE (%) 39.4 26.7 29.4 21.9 19.7

RoCE (%) 34.1 26.1 31.9 23.7 22.6

Dividend yield (%) 2.4 2.4 2.8 2.4 2.4

Net gearing (%) (30.9) (24.0) (27.5) (25.0) (37.8)Source: Company, Anand Rathi Research

Cement

Update

4 June 2010

ACC

Improving efficiency, upgrading to Buy

Upgrade. We raise CY10e/CY11e earnings 13%/19%, given new volume, realization and cost assumptions, and target price to Rs1,125 (from Rs730). We upgrade to Buy, from Sell, given cost rationalization, all-India presence and de-leveraged balance sheet.

Expansion to drive volume growth. ACC’s ongoing expansion would raise cement capacity to 30.5m tons (from 24m tons now) by 3QCY10, leading to a 9% volume CAGR over CY09-11.

Insulation against regional fluctuations. ACC is present in almost all regions, though the West contributes the least. On its Maharashtra plant being commissioned, we expect this imbalance to be redressed, insulating it from regional fluctuations.

Cost rationalization boosts profitability. In the past two years, cost rationalization measures have shown results. It has cut coal consumption per ton of cement by 15% and kept fixed costs constant despite a 9% rise in volumes. This, together with more coal linkages (65%), would keep it competitive.

De-leveraged balance sheet. With no major capex in the pipeline, we expect ACC to remain FCF positive until CY11. We estimate net cash of Rs27bn by CY11 (per share: Rs145).

Valuations. At our target price of Rs1,125, the stock would trade at 7.5x CY11e EV/EBITDA, in line with its ten-year average. The target price implies an EV/ton of US$135 and a PE of 14.3x.

Rating: Buy Target Price: Rs1,125

Share Price: Rs826

Key data ACC IN/ ACC.BO

52-week high/low Rs1017 / Rs570Sensex/Nifty 17022 / 51103-m average volume US$10.8m Market cap Rs155bn/US$3.4bnShares outstanding 187.7mFree float 53.8%Promoters 46.2%Foreign Institutions 13.0%Domestic Institutions 19.8%Public 21.0%

Relative price performance

ACC

Sensex

650

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850

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1,050

May

-09

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09

Jul-0

9

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09

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09

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-09

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10

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10M

ar-1

0

Apr-1

0

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Source: Bloomberg

Change in Estimates Target Reco

4 June 2010 ACC – Improving efficiency, upgrading to Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Net sales 69,907 72,829 80,272 84,641 94,479 Sales growth (%) 20.5 4.2 10.2 5.4 11.6 - Op. expenses 50,720 55,497 55,475 61,984 69,923 EBIDTA 19,186 17,332 24,797 22,657 24,556 EBITDA margins (%) 27.4 23.8 30.9 26.8 26.0 - Interest 739 400 843 500 500 - Depreciation 3,051 2,942 3,421 4,500 5,300 + Other income 1,775 2,887 2,411 2,660 2,710 - Tax 4,917 5,238 6,877 6,095 6,655 PAT 12,255 11,639 16,067 14,222 14,812 PAT growth (%) 14.4 (5.0) 38.0 (11.5) 4.1 Reported PAT 14,386 12,128 16,067 14,222 14,812 FDEPS (Rs/share) 65.2 62.0 85.5 75.7 78.8 CEPS (Rs/share) 93.4 80.4 104.4 100.7 108.1 DPS (Rs/share) 20.0 20.0 23.0 20.0 20.0 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11eShare capital 1,878 1,879 1,879 1,879 1,879 Reserves & surplus 42,962 50,756 61,775 71,799 82,413 Shareholders’ fund 44,841 52,635 63,655 73,679 84,293 Debt 3,064 4,820 5,669 3,143 3,000 Minority interests Capital employed 47,905 57,456 69,324 76,821 87,293 Fixed assets 39,639 50,726 63,145 67,879 63,579 Investments 8,448 6,791 14,756 14,756 14,756 Working capital (7,617) (9,903) (16,041) (11,695) (9,713)Cash 7,435 9,842 7,464 5,881 18,670 Capital deployed 47,905 57,456 69,324 76,821 87,293 No. of shares (m) 187.5 187.8 187.9 187.9 187.9Net Debt/Equity (%) (30.9) (24.0) (27.5) (25.0) (37.8)W C turn (days) (40) (50) (73) (50) (38)Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11ePAT 12,255 11,639 16,067 14,222 14,812 + Depreciation 3,051 2,942 3,421 4,500 5,300 + Deferred Tax 107.3 43.4 134.6 200 200Cash profit 15,413 14,624 19,623 18,922 20,312 - Incr/(Decr) in WC (6,208) (2,286) (6,138) 4,346 1,983 Operating cash flow 21,621 16,910 25,761 14,576 18,329 - Capex 8,731 14,028 15,840 9,234 1,000 Free cash flow 12,890 2,882 9,920 5,342 17,329 - Dividend 4,388 4,391 5,051 4,398 4,398 + Equity raised 99 15 (131) 0 -+ Debt raised (6,096) 1,756 849 (2,527) (143)- Investments 3,413 (1,657) 7,966 - -- Misc. items (2,141) (489) - - -Net cash flow 1,233 2,408 (2,379) (1,582) 12,789 + Opening cash 6,202 7,435 9,842 7,464 5,881 Closing cash 7,435 9,842 7,464 5,881 18,670 Source: Company, Anand Rathi Research

Fig 4 – PE Band

ACC

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Fig 5 – EV/EBITDA Band

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Fig 6 – EV/Ton Band

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Investment Argument and ValuationWe raise CY10 and 11 earnings estimates 13% and 19%, given new volume, realization and cost assumptions. We also raise the target price to Rs1,125 from Rs730, and upgrade to Buy.

Cement expansion to drive volume growth

ACC’s volume CAGR over CY07-CY09 was just 4%, mainly because there was no capacity expansion in CY08 and delays in CY09’s expansion.

In Dec ’09, the company added two split grinding units (with combined capacity of 2.9m tons) in Karnataka. The corresponding clinker unit (new Wadi), though, is to be commissioned in Jul ’10. The company is adding another 3m-ton composite plant at Chanda in Maharashtra, which would be commissioned by 3QCY10, taking capacity to 30.5m tons. We believe these expansion plans would lead to a 9% volume CAGR over CY09-11.

Fig 7 – Expansion to lead to strong volume growth

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Source: Company, Anand Rathi Research

A premium brand with all-India reach

ACC is well-established in almost all regions, though the West contributes the least. We expect this imbalance to be redressed when its Maharashtra plant is commissioned, thereby insulating it from regional fluctuations. The high-growth regions of North, Central, East and West would contribute ~70% of its production.

Fig 8 – Well-diversified regional mix (CY10e)

North20%

South32%East

20%

West13%

Central15%


Expansion would lead to a 9% CAGR in volumes over CY09-11



ACC’s is one of India’s oldest cement companies and the only one that figures in the list of Consumer Super Brands of India. Given this lineage, it has noteworthy brand equity, commanding a premium in all markets.

Cost rationalization boosts profitability

Under the guidance of Holcim, ACC has been working towards cost rationalization. In the past two years, this has yielded good results. In CY07, it used 121kg of coal to produce one ton of cement; it has reduced this to 103kg, a marked 15% lower coal consumption.

Also, it has the highest linkage in the industry (65% of its requirement). It is also setting up a further captive 90 MW, which would raise its self-sufficiency to 86% (from 72% now). Although open market coal costs have risen 55% in the past two years, lower consumption and higher linkages have enabled ACC to hold in check its power and fuel costs.

Fig 9 – Cost rationalization initiatives showing results

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Fixed costs too (employee and ‘other expenses’) have been constant in the past two years despite a 9% increase in volumes. We believe that cost-pruning measures would continue, and partially offset the impact of the rise in fuel and raw material costs.

De-leveraged balance sheet

During CY10, ACC will complete its expansion plans and is expected to have a positive free-cash-flow until CY11. In the next two years, it is estimated to generate cash profits of Rs39bn. Accordingly, its net cash of ~Rs13bn (CY09) is expected to rise to Rs27bn by CY11 (up per share from Rs70 to Rs145). This would take its net gearing from a negative 0.3x in CY09 to a negative 0.4x in CY11. The company is one of the best placed in the sector to fund future growth plans, without much of an impact on its balance sheet.

Coal consumption reduced by 15%, to 103kg per ton of cement

Net cash of Rs13bn (CY09) expected to shoot up to Rs27bn in

CY11



Fig 10 – Net-debt-to-equity vs FCF

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Valuation

At our target price of Rs1,125, the stock would trade at 7.5x CY11 EV/EBITDA, in line with its ten-year average. The target price implies a PE of 14.3x and an EV per ton of US$135.

Fig 11 – 12-month-forward EV/EBITDA – Mean and Standard Deviation

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We slightly raise our sales estimates for CY10 and CY11 – by 4% and 11%, respectively. We have increased our net profit estimate, by 13% and 19% in CY10 and CY11 to factor in higher volumes and realizations.

Fig 12 – Change in estimates CY10e CY11e

Old New Change % Old New Change %

Net sales (Rs m) 81,660 84,641 3.7 84,866 94,479 11.3

EBITDA (Rs m) 20,655 22,657 9.7 20,200 24,556 21.6

PAT (Rs m) 12,615 14,222 12.7 12,500 14,812 18.5

EBITDA per ton (Rs) 25.3 26.8 147 23.8 26.0 219

NSR per ton (Rs) 869 979 12.6 806 951 17.9

Volumes (m tons) 3,437 3,658 6.4 3,387 3,658 8.0

Source: Anand Rathi Research.



Risks to valuation

Industry capacity ramping up quicker and bunching up; steep rise in international coal prices; lower demand offtake over the next two years.

Fig 13 – Income Statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11eNet Sales 69,907 72,829 80,272 84,641 94,479 Sales Growth (%) 20.5 4.2 10.2 5.4 11.6 Less Expenditure Raw Material 7,608 7,988 8,628 10,139 11,861 Staff Cost 3,533 4,163 3,677 3,935 4,525 Power& Fuel 12,436 15,990 15,396 17,864 20,081 Freight charges 9,442 10,016 10,544 11,831 13,892 Other Expenditure 17,701 17,341 17,230 18,215 19,565 EBITDA 19,186 17,332 24,797 22,657 24,556 EBITDA Margin (%) 27.4 23.8 30.9 26.8 26.0 Growth (%) 18.2 (9.7) 43.1 (8.6) 8.4 - Interest 739 400 843 500 500 - Depreciation 3,051 2,942 3,421 4,500 5,300 + Other Income 1,775 2,887 2,411 2,660 2,710 Profit Before Tax 17,172 16,877 22,944 20,317 21,466 - Tax 4,917 5,238 6,877 6,095 6,655 Tax rate (%) 28.6 31.0 30.0 30.0 31.0 Adjusted PAT 12,255 11,639 16,067 14,222 14,812 PAT Margin (%) 17.5 16.0 20.0 16.8 15.7 Growth (%) 14.4 (5.0) 38.0 (11.5) 4.1 Extraordinary Items (2,131) (489) - - -Reported PAT 14,386 12,128 16,067 14,222 14,812 FDEPS (Rs / Share) 65.2 62.0 85.5 75.7 78.8 CEPS (Rs / Share) 93.4 80.4 104.4 100.7 108.1 DPS (Rs / Share) 20.0 20.0 23.0 20.0 20.0

Source: Company, Anand Rathi Research.

Fig 14 – Balance Sheet Year end 31 Dec CY07 CY08 CY09 CY10e CY11eSources of Funds Share Capital 1,878 1,879 1,879 1,879 1,879 Reserves and Surplus 39,648 47,399 58,283 68,107 78,521 Deferred Tax Liability 3,315 3,358 3,493 3,693 3,893 Net Worth 44,841 52,635 63,655 73,679 84,293 Debt 3,064 4,820 5,669 3,143 3,000 Capital Employed 47,905 57,456 69,324 76,821 87,293 Application of Funds Gross Block 54,641 58,357 68,263 98,223 99,559 Less: Depreciation 21,494 23,660 26,680 31,180 36,480 Net Block 33,147 34,697 41,583 67,043 63,079 Capital WIP 6,492 16,029 21,562 836 500 Investments 8,448 6,791 14,756 14,756 14,756 Sundry Debtors 2,893 3,102 2,037 3,478 3,883 Inventories 7,309 7,933 7,790 9,276 10,354 Loans & Advances 4,394 6,475 5,654 7,154 8,654 Current Assets 14,596 17,510 15,481 19,908 22,891 Current Liablities 15,550 17,774 20,603 20,603 20,603 Provisions 6,663 9,639 10,919 11,000 12,000 Current Liabilities 22,213 27,413 31,522 31,603 32,603 Working Capital (7,617) (9,903) (16,041) (11,695) (9,713)Cash 7,435 9,842 7,464 5,881 18,670 Net Current Assets (183) (61) (8,578) (5,814) 8,958 Capital Deployed 47,905 57,456 69,324 76,821 87,293 W C Turnover (days) (40) (50) (73) (50) (38)BV (Rs / Share) 221 262 320 372 428




Fig 15 – Cash Flow Statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

PAT 12,255 11,639 16,067 14,222 14,812

+ Depreciation 3,051 2,942 3,421 4,500 5,300

+ Deffered Tax 107.3 43.4 134.6 200 200

Cash profit 15,413 14,624 19,623 18,922 20,312

- Incr/(Decr) in WC (6,208) (2,286) (6,138) 4,346 1,983

Operating cash flow 21,621 16,910 25,761 14,576 18,329

- Capex 8,731 14,028 15,840 9,234 1,000

Free cash flow 12,890 2,882 9,920 5,342 17,329

- Dividend 4,388 4,391 5,051 4,398 4,398

+ Equity raised 99 15 (131) 0 -

+ Debt raised (6,096) 1,756 849 (2,527) (143)

- Investments 3,413 (1,657) 7,966 - -

- Misc. items (2,141) (489) - - -

Net cash flow 1,233 2,408 (2,379) (1,582) 12,789

+ Opening cash 6,202 7,435 9,842 7,464 5,881

Closing cash 7,435 9,842 7,464 5,881 18,670


Fig 16 – Ratio Analysis @ Rs826 Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Sales Growth (%) 20.5 4.2 10.2 5.4 11.6

PAT Growth (%) 14.4 (5.0) 38.0 (11.5) 4.1

Operating Margin (%) 27.4 23.8 30.9 26.8 26.0

PE (x) 10.8 12.8 9.7 10.9 10.5

P/C (x) 8.8 10.3 7.9 8.2 7.6

Dividend Yield (%) 2.4 2.4 2.8 2.4 2.4

P/B (x) 3.7 3.1 2.6 2.2 1.9

EV/Sales (x) 2.0 2.0 1.8 1.7 1.4

EV/EBITDA (x) 7.5 8.4 5.7 6.2 5.2

Net Debt / Equity (%) (30.9) (24.0) (27.5) (25.0) (37.8)

Working Capital Turnover (days) (40) (50) (73) (50) (38)

Dividend Payout (%) 26.1 30.9 26.9 26.4 25.4

RoE (%) 39.4 26.7 29.4 21.9 19.7

RoCE (%) 34.1 26.1 31.9 23.7 22.6



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Key financials

Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Sales (Rsm) 56,314 62,203 70,769 76,612 84,882

Net profit (Rsm) 13,039 10,939 12,184 14,259 16,300

EPS (Rs) 8.6 7.2 8.0 9.4 10.7

Growth (%) 0.9 (16.1) 11.4 17.0 14.3

PE (x) 12.8 15.3 13.8 11.8 10.3

EV/EBITDA (x) 7.4 9.1 8.2 6.8 5.2

EV/Ton (US$) 182 160 155 123 111

RoE (%) 32.0 21.2 20.1 20.6 20.5

RoCE (%) 35.8 25.3 23.3 24.0 24.3

Dividend yield (%) 3.2 2.0 2.2 2.7 2.5

Net gearing (%) (28.3) (15.8) (22.3) (24.0) (39.1)Source: Company, Anand Rathi Research

Cement

Update

4 June 2010

Ambuja Cements

Cost leader, expansion in growth areas; upgrading to Buy

Upgrade. We raise CY10/11 earnings estimates 26%/39%, given new volume, realization and cost assumptions; and target price to Rs148, from Rs87. We upgrade to Buy from Sell, given the resurgence of its cost leadership status, expansion in high-growth regions and de-leveraged balance sheet.

Cement expansion to drive volume growth. Ambuja would complete its expansion in CY10. In 1Q, cement capacity rose to 25m tons (from 22m), and is expected to be 27m tons by 3Q. We expect this to lead to a 10% volume CAGR over CY09-11.

Established in North, Central, East. Around 60% of its sales arise from the high-growth North, Central and East regions; the rest from the West. Its recent foray into the southern region with a bulk terminal in Kerala makes it an all-India player.

Cost leadership reinforced. In 1QCY10, it commissioned its 4.6m-ton clinker plant, taking capacity to 16.7m tons. We expect this to save ~Rs200/ton, reinforcing Ambuja’s cost leadership status, putting behind cost issues with clinker.

De-leveraged balance sheet. With no major capex in the pipeline, we expect Ambuja to remain FCF positive until CY11. We estimate net cash to rise to Rs33bn by CY11 (per share: Rs22).

Valuation. At our target price of Rs148, the stock would trade at 7.5x CY11 EV/EBITDA, in line with its ten-year average. The target price implies a PE of 14x CY11 and an EV/ton of US$160.

Rating: Buy Target Price: Rs148 Share Price: Rs110

Key data ACEM IN / ABUJ.BO

52-week high/low Rs114 / Rs60 Sensex/Nifty 17022 / 51103-m average volume US$10m Market cap Rs168bn/US$3.7bnShares outstanding 1523.7mFree float 53.6%Promoters 46.4%Foreign Institutions 27.3%Domestic Institutions 16.5%Public 9.80%


Ambuja

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4 June 2010 Ambuja Cements – Cost leader, expansion in growth areas; upgrading to Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Net sales 56,314 62,203 70,769 76,612 84,882 Sales growth (%) 16.0 10.5 13.8 8.3 10.8 - Op. expenses 35,862 44,779 52,100 54,531 59,186 EBIDTA 20,451 17,424 18,669 22,081 25,696 EBITDA margins (%) 36.3 28.0 26.4 28.8 30.3 - Interest 591 321 224 250 250 - Depreciation 2,363 2,598 2,970 3,900 4,700 + Other income 1,935 2,109 2,558 2,825 3,225 - Tax 6,393 5,676 5,849 6,497 7,671 PAT 13,039 10,939 12,184 14,259 16,300 PAT growth (%) 0.9 (16.1) 11.4 17.0 14.3 Reported PAT 17,691 14,023 12,706 14,460 16,300 FDEPS (Rs/share) 8.6 7.2 8.0 9.4 10.7 CEPS (Rs/share) 13.2 10.9 11.0 12.7 14.4 DPS (Rs/share) 3.5 2.2 2.4 3.0 2.8 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Share capital 3,045 3,045 3,047 3,047 3,047 Reserves & surplus 47,286 57,445 66,494 76,622 88,942 Shareholders’ fund 50,330 60,490 69,542 79,670 91,990 Debt 3,304 2,887 1,657 500 400 Minority interests Capital employed 53,635 63,377 71,199 80,170 92,390 Fixed assets 36,567 51,400 61,545 63,454 59,754 Investments 12,889 3,324 7,270 6,066 6,066 Working capital (2,247) 135 (6,423) (1,469) (1,042)Cash 6,426 8,518 8,807 12,118 27,612 Capital deployed 53,635 63,377 71,199 80,170 92,390 No. of shares (m) 1522.4 1522.6 1523.7 1523.7 1523.7Net Debt/Equity (%) (28.3) (15.8) (22.3) (24.0) (39.1)W C turn (days) (15) 1 (33) (7) (4)Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11ePAT 13,039 10,939 12,184 14,259 16,300 + Depreciation 2,363 2,598 2,970 3,900 4,700 + Deferred Tax (55) 60 1,015 1,000 1,001 Cash profit 15,348 13,597 16,168 19,159 22,001 - Incr/(Decr) in WC (3,215) 2,382 (6,558) 4,954 427 Operating cash flow 18,563 11,215 22,726 14,205 21,575 - Capex 7,689 17,431 13,115 5,809 1,000 Free cash flow 10,874 (6,216) 9,611 8,396 20,575 - Dividend 6,232 3,919 4,277 5,348 4,991 + Equity raised 244 (23) 115 - (1)+ Debt raised (5,350) (418) (1,230) (1,157) (100)- Investments 1,558 (9,566) 3,946 (1,204) -- Misc. items (4,667) (3,103) (16) (217) (11)Net cash flow 2,645 2,093 288 3,312 15,494 + Opening cash 3,781 6,426 8,518 8,807 12,118 Closing cash 6,426 8,518 8,807 12,118 27,612 Source: Company, Anand Rathi Research

Fig 4 – PE Band

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Investment Argument and ValuationWe raise Ambuja’s CY10/11 earnings estimates 26%/39%, given new volume, realization and cost assumptions; and the target price to Rs148, from Rs87. Given its cost leadership, de-leveraged balance sheet and expansion into high-growth regions, we upgrade the stock from a Sell to a Buy.


Ambuja’s volume CAGR over CY07-CY09 was just 6% due to cement capacity constraints. Also, a mismatch in clinker and cement capacity resulted in sourcing clinker at a higher cost, leading to lower profitability during CY07-CY09.

In 1QCY10, the company added two grinding units of 1.5m tons each in Himachal Pradesh and Uttar Pradesh, taking cement capacity to 25m tons. It is also adding another 1m tons each at Maharashtra and Chhattisgarh by 3QCY10, taking cement capacity to 27m tons. We believe this expansion would lead to 10% volume CAGR over CY09-11, given its established presence in the high-growth markets of the North, Central and East.

Fig 7 – Expansion to lead to strong volume growth

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Presence in high-growth North, Central, East; foray into the South

During FY10 dispatches to the North, East and Central markets grew 13%, 13% and 15%, respectively, while to the West and the South they grew ~7% each. Ambuja would complete the last leg of its expansion in 3QCY10, after which it would have about 60% exposure to these three high-growth markets, the balance coming from the West. Also, prices in the markets of the North, East and Central have been stronger than in other regions. This makes for a strong regional portfolio for Ambuja.

In CY09, Ambuja commissioned a Rs660m bulk terminal in Kerala. This would enable it to directly move products from its Gujarat plant to southern markets, making it an all-India player.

Ambuja is expected to post a 10% CAGR in volumes over CY09-11

Post-expansion, Ambuja would have 60% exposure to the high-growth

markets of the North, Central and East



Fig 8 – Geographical breakup – Capacity (CY10e)

North33%

East20%

West41%

Central6%


Cost leadership status reinforced

In the past three years, Ambuja had to resort to third parties sourcing for clinker as it had been plagued with clinker shortages. Besides restricting cement sales, this came at higher prices and pushed up raw material costs per ton.

In 1QCY10 Ambuja commissioned clinker capacity of 4.6m tons (at Himachal Pradesh and Chhattisgarh), taking capacity to 16.7m tons and potential cement production to 24m tons (current cement capacity at 25m tons). This has already lowered the raw material cost in 1QCY10, by ~Rs100/ton qoq. With the full ramp-up in clinker capacity, we expect cost savings of ~Rs200/ton, which would reinforce Ambuja’s position as the lowest-cost producer in the industry.

Fig 9 – Raw material costs vs EBITDA margin

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In CY10, Ambuja is expected to complete all its expansion and to generate positive free cash till CY11. Accordingly, we expect its net cash of Rs14bn (in CY09) to rise to Rs33bn by CY11 (per share up from Rs10 to Rs22). This would take its net gearing from a negative 0.28x in CY09 to a negative 0.39x two years later. Ambuja is one of the best-placed companies in the sector to fund future growth plans without much impact on its balance sheet.

Post the full ramp-up of clinker capacity, we expect cost savings of

Rs200 a ton



Fig 10 – Net-Debt-to-Equity vs FCF

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Valuation

At our target price of Rs148, it would trade at 7.5x CY11e EV/EBITDA, in line with its ten-year average. The target price implies a PE of 14x and an EV per ton of US$160.


EV/EBITDA

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We raise our net profit estimates of Ambuja for FY11/12, by 26% and 39%, respectively, in order to factor in more volumes and better realizations.

Fig 12 – Key changes CY10e CY11e


Net sales (Rs m) 70,123 76,612 9.3 75,782 84,882 12.0

EBITDA (Rs m) 17,909 22,081 23.3 18,996 25,696 35.3

PAT (Rs m) 11,359 14,259 25.5 11,746 16,300 38.8

EBITDA margin (%) 25.5 28.8 328 25.1 30.3 521

EBITDA per ton (Rs) 918 1,078 17.4 901 1,132 25.7

NSR per ton (Rs) 3,593 3,739 4.1 3,593 3,739 4.1

Volumes (m ton) 19.5 20.5 5.0 21.1 22.7 7.6




Risks to valuation

Industry capacity ramping up quicker and bunching; steep rise in international coal prices; lower demand offtake in the next two years.

Fig 13 – Income Statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Net Sales 56,314 62,203 70,769 76,612 84,882 Sales Growth (%) 16.0 10.5 13.8 8.3 10.8 Less Expenditure Raw Material 3,979 5,193 10,139 6,495 5,892 Staff Cost 2,086 2,661 2,728 3,138 3,451 Power& Fuel 10,198 13,257 14,228 16,482 18,524 Freight charges 10,895 12,499 13,474 15,683 17,669 Other Expenditure 8,704 11,170 11,531 12,734 13,650EBITDA 20,451 17,424 18,669 22,081 25,696 EBITDA Margin (%) 36.3 28.0 26.4 28.8 30.3 Growth (%) 15.7 (14.8) 7.1 18.3 16.4 - Interest 591 321 224 250 250 - Depreciation 2,363 2,598 2,970 3,900 4,700 + Other Income 1,935 2,109 2,558 2,825 3,225 Profit Before Tax 19,433 16,615 18,033 20,756 23,971 - Tax 6,393 5,676 5,849 6,497 7,671 Tax rate (%) 31.4 28.8 31.5 31.0 32.0 Adjusted PAT 13,039 10,939 12,184 14,259 16,300 PAT Margin (%) 23.2 17.6 17.2 18.6 19.2 Growth (%) 0.9 (16.1) 11.4 17.0 14.3 Extraordinary Items (4,652) (3,083) (523) (201) -Reported PAT 17,691 14,023 12,706 14,460 16,300 FDEPS (Rs / Share) 8.6 7.2 8.0 9.4 10.7 CEPS (Rs / Share) 13.2 10.9 11.0 12.7 14.4 DPS (Rs / Share) 3.5 2.2 2.4 3.0 2.8




Fig 14 – Balance Sheet (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Sources of Funds

Share Capital 3,045 3,045 3,047 3,047 3,047

Reserves and Surplus 43,502 53,637 61,636 70,764 82,084

Deferred Tax Liability 3,784 3,808 4,858 5,858 6,858

Net Worth 50,330 60,490 69,542 79,670 91,990

Debt 3,304 2,887 1,657 500 400

Capital Employed 53,635 63,377 71,199 80,170 92,390

Application of Funds

Gross Block 52,311 57,069 62,241 94,195 95,195

Less: Depreciation 22,712 25,142 27,841 31,741 36,441

Net Block 29,599 31,928 34,400 62,454 58,754

Capital WIP 6,968 19,472 27,144 1,000 1,000

Investments 12,889 3,324 7,270 6,066 6,066

Sundry Debtors 1,457 2,246 1,522 3,148 3,488

Inventories 5,816 9,398 6,832 9,445 10,465

Loans & Advances 2,175 3,233 2,632 4,132 5,632

Current Assets 9,448 14,876 10,987 16,726 19,585

Current Liablities 6,759 10,036 10,669 10,495 11,628

Provisions 4,936 4,706 6,740 7,700 9,000

Current Liabilities 11,695 14,741 17,409 18,195 20,628

Working Capital (2,247) 135 (6,423) (1,469) (1,042)

Cash 6,426 8,518 8,807 12,118 27,612

Net Current Assets 4,179 8,653 2,384 10,649 26,570

Capital Deployed 53,635 63,377 71,199 80,170 92,390

W C Turnover (days) (15) 1 (33) (7) (4)

BV (Rs / Share) 31 37 42 48 56


Fig 15 – Cash Flow Statement (Rsm) Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

PAT 13,039 10,939 12,184 14,259 16,300

+ Depreciation 2,363 2,598 2,970 3,900 4,700

+ Deffered Tax (55) 60 1,015 1,000 1,001

Cash profit 15,348 13,597 16,168 19,159 22,001

- Incr/(Decr) in WC (3,215) 2,382 (6,558) 4,954 427


- Capex 7,689 17,431 13,115 5,809 1,000

Free cash flow 10,874 (6,216) 9,611 8,396 20,575

- Dividend 6,232 3,919 4,277 5,348 4,991

+ Equity raised 244 (23) 115 - (1)

+ Debt raised (5,350) (418) (1,230) (1,157) (100)

- Investments 1,558 (9,566) 3,946 (1,204) -

- Misc. items (4,667) (3,103) (16) (217) (11)

Net cash flow 2,645 2,093 288 3,312 15,494

+ Opening cash 3,781 6,426 8,518 8,807 12,118

Closing cash 6,426 8,518 8,807 12,118 27,612




Fig 16 – Ratio Analysis @ Rs110 Year end 31 Dec CY07 CY08 CY09 CY10e CY11e

Sales Growth (%) 16.0 10.5 13.8 8.3 10.8

PAT Growth (%) 0.9 (16.1) 11.4 17.0 14.3


PE (x) 12.8 15.3 13.8 11.8 10.3

P/C (x) 8.4 10.1 10.0 8.7 7.6

Dividend Yield (%) 3.2 2.0 2.2 2.7 2.5

P/B (x) 3.6 3.0 2.6 2.3 2.0

EV/Sales (x) 2.7 2.5 2.2 2.0 1.6

EV/EBITDA (x) 7.4 9.1 8.2 6.8 5.2

Net Debt / Equity (%) (28.3) (15.8) (22.3) (24.0) (39.1)

Working Capital Turnover (days) (15) 1 (33) (7) (4)

Dividend Payout (%) 40.8 30.6 30.0 32.1 26.2

RoE (%) 32.0 21.2 20.1 20.6 20.5

RoCE (%) 35.8 25.3 23.3 24.0 24.3



India I Equities


[email protected]


[email protected]

Key financials

Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

Sales (Rsm) 55,088 63,831 70,497 74,912 80,255

Net profit (Rsm) 10,076 9,770 10,932 9,971 10,669

EPS (Rs) 80.9 78.5 87.8 80.1 85.7

Growth (%) 28.8 (3.0) 11.9 (8.8) 7.0

PE (x) 11.7 12.1 10.8 11.9 11.1

EV/EBITDA (x) 7.7 7.5 5.9 6.2 5.5

EV/Ton (US $) 162 130 112 108 102

RoE (%) 45.2 31.0 26.6 19.8 18.0

RoCE (%) 33.5 24.1 23.4 18.4 17.2

Dividend yield (%) 0.5 0.5 0.6 0.9 1.1

Net gearing (%) 54.5 27.8 (3.2) (11.6) (19.5)


Cement

Update

4 June 2010

UltraTech

Restructuring-led growth and re-rating, upgrading to Buy

Upgrade. We raise FY11e/12e earnings 2%/14%, given new volume and realization assumptions and cost savings. We raise the target price to Rs1,255 from Rs890 and upgrade from Sell to Buy.

Strong brand equity. UltraTech has a strong brand equity and is categorized as a ‘Grade A’ brand in most regions.

Focus on greater efficiency through cost control. We expect UltraTech’s cost control measures (raising captive power, blending ratio, reducing fuel usage) to strengthen its cost competitiveness.

Restructuring: platform for accelerated future growth. The consolidation of the cement business of the Aditya Birla Group (merger of Grasim’s cement business with Ultratech) would create India’s largest cement company with a 49m-ton capacity and an all-India presence. This would enable the company to capitalize on organic and inorganic growth opportunities.

Strong balance sheet to support future growth. We expect UltraTech to be FCF positive till FY12, with net cash of Rs12.5bn by FY12 (per share of Rs100).

Valuations. At our target price of Rs1,255, the stock would trade at 7.5x FY12e EV/EBITDA, on par with the target multiples of other large cement companies. The target price implies a PE of 14.5x and an EV per ton of US$140 (standalone). On a merged basis, it implies a PE of 12x and EV per ton of US$145.

Rating: Buy Target Price: Rs1,255

Share Price: Rs951

Key data UTCEM IN / ULTC.BO

52-week high/low Rs1059/Rs343

Sensex/Nifty 17022 / 5110

3-m average volume US$5.0m

Market cap Rs118bn/US$2.6bn

Shares outstanding 125.3m

Free float 45.2%

Promoters 54.8%

Foreign Institutions 5.5%

Domestic Institutions 16.5%

Public 23.2%


Ultratech

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Source: Bloomberg


4 June 2010 UltraTech Cements – Restructuring-let growth and re-rating; upgrading to Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

Net sales 55,088 63,831 70,497 74,912 80,255 Sales growth (%) 12.2 15.9 10.4 6.3 7.1 - Op. expenses 37,830 46,790 50,786 56,788 60,984 EBIDTA 17,258 17,041 19,711 18,124 19,272 EBITDA margins (%) 31.3 26.7 28.0 24.2 24.0 - Interest 823 1,255 1,175 1,100 1,000 - Depreciation 2,372 3,230 3,881 4,300 4,700 + Other income 1,007 1,058 1,227 1,520 1,670 - Tax 4,994 3,844 4,949 4,273 4,572 PAT 10,076 9,770 10,932 9,971 10,669 PAT growth (%) 28.8 (3.0) 11.9 (8.8) 7.0 Reported PAT 10,076 9,770 10,932 9,971 10,669 FDEPS (Rs/share) 80.9 78.5 87.8 80.1 85.7 CEPS (Rs/share) 98.7 114.8 127.7 123.5 132.3 DPS (Rs/share) 5.0 5.0 6.0 9.0 10.0 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

Share capital 1,253 1,262 1,262 1,262 1,262 Reserves & surplus 31,141 41,989 53,125 62,885 73,197 Shareholders’ fund 32,393 43,250 54,387 64,147 74,459 Debt 17,405 21,416 16,047 15,647 15,247 Minority interests Capital employed 49,798 64,667 70,433 79,793 89,706 Fixed assets 47,836 53,130 52,022 54,972 57,184 Investments 1,709 10,348 16,693 16,693 16,693 Working capital (754) 144 895 2,811 4,810 Cash 1,007 1,045 823 5,317 11,018 Capital deployed 49,798 64,667 70,433 79,793 89,706 No. of shares (m) 124.5 124.5 124.5 124.5 124.5Net Debt/Equity (%) 54.5 27.8 (3.2) (11.6) (19.5)W C turn (days) 1 (2) 3 9 17 Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

PAT 10,076 9,770 10,932 9,971 10,669 + Depreciation 2,372 3,230 3,881 4,300 4,700 + Deferred Tax -179.1 1287.3 1078 1100 1100Cash profit 12,269 14,288 15,891 15,371 16,469 - Incr/(Decr) in WC (1,908) 898 751 1,916 1,999 Operating cash flow 14,177 13,390 15,140 13,455 14,470 - Capex 18,066 8,524 2,773 7,250 6,912 Free cash flow (3,889) 4,866 12,367 6,205 7,558 - Dividend 728 728 874 1,311 1,457 + Equity raised (16) 528 - - -+ Debt raised 1,619 4,011 (5,370) (400) (400)- Investments (3,126) 8,639 6,345 - -- Misc. items - - - - -Net cash flow 111 38 (222) 4,494 5,701 + Opening cash 896 1,007 1,045 823 5,317 Closing cash 1,007 1,045 823 5,317 11,018 Source: Company, Anand Rathi Research

Fig 4 – PE Band

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UltraTech

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Investment Argument and ValuationWe raise our FY11/12 earnings estimates for Ultratech 2%/14%, given new volume and realization assumptions and the gains from cost savings. We also raise the target price to Rs1,255 (from Rs890) and upgrade from a Sell to a Buy.

Strong brand equity

UltraTech enjoys strong brand equity and is categorized as a ‘Grade A’ brand in most regions. Both Grasim and UltraTech cement are sold under a single brand “UltraTech”. On acquiring L&T’s cement business, the brand name UltraTech was created and promoted as an all-India brand, with the other brand “Birla Plus” being slowly phased out.

UltraTech is now well established in the South, West and East. However, the merger with Grasim’s cement business would give it an all-India footprint. Its recent expansion into Karnataka is expected to lead to a 12% CAGR in cement sales over FY10-12.

Focus on greater efficiency through cost control

UltraTech’s efforts towards cost control are expected to strengthen its cost competitiveness. Besides modernizing and upgrading its plants, it is working towards greater availability of captive power, adding 86 MW to its present 210 MW. This includes a 75 MW thermal plant and 11 MW through waste-heat recovery. These power plants would be commissioned by end-FY11 and take its power sufficiency to 80% (from 40% now).

Apart from power capex, UltraTech is also investing in logistics and material evacuation measures to keep operating costs under control. It is also working on altering the product mix by increasing the blending ratio (at present 1.29x, vs industry average of 1.34x). this would give it higher profitability.

Fig 7 – Geographical Break up – Pre Merger

South35%

East18%

West47%

Source: Company

Fig 8 – Geographical Break up – Post Merger

South29%

East15%

West31%

North15%

Central10%

Source: Company

The 86-MW addition would take UltraTech’s power self-sufficiency

from 40% now to 80%



Fig 9 – Reducing power and fuel costs per ton

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Business restructuring: platform for accelerated future growth

The consolidation of the cement business of the Aditya Birla Group (through the merger of Grasim’s cement business with UltraTech) would create the largest cement company in India with a 49m-ton capacity (20% market share) and with an all-India presence. This would enable the company to capitalize on organic and inorganic growth opportunities.

The amalgamated entity is estimated to have a net profit of Rs25.8bn and Rs28bn in FY11 and FY12, respectively, on net sales of Rs169bn and Rs183bn. Also, its market cap is expected to more than double to $5.8bn from levels now, dwarfing the market caps of ACC and Ambuja ($3.5bn).

Fig 10 – UltraTech to have an all-India presence (post cement assets restructuring)

Source: Company

Strong balance sheet to support future growth

UltraTech has completed its major expansion plan and is expected to continue to generate a positive free cash-flow till FY12. Its net cash of ~Rs1.5bn (FY10) is expected to shoot up to Rs12.5bn by FY12 (per share of Rs100). This would take its net gearing from a negative 0.03x in FY10 to a negative 0.2x in FY12. This would, without increasing leverage by a great extent, support future growth plans, which include adding 12m tons

The consolidation of the Aditya Birla Group’s cement business would create the largest cement company in India, of 49m-ton

capacity



in five years.

Post-merger, the company aims to add 25m tons in the next five years in order to retain its market share. This is likely to cost it over Rs125bn. Funding should not be a daunting task, given the estimated annual cash generation of around Rs30bn (post merger).


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Valuation

At our target price of Rs1,255, the stock would trade at 7.5x FY12 EV/EBITDA, on par with the target multiples of other large cement companies. The target price implies a PE of 14.5x and an EV per ton of US$140 (pre-merger).

Fig 12 – 12-month-forward EV/EBITDA – Mean and standard deviation

Mean

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Source: Bloomberg, Anand Rathi Research.

Our target price of Rs1,255 implies a 32% return from the present Rs951. At the current price of Rs951, the stock trades at a PE of 11.1x, an EV/EBITDA of 5.5x and an EV/ton of US$102 on FY12 estimates.

Valuation: Merger with Grasim’s cement business

Based on the merger of Grasim’s cement assets with UltraTech, at the target price of Rs1,255, the stock would trade at $145 EV per ton is pre-merger (FY12e), at par with other large-cap cement companies. It would trade at a PE of 11.8x and an EV/EBITDA of 6.7x.



Fig 13 – Key financials – Amalgamated Entity Rs m FY11e FY12e

Net Sales 169,062 183,468

EBITDA 42,536 46,953

PAT 24,949 27,974

Equity 2,740 2,740

EPS 91.1 102.1

Valuation

PE (x) 10.4 9.3

EV/EBITDA (x) 5.9 5.1

EV/ ton (US$) 115 109


Change in estimates

We raise our sales estimates for FY11 and FY12, by 3% and 10%, respectively. We have increased our net profit estimates, by 2% and 14% for FY11 and FY12, to factor in higher volumes and realization.

Fig 14 – Change in estimates FY11 FY12


Net sales (Rs m) 72,723 74,912 3.0 73,085 80,255 9.8

EBITDA (Rs m) 18,672 18,124 (2.9) 17,547 19,272 9.8

PAT (Rs m) 9,777 9,971 2.0 9,324 10,669 14.4

EBITDA margin (%) 25.7 24.2 (148) 24.0 24.0 0

EBITDA per ton (Rs) 873 840 (3.8) 816 852 4.4

NSR per ton (Rs) 3,400 3,472 2.1 3,400 3,547 4.3

Volumes (m tons) 21.4 21.6 0.9 21.5 22.6 5.2


Risks to our target price

Industry capacity ramping up quicker and bunching of capacities

Steep rise in international prices of coal

Lower demand offtake in the next two years



Fig 15 – Income statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12eNet Sales 55,088 63,831 70,497 74,912 80,255 Sales Growth (%) 12.2 15.9 10.4 6.3 7.1 Less Expenditure Raw Material 5,101 5,962 9,629 10,601 11,127 Staff Cost 1,676 2,177 2,506 2,556 2,607 Power& Fuel 12,533 17,270 14,309 17,033 17,854 Freight charges 9,693 10,583 12,288 14,122 16,099 Other Expenditure 8,827 10,798 12,054 12,476 13,296 EBITDA 17,258 17,041 19,711 18,124 19,272 EBITDA Margin (%) 31.3 26.7 28.0 24.2 24.0 Growth (%) 21.7 (1.3) 15.7 (8.1) 6.3 - Interest 823 1,255 1,175 1,100 1,000 - Depreciation 2,372 3,230 3,881 4,300 4,700 + Other Income 1,007 1,058 1,227 1,520 1,670 Profit Before Tax 15,070 13,615 15,882 14,244 15,242 - Tax 4,994 3,844 4,949 4,273 4,572 Tax rate (%) 33.1 28.2 31.2 30.0 30.0 Adjusted PAT 10,076 9,770 10,932 9,971 10,669 PAT Margin (%) 18.3 15.3 15.5 13.3 13.3 Growth (%) 28.8 (3.0) 11.9 (8.8) 7.0 Extraordinary Items - - - - -Reported PAT 10,076 9,770 10,932 9,971 10,669 FDEPS (Rs / Share) 80.9 78.5 87.8 80.1 85.7 CEPS (Rs / Share) 98.7 114.8 127.7 123.5 132.3 DPS (Rs / Share) 5.0 5.0 6.0 9.0 10.0



Sources of Funds

Share Capital 1,253 1,262 1,262 1,262 1,262


Deferred Tax Liability 5,424 7,229 8,307 9,407 10,507

Net Worth 32,393 43,250 54,387 64,147 74,459

Debt 17,405 21,416 16,047 15,647 15,247



Gross Block 49,726 74,010 82,773 89,681 95,593


Net Block 25,005 46,357 51,239 53,847 55,059

Capital WIP 22,832 6,773 783 1,125 2,125

Investments 1,709 10,348 16,693 16,693 16,693

Sundry Debtors 2,166 1,862 2,158 3,079 3,298

Inventories 6,098 6,920 8,217 9,236 10,994

Loans & Advances 3,768 3,790 3,511 4,511 5,511

Current Assets 12,032 12,571 13,886 16,825 19,803


Provisions 1,256 1,218 1,610 1,700 1,800


Working Capital (754) 144 895 2,811 4,810

Cash 1,007 1,045 823 5,317 11,018

Net Current Assets 253 1,189 1,718 8,128 15,828


W C Turnover (days) 1 (2) 3 9 17

BV (Rs / Share) 215 285 365 434 507




Fig 17 – Cash flow statement (Rsm) Year end 31 Dec FY08 FY09 FY10 FY11e FY12e

PAT 10,076 9,770 10,932 9,971 10,669

+ Depreciation 2,372 3,230 3,881 4,300 4,700

+ Deferred Tax -179.1 1287.3 1078 1100 1100

Cash profit 12,269 14,288 15,891 15,371 16,469

- Incr/(Decr) in WC (1,908) 898 751 1,916 1,999


- Capex 18,066 8,524 2,773 7,250 6,912

Free cash flow (3,889) 4,866 12,367 6,205 7,558

- Dividend 728 728 874 1,311 1,457

+ Equity raised (16) 528 - - -

+ Debt raised 1,619 4,011 (5,370) (400) (400)

- Investments (3,126) 8,639 6,345 - -

- Misc. items - - - - -

Net cash flow 111 38 (222) 4,494 5,701

+ Opening cash 896 1,007 1,045 823 5,317

Closing cash 1,007 1,045 823 5,317 11,018


Fig 18 – Ratio analysis @Rs951 Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

Sales Growth (%) 12.2 15.9 10.4 6.3 7.1

PAT Growth (%) 28.8 (3.0) 11.9 (8.8) 7.0


PE (x) 11.7 12.1 10.8 11.9 11.1

P/C (x) 9.6 8.3 7.5 7.7 7.2

Dividend Yield (%) 0.5 0.5 0.6 0.9 1.1

P/B (x) 4.4 3.3 2.6 2.2 1.9

EV/Sales (x) 2.4 2.0 1.7 1.5 1.3

EV/EBITDA (x) 7.7 7.5 5.9 6.2 5.5

Net Debt / Equity (%) 54.5 27.8 (3.2) (11.6) (19.5)

Working Capital Turnover (days) 1 (2) 3 9 17

Dividend Payout (%) 6.2 6.4 6.8 11.2 11.7

RoE (%) 45.2 31.0 26.6 19.8 18.0

RoCE (%) 33.5 24.1 23.4 18.4 17.2



India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 21,091 27,106 36,321 41,702 51,490

Net profit (Rsm) 2,993 6,089 7,828 8,005 9,599

EPS (Rs) 86 175 225 230 276

Growth (%) (20.4) 103.5 28.6 2.3 19.9

PE (x) 23.5 11.5 9.0 8.8 7.3

Normalised PE (x) # 12.7 10.6 6.7 6.6 5.2

EV/EBITDA (x) 8.5 7.5 4.8 5.0 3.4

EV/Ton (US$) 178 175 128 103 83

RoE (%) 48.3 63.0 44.4 36.4 32.0

RoCE (%) 22.5 32.0 28.4 22.0 21.9

Net gearing (%) 43.7 14.8 12.8 9.9 (26.0)

Source: Company, Anand Rathi Research #Depreciation taken at SLM value

Cement

Update

4 June 2010

Shree Cements

Low cost, power-venture diversification, upgrading to Buy

Upgrade. We lower FY11/12 earnings 7%/2%, given new cost, volume, realization, depreciation assumptions. We raise the target price to Rs2,730 from Rs1,700, and upgrade to Buy from Hold.

Cement grinding/clinker units to drive profitability/sales. Shree’s recently commissioned grinding units would enable it convert clinker sales to cement sales, yielding higher realizations and profitability. New clinker unit to be commissioned by Sep ’10 would boost sales. We estimate a 9% cement CAGR (FY10-12).

Low cost player. We expect Shree’s status as lowest-cost cement producer to be maintained, given (1) availability of captive power, (2) higher sales of blended cement and (3) lowest power and coal consumption. These could result in industry-leading profits.

Merchant power sales offer diversified earnings. Shree’s foray into power has yielded high returns, given high tariffs and competitive cost of production. Its share of earnings is expected to rise to 28% in FY12 from 7% two years earlier.

Strong balance sheet. Shree is estimated to be FCF positive, with net cash of Rs9bn (Rs257 a share:) as on Mar ’12. Its strong balance sheet would enable it to grow organically or inorganically.

Valuation. Our sum-of-parts value is Rs2,730: Rs2,150 for cement at 5x FY12e EV/EBITDA and Rs580 for power at 1x P/BV. It implies a normalized PE of 7x and an EV/ton of $125.

Rating: Buy Target Price: Rs2,730 Share Price: Rs2,015

Key data SRCM IN / SHCM.BO

52-week high/low Rs2,542/Rs953Sensex/Nifty 17022 / 51103-m average volume US$1.2m Market cap Rs69.6bn/US$1.55bnShares outstanding 34.8m Free float 34.5%Promoters 65.5%Foreign Institutions 15.8%Domestic Institutions 8.8%Public 9.9%


Shree Cement

Sensex

9001,1001,3001,5001,7001,9002,1002,3002,500

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Source: Bloomberg


4 June 2010 Shree Cements – Low cost, power venture diversification, upgrading to Buy



Net sales 21,091 27,106 36,321 41,702 51,490Sales growth (%) 54.2 28.5 34.0 14.8 23.5 - Op. expenses 12,467 17,571 21,204 27,240 33,283 EBIDTA 8,624 9,535 15,117 14,462 18,206 EBITDA margins (%) 40.9 35.2 41.6 34.7 35.4 - Interest 533 772 950 1,000 1,000- Depreciation 4,788 2,054 5,704 5,000 7,000 + Other income 768 829 1,284 1,300 1,500 - Tax 1,079 1,449 1,918 1,757 2,107 PAT 2,993 6,089 7,828 8,005 9,599 PAT growth (%) (20.4) 103.5 28.6 2.3 19.9 Reported PAT 2,604 5,780 6,761 8,005 9,599 FDEPS (Rs/share) 86 175 225 230 276 CEPS (Rs/share) 208 227 370 376 479 DPS (Rs/share) 8 10 13 17 20 Source: Company, Anand Rathi Research


Share capital 348 348 348 348 348 Reserves & surplus 6,195 11,648 17,859 25,271 34,155 Shareholders’ fund 6,543 11,996 18,207 25,619 34,503 Debt 13,307 14,962 21,060 21,060 21,060 Minority interests Capital employed 19,850 26,958 39,267 46,679 55,563 Fixed assets 7,779 11,057 18,566 23,896 20,906 Investments 5,910 8,448 15,922 16,500 28,000 Working capital 1,487 2,729 1,991 4,262 4,635 Cash 4,675 4,723 2,789 2,021 2,023 Capital deployed 19,850 26,958 39,267 46,679 55,563 No. of shares (m) 34.8 34.8 34.8 34.8 34.8Net Debt/Equity (%) 43.7 14.8 12.8 9.9 (26.0)W C turn (days) 25 28 24 27 32 Source: Company, Anand Rathi Research


PAT 2,993 6,089 7,828 8,005 9,599 + Depreciation 4,788 2,054 5,704 5,000 7,000 + Deferred tax (147) 81 (20) 100 100 Cash profit 7,633 8,224 13,512 13,105 16,699 - Incr/(Decr) in WC 125 1,243 (739) 2,271 373 Operating cash flow 7,508 6,981 14,250 10,834 16,327 - Capex 3,647 5,332 13,213 10,330 4,010 Free cash flow 3,860 1,649 1,038 504 12,317 - Dividend 326 408 530 693 815 + Equity raised (587) (0) (2,133) - -+ Debt raised 3,993 1,655 6,098 - -- Investments 5,410 2,538 7,474 578 11,500 - Misc. items 389 309 (1,067) - -Net cash flow 1,141 48 (1,934) (767) 1 + Opening cash 3,533 4,675 4,723 2,789 2,022 Closing cash 4,675 4,723 2,789 2,021 2,023 Source: Company, Anand Rathi Research

Fig 4 – PE Band

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Investment Argument and ValuationCommissioning of the new grinding and clinker units in 2QFY11 would drive volume growth for Shree. We expect a 9% volume CAGR over FY10-12. This, coupled with the cement-cost advantage, a 28% contribution to EBITDA from power and a strong balance sheet, bodes well for Shree.

Cement grinding/clinker units to drive profits/sales

Shree’s two recently commissioned grinding units of 1.2m tons and 1.8m tons (at Rajasthan and Uttrakhand) take its capacity to 12m tons. During FY10 it sold ~1m tons of clinker due to a mismatch in its clinker and cement capacities. Commissioning of these grinding units would enable it to convert clinker sales to cement sales, thereby yielding higher realizations and profitability.

Shree is also setting up a new clinker unit of 1m ton and a cement grinding unit of 1.5m tons, which would take its clinker capacity to 9.4m tons and cement capacity to 13.5m tons by 2QFY11. The push in volume growth would come on the commissioning of these two units. We expect a 9% volume CAGR over FY10-12.

Fig 7 – Capacity additions to drive volumes

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Long-term plans

Shree plans to geographically diversify its capacities, for which it has already acquired land (90% of requirement) to set up a 5m-ton plant in Karnataka. It has also acquired limestone mines, with sufficient reserves to support a 5m-ton capacity for 50 years. It plans to place orders for equipment by 4QFY11.

In the next five years it plans to more than double its capacity, from 12m tons now to 25m tons.

Low cost player

Shree Cements is the lowest-cost cement producer in India due to its competitive advantages of captive power, more sales of blended cement and plant efficiency, resulting in the lowest power and coal consumption. These, together with better realizations, lead to industry-leading profitability. Ahead, we expect this to be maintained.

We expect a 9% CAGR in volumes over FY10-12

Shree plans to geographically diversify its capacities, for which it

has already acquired land (90% of requirement) to set up a 5m-ton

plant in Karnataka



Fig 8 – Cost-structure advantage Heads Advantages

Product mix A greater share of blended sales (~80%), resulting in a cement-clinker conversion ratio of around 1.35x vs the industry range of 1.2x to 1.4x

Power Shree’s power consumption per ton of cement is around 76 units vs the industry range of 80 to 95 units. Also Shree meets its power requirement through captive power plants.

Fuel Shree uses only PET coke to produce cement and power. Its plants support PET-coke as a fuel, making them very cost efficient (cost per k cal). This leads to a ~15% lower fuel cost than its peers, who use coal.

Market mix Shree sells its entire output in the Northern and Central regions, which are better placed in terms of demand and supply. It is number one in Haryana, Rajasthan, HP and Delhi. Also, its lead distance to some of the important cities in the North is the lowest of its peers enabling it a greater market share


Merchant power sales to provide diversified earnings stream

At present Shree has captive capacity of 216 MW including the recently commissioned 46 MW through waste-heat recovery, and a 50 MW thermal plant. However, it consumes less power than it generates; hence, it sells the surplus on a merchant basis to state government utilities and exchanges. Shree’s foray into power beyond captive consumption (merchant sales) has yielded high returns, given the high tariffs and its competitive cost of production.

Fig 11 – Increasing contribution from power segment

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Fig 12 – Key assumptions - Power segment

FY09 FY10 FY11e FY12e

Unit Sold (m units) 117 264 931 2,234

Realizations (Rs/unit) 6.88 6.20 5.00 4.50

Merchant Sales (Rs m) 806 1,639 4,654 10,052

Cost (Rs/unit) 2.5 2.0 2.2 2.2

EBITDA (Rs/unit) 4.4 4.2 2.8 2.3

EBITDA (Rs m) 518 1,123 2,626 5,040

EBITDA Margins (%) 64.2 68.5 56.4 50.1


Fig 9 – Lowest cost producer in the Industry (FY10)

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It is expected to add another 350 MW of thermal power by Jun ’11, taking its capacity to 566 MW. The saleable power based on 13.5m-ton cement output is around 420 MW. The company has not signed a PPA, leading to all the power being sold at merchant rates. During FY10, its average realizations were Rs6.2/unit, which resulted in an EBITDA of Rs4.2/unit. The share of earnings from power is expected to quadruple – from 7% in FY10 to 28% two years later on the commissioning of the 350 MW (by Jun ’11). In the next six years, the company plans to expand capacity to 1,200 MW.

Note: Based on its track record of commissioning ahead of deadlines, the company is likely to commission 300 MW by Mar ’11, which would push up depreciation by Rs4.5bn during FY11.

Strong balance sheet

During FY11, Shree would complete most of its ongoing capex and is expected to be FCF positive. With no major capex in the pipeline beyond FY11, it would add net cash of Rs7bn in the next two years. Accordingly, its net cash as on Mar ’12 is expected to be Rs9bn (per share of Rs257). This would take its net gearing from 0.13x in FY10 to a negative 0.26x two years later. The strong balance sheet would enable it to grow aggressively, organically or inorganically, from its proposed 13.5m tons.

Fig 13 – Free cash flow vs net debt to equity

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Valuation

Our sum-of-parts value for Shree is Rs2,730: Rs2,150 for cement at 5x FY12 EV/EBITDA (a 33% discount to large caps) and Rs580 for the power business at 1x P/BV. The fair price implies a normalized PE (depreciation taken at SLM vs WDV) of 7x and an EV/ ton of US$125.

Fig 12 – Sum-of-parts valuation Segments (FY12e) Multiple (x) Value (Rsm) Per share (Rs)

- Cement - EV/EBITDA 5.0 74,794 2,147

- Power - P/BV 1.0 20,300 583

Target price 95,094 2,730


Our target price of Rs2,730 implies a 35% return from the ruling Rs2,015. At the going price, the stock trades at a normalized PE of 5.2x, an EV/EBITDA of 3.4x and an EV/ton of US$83 on FY12 estimates.

The share of earnings from power is expected to quadruple – from 7% in

FY10 to 28% two years later




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Change in estimates

We raise our sales estimates for FY11 and FY12 – by 9% and 15%, respectively. After factoring higher costs, volumes and higher depreciation expense, we have lowered our net profit estimates, by 7% and 2%, respectively.

Fig 14 – Change in estimates FY11e FY12e


Net sales (Rs m) 38,209 41,702 9.1 44,692 51,490 15.2

EBITDA (Rs m) 15,292 14,462 -5.4 17,603 18,206 3.4

PAT (Rs m) 8,635 8,005 -7.3 9,797 9,599 -2.0

Cash Profit (Rs m) 14,635 13,105 -10.5 16,797 16,699 -0.6

EBITDA margin (%) 40.0 34.7 (534)bps 39.4 35.4 (403)bps

EBITDA per ton (Rs) 1,134 1,054 -7.0 1,008 1,064 5.6

NSR per ton (Rs) 3,206 3,300 2.9 3,206 3,350 4.5

Volumes (m tons) 10.57 11.2 6.3 11.17 12.4 10.7

Source: Anand Rathi Research.

Risks to valuation

Industry capacity ramping up quicker and bunching up of capacities

Steep rise in prices of PETcoke

Lower-than-expected prices of merchant power

Lower demand offtake over the next two years



Fig 15 – Income Statement (Rsm) Year end 31 March FY08 FY09 FY10e FY11e FY12e

Net Sales 21,091 27,106 36,321 41,702 51,490

Sales Growth (%) 54 29 34 15 23

Less Expenditure

Raw Material 2,262 2,623 3,133 3,829 4,388

Staff Cost 736 1,039 1,495 1,793 1,973

Power& Fuel 3,672 6,058 6,105 8,631 12,425

Freight charges 3,947 5,399 7,626 9,867 11,053

Other Expenditure 1,850 2,452 2,847 3,119 3,444

EBITDA 8,624 9,535 15,117 14,462 18,206

EBITDA Margin (%) 40.9 35.2 41.6 34.7 35.4

Growth (%) 46.2 10.6 58.5 (4.3) 25.9

- Interest 533 772 950 1,000 1,000

- Depreciation* 4,788 2,054 5,704 5,000 7,000

+ Other Income 768 829 1,284 1,300 1,500

Profit Before Tax 4,072 7,538 9,746 9,762 11,706

- Tax 1,079 1,449 1,918 1,757 2,107

Tax rate (%) 26.5 19.2 19.7 18.0 18.0

Adjusted PAT 2,993 6,089 7,828 8,005 9,599

PAT Margin (%) 14.2 22.5 21.6 19.2 18.6

Growth (%) (20.4) 103.5 28.6 2.3 19.9

Extraordinary Items 389 309 1,067 - -

Reported PAT 2,604 5,780 6,761 8,005 9,599

FDEPS (Rs / Share) 85.9 174.8 224.7 229.8 275.5

CEPS (Rs / Share) 207.9 227.2 369.8 376.2 479.4

DPS (Rs / Share) 8.0 10.0 13.0 17.0 20.0

* Based on its track record of commissioning ahead of deadlines, the company is likely to commission 300 MW by Mar ’11. This would push up depreciation by Rs4.5bn during FY11. Source: Company, Anand Rathi Research

Fig 16 – Balance Sheet (Rsm) Year end 31 March FY08 FY09 FY10e FY11e FY12eSources of Funds Share Capital 348 348 348 348 348 Reserves and Surplus 6,380 11,752 17,983 25,295 34,079 Deferred Tax Liability (185) (104) (124) (24) 76 Net Worth 6,543 11,996 18,207 25,619 34,503 Debt 13,307 14,962 21,060 21,060 21,060 Capital Employed 19,850 26,958 39,267 46,679 55,563 Application of Funds Gross Block 21,873 22,559 33,298 39,798 54,401 Less: Depreciation 14,273 16,291 21,995 26,995 33,995 Net Block 7,600 6,269 11,303 12,803 20,406 Capital WIP 180 4,789 7,263 11,093 500 Investments 5,910 8,448 15,922 16,500 28,000 Sundry Debtors 494 583 824 1,714 1,693 Inventories 1,766 1,545 3,581 3,999 4,937 Loans & Advances 4,026 7,443 7,252 8,000 9,000 Current Assets 6,286 9,571 11,658 13,713 15,630 Current Liabilities 2,362 2,956 4,668 4,570 5,643 Provisions 2,437 3,885 4,999 4,880 5,353 Current Liabilities 4,799 6,842 9,667 9,451 10,995 Working Capital 1,487 2,729 1,991 4,262 4,635 Cash 4,675 4,723 2,789 2,021 2,023 Net Current Assets 6,161 7,452 4,780 6,283 6,658 Capital Deployed 19,850 26,958 39,267 46,679 55,563 W C Turnover (days) 25 28 24 27 32 BV (Rs / Share) 179 347 526 736 988




Fig 17 – Cash Flow Statement (Rsm) Year end 31 March FY08 FY09 FY10 FY11e FY12e

PAT 2,993 6,089 7,828 8,005 9,599

+Depreciation 4,788 2,054 5,704 5,000 7,000

+Deferred tax (147) 81 (20) 100 100

Cash profit 7,633 8,224 13,512 13,105 16,699

- Incr/(Decr) in WC 125 1,243 (739) 2,271 373


-Capex 3,647 5,332 13,213 10,330 4,010

Free cash flow 3,860 1,649 1,038 504 12,317

-Dividend 326 408 530 693 815

+ Equity raised (587) (0) (2,133) - -

+ Debt raised 3,993 1,655 6,098 - -

-Investments 5,410 2,538 7,474 578 11,500

-Misc. items 389 309 (1,067) - -

Net cash flow 1,141 48 (1,934) (767) 1

+Opening cash 3,533 4,675 4,723 2,789 2,022

Closing cash 4,675 4,723 2,789 2,022 2,023


Fig 18 – Ratio Analysis @ Rs2,015 Year end 31 March FY08 FY09 FY10e FY11e FY12e

Sales Growth (%) 54.2 28.5 34.0 14.8 23.5

PAT Growth (%) (20.4) 103.5 28.6 2.3 19.9


PE (x) 23.5 11.5 9.0 8.8 7.3

P/C (x) 9.7 8.9 5.4 5.4 4.2

Dividend Yield (%) 0.4 0.5 0.6 0.8 1.0

P/B (x) 11.3 5.8 3.8 2.7 2.0

EV/Sales (x) 3.5 2.7 2.0 1.7 1.2

EV/EBITDA (x) 8.5 7.5 4.8 5.0 3.4

Net Debt / Equity (%) 43.7 14.8 12.8 9.9 (26.0)

Working Capital Turnover (days) 25 28 24 27 32

Dividend Payout (%) 9.3 5.7 5.8 7.4 7.3

RoE (%) 48.3 63.0 44.4 36.4 32.0

RoCE (%) 22.5 32.0 28.4 22.0 21.9



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Key financials


Sales (Rsm) 30,578 34,279 37,713 40,046 45,973

Net profit (Rsm) 6,756 5,116 3,108 2,216 3,741

EPS (Rs) 24.0 18.1 10.1 7.2 12.2

Growth (%) 22.0 (24.4) (44.1) (28.7) 68.8

PE (x) 4.5 6.0 10.7 15.0 8.9

EV/EBITDA (x) 4.1 4.7 6.4 8.4 5.8

EV /Ton ($) 102 92 84 80 78

RoE (%) 49.6 15.6 10.8 6.0 9.6

RoCE (%) 36.2 14.2 9.4 5.6 8.8

Dividend yield (%) 1.9 1.9 1.9 1.9 2.3

Net gearing (%) 48.8 51.4 50.3 55.7 48.9


India Cements

Update

4 June 2010

India Cements

Cement biz to improve, IPL adds value, upgrading to Buy

Upgrade. We upgrade the stock to a Buy from a Sell owing to lower funding, regional risk and IPL monetization opportunity.

Regional concentration risk reducing. India Cements’ exposure to the South at 90% would fall to 80% by Dec’10, on the commissioning of its 1.4m ton Rajasthan unit, reducing concentration risk. We estimate volume CAGR of 11%(FY10-12).

Cost rationalizing initiatives. To rationalize costs, India Cements plans to set up a captive power plant and make an overseas coal acquisition besides improving overall efficiency.

Well-funded for growth. India Cements’ recent Rs3bn QIP lowered leverage to 0.5x. This, together with cash generated, is expected to fund its capex and the Rs5bn FCCB redemption.

IPL monetization. Its investment in an IPL franchise offers a value-unlocking opportunity – the winning bids for the two new teams imply a value of Rs35-41 per share.

Lowering estimates. We lower FY11/12 estimates 53%/30% to factor in lower realizations and cost pressures.

Valuation. Our sum-of-parts value is Rs142 (earlier Rs104) Rs115 for cement at 6x FY12 EV/EBITDA and Rs27 for the IPL stake (a 30% discount to the recently awarded franchises). The implied valuation of the cement business is 9.5x PE and US$80 EV/ton.


Key data ICEM IN/ ICMN BO

52-week high/low Rs180/Rs90Sensex/Nifty 17022 / 51103-m average volume US$7.9m Market cap Rs33bn/US$0.69bnShares outstanding 282.5mFree float 72.6%Promoters 27.4%Foreign Institutions 32.4%Domestic Institutions 16.8%Public 23.4%


India Cements

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4 June 2010 India Cements - Cement biz to improve, IPL adds value, upgrading to Buy



Net sales 30,578 34,279 37,713 40,046 45,973Sales growth (%) 35.6 12.1 10.0 6.2 14.8 - Op. expenses 19,648 24,317 29,448 33,360 36,557 EBIDTA 10,929 9,962 8,266 6,686 9,417 EBITDA margins (%) 35.7 29.1 21.9 16.7 20.5 - Interest 1,099 1,122 1,426 1,325 1,450 - Depreciation 1,279 2,033 2,331 2,794 3,206 + Other income 275 470 370 598 583 - Tax 2,071 2,161 1,770 950 1,603 PAT 6,756 5,116 3,108 2,216 3,741 PAT growth (%) 22.0 (24.4) (44.1) (28.7) 68.8 Reported PAT 6,375 4,322 3,543 2,216 3,741 FDEPS (Rs/share) 24.0 18.1 10.1 7.2 12.2 CEPS (Rs/share) 35.0 26.4 18.2 17.6 23.9 DPS (Rs/share) 2.0 2.0 2.0 2.0 2.5 Source: Company, Anand Rathi Research


Share capital 2,819 2,824 3,072 3,072 3,072 Reserves & surplus 32,412 35,910 41,667 43,614 45,735 Shareholders’ fund 35,230 38,735 44,739 46,686 48,807 Debt 18,115 19,880 23,050 23,450 21,946 Minority interests Capital employed 53,345 58,615 67,789 70,136 70,753 Fixed assets 40,394 47,123 51,592 55,648 55,492 Investments 1,293 3,854 2,390 1,590 1,590 Working capital 7,402 6,786 11,194 12,183 12,931 Cash 4,256 852 2,613 715 741 Capital deployed 53,345 58,615 67,789 70,136 70,753 No. of shares (m) 281.9 282.4 307.2 307.2 307.2Net Debt/Equity (%) 48.8 51.4 50.3 55.7 48.9 W C turn (days) 130 115 121 135 121 Source: Company, Anand Rathi Research


PAT 6,756 5,116 3,108 2,216 3,741 + Depreciation 1,279 2,033 2,331 2,794 3,206 + Deferred Tax 1,827 299 137 400 400 Cash profit 9,862 7,448 5,576 5,410 7,347 - Incr/(Decr) in WC 673 (774) 4,044 625 384 Operating cash flow 9,189 8,223 1,531 4,785 6,963 - Capex 8,483 8,920 7,164 7,214 3,414 Free cash flow 706 (698) (5,633) (2,429) 3,549 - Dividend 660 661 719 719 898 + Equity raised 5,410 (558) 2,957 - -+ Debt raised (2,472) 1,765 3,170 400 (1,504)- Investments 742 2,561 (1,464) (800) -- Misc. items 287 692 (521) (50) 1,121 Net cash flow 1,955 (3,404) 1,761 (1,898) 25 + Opening cash 2,302 4,256 852 2,613 715 Closing cash 4,256 852 2,613 715 741 Source: Company, Anand Rathi Research

Fig 4 – PE Band

India Cement

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India Cement

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Investment Argument and ValuationWe upgrade the stock to a Buy from a Sell, owing to reducing funding and regional concentration risk and IPL monetization opportunity.

Regional concentration risk decreasing

The leader in South India, India Cements serves AP, TN, Karnataka and Kerala. With its new grinding unit in Parli, it also caters to Maharashtra (12% of the total). It plans to further reduce its concentration risk (current exposure in the South at ~90%) by setting up a 1.4m-ton greenfield unit in Rajasthan. The plant is slated for commissioning by Dec’2010; subsequently, its exposure in the South would slide to ~80%.

We expect the utilization rates in the South to stabilize, leading to stable prices. Situations of intermittent demand-supply mismatch could arise, though these could even out in the course of the year.

Fig 7 - Market Mix

Andhra Pradesh21%

Karnataka14%

Kerela15%

Tamil Nadu38%

Maharashtra12%

Source: Company

AP exposure at ~20%; visibility in demand revival

India Cements’ present exposure to the AP market is 20%, with the rest coming from Tamil Nadu, Karnataka, Kerala and Maharashtra. The demand collapse in AP from Jul to Dec ’09 came on the back of state-specific events, all of which followed in rapid succession. The major ones were the demise of the chief minister (leading to temporary political instability), floods and the emergence of the Telangana issue. These, coupled with the massive capacity additions in the state (7m tons added in FY10, 30% of FY09 and 26% of all-India additions) led to severe over-capacity and the consequent sharp drop in prices.

Demand in AP is now reviving, with consumption in 3QFY10 rising 14% qoq, against the normal 6-8%. In 4QFY10 demand rose 12% qoq, resulting in a pull-back in prices. Prices in AP have bounced back 28% from levels of Dec ’09 after dropping 27% during 3QFY10. Similar is the trend in other regions in the South. With key one-off events leading to demand collapse, behind it, the demand-supply scenario in AP has stabilized and should continue ahead as well. We expect 12m tons to be added in FY11 (33% of Mar’10 and 40% of all-India additions). Overall, South India is expected to see additions of 15m tons in FY11 (16% of FY10 and 50% of all-India additions) and 10m tons in FY12. If demand growth in South India turns out at 10% p.a. over FY10-12, it would

On the commissioning of its Rajasthan unit, its exposure to the

South would go down to 80%



require further production of 14m tons over a two year period. This may put a squeeze on prices during FY11; but prices are expected to improve during FY12.

We expect volumes at the company to see a 11% CAGR over FY10-12.

Cost-rationalizing initiatives

In an attempt to rationalize its costs, India Cements is working towards reducing its power and fuel costs. Towards that objective, it plans to set up a captive 100 MW plant and is aggressively looking at coal acquisition overseas.

The two captive plants (50 MW each) planned for its units in AP and Tamil Nadu, would lower its power costs. This would also cut dependence on state electricity boards, thereby ensuring constant supply during power cuts, an annual phenomenon in AP and Tamil Nadu during the first six months of the year.

At present, 60% of coal required is met through high-cost imports, making the company susceptible to the vagaries of international coal and freight prices. The company bought two ships in FY09 and is in an advanced stage of acquiring a coal mine in Indonesia, ensuring steady supply (captive source). It would also result in savings in costs. It estimates landed cost to be around US$70, contrasted with the current landed price of US$110. We have not factored in such savings, pending completion of the acquisition.

Fig 8 - Power and fuel costs expected to decline

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Well-funded for future growth

India Cements’ current round of expansions is well funded. Hence, it does not need to take on more debt or raise equity over the next two years. Its ongoing expansion plan involves capex of Rs10bn over FY11-12: the Rajasthan cement unit at Rs3bn, a 100-MW plant at Rs5bn, coal-mine acquisition and maintenance at Rs2bn. The company has (at end-Mar ’10) already spent Rs3bn on its Rajasthan unit. Also, there is likely to be cash outflow on account of the FCCB redemption (conversion at Rs306/share), due May ’11, totaling Rs5bn (including interest of Rs1.6bn). Thus it would have a total funding requirement of Rs15bn over FY11-12.

We estimate an operating cash flow of Rs12.7bn over FY11-12. The balance would be bridged with the QIP proceeds at Rs120 a share in Mar ’10 (Rs3bn). The QIP issue has enabled the company to maintain its leverage at 0.5x. This would protect its balance sheet from any potential shocks.

It is in an advanced stage of acquiring a coal mine in Indonesia,

ensuring steady supply (captive source) resulting in cost savings

Funding of Rs15bn required over FY11-12 - Rs5bn for FCCBs

and Rs10bn for capex



Fig 9 - FCF vs D/E

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IPL franchise: value-unlocking potential and promote cement brand

India Cements acquired the franchise rights of an IPL team (Chennai Super Kings) in 2008 for US$91m. The right to operate the franchise provides a platform to build corporate and brand image, more so in the context of the company becoming an all-India player.

The valuation of the recent deals involving the award of two new teams signifies the potential value unlocking in the venture. Two new franchises (Pune and Kochi) were recently awarded at an astronomical US$333-370m against the reserve price of US$225m. With this figure as the benchmark, the implied value of the India Cements venture amounts to Rs11-12.5bn or Rs35-41 a share, ~35% of its market cap.

The company made an EBITDA of Rs190m during FY10 from this venture. This figure is expected to increase in FY11, given the addition of two new teams (18 matches vs 14 earlier). We have not taken into our estimate any earnings accruing from the IPL.

Valuation

Our sum-of-parts value is Rs142: Rs115 for cement at 6x FY12 EV/EBITDA (20%discount to large cap stocks) and Rs27 for its stake in IPL (a 30% discount to recently awarded franchises). The implied valuation of the cement business is 9.5x PE and US$80 EV/ton.

Fig 10 - 12-month-forward EV/EBITDA – Mean and Standard Deviation

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Our target price of Rs142 (earlier Rs104) implies a 31% return. At the current price of Rs108, the stock trades at a PE of 8.9x, an EV/EBITDA of 5.8x and an EV/ton of US$78 on FY12 estimates. Excluding the fair value of the IPL, it trades at 6.7x PE, an EV/EBITDA of 4.9x and an EV/ton of US$66.

Change in estimates

We slightly lower our FY11/12 sales estimates, by 4% and 1%, respectively. We have lowered our net profit estimates, by 53% and 30%, respectively, to factor in higher costs and lower realization.

Fig 11 – Change in estimates FY11e FY12e


Net sales (Rs m) 41,799 40,046 (4.2) 46,340 45,973 (0.8)

EBITDA (Rs m) 9,844 6,686 (32.1) 11,035 9,417 (14.7)

PAT (Rs m) 4,674 2,216 (52.6) 5,368 3,741 (30.3)

EBITDA margin (%) 23.6 16.70 (685) 23.8 20.48 (333)

EBITDA per ton (Rs) 824 550 (33.3) 797 701 (12.1)

NSR per ton (Rs) 3,500 3,295 (5.8) 3,348 3,420 2.1

Volumes (m tons) 11.9 12.2 1.8 13.8 13.4 (2.9)



Industry capacity ramping up quicker and bunching of capacities

Steep rise in prices of international coal

Lower demand offtake in South in the next two years

Non availability of continuous power from the AP and TN grids



Fig 12 – Income statement (Rsm) Year end 31 March FY08 FY09 FY10 FY11e FY12e

Net Sales 30,578 34,279 37,713 40,046 45,973

Sales Growth (%) 36 12 10 6 15

Less Expenditure

Raw Material 2,826 3,565 4,799 5,520 6,129

Staff Cost 1,877 1,983 2,500 2,625 2,756

Power& Fuel 6,907 8,916 9,999 11,190 12,290

Freight charges 4,600 4,860 6,431 8,006 9,121


EBITDA 10,929 9,962 8,266 6,686 9,417

EBITDA Margin (%) 35.7 29.1 21.9 16.7 20.5

Growth (%) 48.8 (8.8) (17.0) (19.1) 40.8

- Interest 1,099 1,122 1,426 1,325 1,450

- Depreciation 1,279 2,033 2,331 2,794 3,206

+ Other Income 275 470 370 598 583


- Tax 2,071 2,161 1,770 950 1,603

Tax rate (%) 24.5 33.3 33.3 30.0 30.0

Adjusted PAT 6,756 5,116 3,108 2,216 3,741

PAT Margin (%) 22.1 14.9 8.2 5.5 8.1

Growth (%) 22 (24) (44) (29) 69

Extraordinary Items 380 794 (436) - -

Reported PAT 6,375 4,322 3,543 2,216 3,741

FDEPS (Rs / Share) 24 18 10 7 12

CEPS (Rs / Share) 35 26 18 18 24

DPS (Rs / Share) 2 2 2 2 3

Source: Company, Anand rathi Research

Fig 13 – Balance sheet (Rsm) Year end 31 March FY08 FY09 FY10 FY11e FY12e

Sources of Funds Share Capital 2,819 2,824 3,072 3,072 3,072 Reserves and Surplus 30,154 33,354 38,975 40,522 42,243 Deferred Tax Liability 2,257 2,556 2,693 3,093 3,493 Net Worth 35,230 38,735 44,739 46,686 48,807 Debt 18,115 19,880 23,050 23,450 21,946 Capital Employed 53,345 58,615 67,789 70,136 70,753 Application of Funds Gross Block 47,087 53,136 64,876 74,076 78,076 Less: Depreciation 12,442 15,053 17,385 20,178 23,385 Net Block 34,645 38,083 47,492 53,898 54,692 Capital WIP 5,749 9,040 4,100 1,750 800 Investments 1,293 3,854 2,390 1,590 1,590 Sundry Debtors 3,111 3,540 4,650 5,486 6,298 Inventories 3,506 3,909 4,699 5,006 5,490 Loans & Advances 10,621 10,870 14,099 14,374 14,682 Current Assets 17,238 18,319 23,447 24,865 26,471 Current Liabilities 9,176 10,679 11,149 11,384 11,870 Provisions 659 854 1,104 1,297 1,670 Current Liabilities 9,835 11,533 12,253 12,682 13,539 Working Capital 7,402 6,786 11,194 12,183 12,931 Cash 4,256 852 2,613 715 741 Net Current Assets 11,659 7,638 13,808 12,899 13,672 Capital Deployed 53,345 58,615 67,789 70,136 70,753 W C Turnover (days) 130 115 121 135 121 BV (Rs / Share) 91 105 117 123 131




Fig 14 – Cash flow statement (Rsm) Year end 31 March FY08 FY09 FY10 FY11e FY12e

PAT 6,756 5,116 3,108 2,216 3,741

+Depreciation 1,279 2,033 2,331 2,794 3,206

+Deferred Tax 1,827 299 137 400 400

Cash profit 9,862 7,448 5,576 5,410 7,347

- Incr/(Decr) in WC 673 (774) 4,044 625 384


- Capex 8,483 8,920 7,164 7,214 3,414

Free cash flow 706 (698) (5,633) (2,429) 3,549

- Dividend 660 661 719 719 898

+ Equity raised 5,410 (558) 2,957 - -

+ Debt raised (2,472) 1,765 3,170 400 (1,504)

- Investments 742 2,561 (1,464) (800) -

- Misc. items 287 692 (521) (50) 1,121

Net cash flow 1,955 (3,404) 1,761 (1,898) 25

+ Opening cash 2,302 4,256 852 2,613 715

Closing cash 4,256 852 2,613 715 741


Fig 15 – Ratio analysis @ Rs108 Year end 31 March FY08 FY09 FY10 FY11e FY12e

Sales Growth (%) 35.6 12.1 10.0 6.2 14.8

PAT Growth (%) 22.0 (24.4) (44.1) (28.7) 68.8


PE (x) 4.5 6.0 10.7 15.0 8.9

P/C (x) 3.1 4.1 6.0 6.1 4.5

Dividend Yield (%) 1.9 1.9 1.9 1.9 2.3

P/B (x) 1.2 1.0 0.9 0.9 0.8

EV/Sales (x) 1.4 1.4 1.4 1.4 1.2

EV/EBITDA (x) 4.1 4.7 6.4 8.4 5.8

Net Debt / Equity (%) 48.8 51.4 50.3 55.7 48.9


Dividend Payout (%) 8.8 13.1 17.3 27.7 20.5

RoE (%) 49.6 15.6 10.8 6.0 9.6

RoCE (%) 36.2 14.2 9.4 5.6 8.8



India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 17,248 17,907 21,570 22,965 26,800

Net profit (Rsm) 3,936 3,235 5,572 4,836 5,676

EPS (Rs) 51.1 42.0 72.4 62.8 73.7

Growth (%) 20.6 (17.8) 72.2 (13.2) 17.4

PE (x) 7.2 8.7 5.1 5.8 5.0

EV/EBITDA (x) 4.2 5.2 2.9 3.3 2.7

EV /Ton ($) 83 78 73 58 46

RoE (%) 47.6 28.4 36.4 24.2 23.1

RoCE (%) 45.2 25.6 30.8 19.7 20.3

Dividend yield (%) 1.1 1.2 1.6 1.8 1.9

Net gearing (%) (39.4) (46.5) (43.9) (33.7) (28.9)


Cement

Initiating Coverage

4 June 2010

Birla Corp

Low-cost producer in high-growth areas; initiate at Buy

Buy. We initiate coverage on Birla Corp, with a Buy rating and a target price of Rs490. We are positive on the company, given its low cost structure, de-leveraged balance sheet, capacity expansion and presence in high-growth regions.

Cement expansion to drive volume growth. Birla Corp’s ongoing expansion will add 1.7m tons (in MP and Rajasthan) to its 5.8m tons by 2QFY11. This would drive a volume CAGR of 11% over FY10-12 compared with 4% over FY08-10.

Presence in high-growth regions. Birla Corp’s plants cater to the high-growth regions of the North, Central and East. All regions are well placed in terms of net realizations as well as demand-supply equilibrium.

Lean cost structure offers high profitability. Birla Corp is one of India’s lowest-cost cement producers, mainly due to more sales of blended cement and lower cost of freight and power. This, along with better realizations, results in greater profitability.

De-leveraged balance sheet. We expect Birla Corp to be FCF positive, with net cash of Rs8bn by FY12 (Rs102 a share).

Valuation. At our target price of Rs490, the stock would trade at 4x FY12e EV/EBITDA, ~50% discount to our target multiple for large-cap cement companies, in line with its eight-year average. The target price implies a PE of 6.7x and an EV per ton of US$70.


Key data BCORP IN/BRLC.BO

52-week high/low Rs422/Rs187 Sensex/Nifty 17022/51103-m average volume US$0.6m Market cap Rs28.3bn/US$628mShares outstanding 77mFree float 37.1%Promoters 62.9%Foreign Institutions 7.4%Domestic Institutions 12.4%Public 17.3%


Birla Corp

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4 June 2010 Birla Corp – Low-cost producer in high-growth areas; initiate at Buy



Net sales 17,248 17,907 21,570 22,965 26,800 Sales growth (%) 10.1 3.8 20.5 6.5 16.7 - Op. expenses 11,481 13,647 14,519 16,725 19,264 EBIDTA 5,767 4,259 7,051 6,240 7,536 EBITDA margins (%) 33.4 23.8 32.7 27.2 28.1 - Interest 217 221 270 270 270 - Depreciation 414 434 556 748 894 + Other income 376 760 1,383 1,403 1,403 - Tax 1,576 1,130 2,036 1,789 2,099 PAT 3,936 3,235 5,572 4,836 5,676 PAT growth (%) 20.6 (17.8) 72.2 (13.2) 17.4 Consolidated PAT 3,936 3,235 5,572 4,836 5,676 FDEPS (Rs/share) 51.1 42.0 72.4 62.8 73.7 CEPS (Rs/share) 56.5 47.6 79.6 72.5 85.3 DPS (Rs/share) 4.0 4.5 6.0 6.5 7.0 Source: Company, Anand Rathi Research


Share capital 770 770 770 770 770 Reserves & surplus 9,947 12,879 17,911 22,261 27,406 Shareholders’ fund 10,717 13,649 18,681 23,031 28,176 Debt 2,723 2,765 7,090 7,090 7,090 Minority interests - - - - -Capital employed 13,439 16,414 25,771 30,121 35,266 Fixed assets 6,275 7,489 9,867 14,549 18,540 Investments 6,340 5,523 12,958 12,958 12,958 Working capital 511 205 996 1,051 1,806 Cash 314 3,197 1,950 1,563 1,962 Capital deployed 13,439 16,414 25,771 30,121 35,266 No. of shares (m) 77.0 77.0 77.0 77.0 77.0Net Debt/Equity (%) (39.4) (46.5) (43.9) (33.7) (28.9)W C turn (days) 10 7 10 16 19 Source: Company, Anand Rathi Research


PAT 3,936 3,235 5,572 4,836 5,676 +Depreciation 414 434 556 748 894 +Deffered Tax (80) 105 - 100 100 Cash profit 4,270 3,775 6,128 5,685 6,669 - Incr/(Decr) in WC 91 (306) 791 55 755 Operating cash flow 4,179 4,081 5,337 5,630 5,914 -Capex 1,426 1,648 2,935 5,430 4,885 Free cash flow 2,753 2,432 2,403 199 1,029 -Dividend 360 405 541 586 631 + Equity raised 0 - - - - + Debt raised (104) 42 4,326 - - -Investments 2,139 (817) 7,435 - - -Misc. items 180 2 0 0 (0) Net cash flow (30) 2,884 (1,247) (386) 399 +Opening cash 344 314 3,197 1,950 1,563 Closing cash 314 3,197 1,950 1,563 1,962 Source: Company, Anand Rathi Research

Fig 4 – PE Band

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Birla Corp.

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Fig 6 – Segmental Break up

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Revenue PBIT

Cement Jute Power Others




Investment Argument and ValuationWe initiate coverage on Birla Corp, with a Buy rating and a target price of Rs490. We are positive on the company, given its low-cost structure, de-leveraged balance sheet, capacity expansion and presence in high-growth regions.


Over FY08-10, Birla Corp’s volumes had a mere 4% CAGR. In 2QFY11, it plans to add two brownfield units, totalling 1.7m tons, at Rajasthan and MP. On their commissioning, we expect the company to post an 11% CAGR in volumes over FY10-12, given its presence in high-growth markets.

The second leg of the brownfield expansion involves another 1.8m tons in Rajasthan and West Bengal by 4QFY12. These would drive volume growth from FY13.

Fig 7 – Expansion to lead to strong cement volume growth

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Opening up diversified revenue streams

Birla Corp’s growth plans over the next two years include completion of the ongoing cement 1.7m ton expansion, further brownfield expansion of 1.8m tons, a packing, mixing plant and coal washery and putting up 83 MW of power plants (60 MW thermal, 23 MW from waste heat). While the first would cost Rs3.5bn, the latter three would cost Rs11.5bn cumulatively. The company’s power capacity would reach 140 MW on the expansion, whereas its requirement for 9.3m tons of cement would be around 105 MW. The balance would be sold in the open market, opening up another revenue stream.

Presence in high-growth regions

In FY10, the North, East and Central markets grew 13%, 13% and 15%, respectively, while the West and South grew ~7% each. Birla Corp’s plants cater to the high-growth regions of the North, Central and East. We expect these regions to see a 13% plus CAGR over FY10-12. All the three regions are relatively better placed in terms of demand-supply compared with the South, resulting in lower pricing pressure. At present, all the three regions generate 8-10% higher absolute prices than the South and West.

We expect an 11% CAGR in volumes over FY10-12

Power capacity would reach 140 MW, while requirement would be

around 105 MW at 9.3m tons



Fig 8 – Presence in high-growth regions (FY10)

North35%

Central37%

East28%


Lean cost structure offers high profitability

Birla Corp is a low-cost cement producer, mainly because it sells a high percentage of blended cement and its freight and power costs are low. Around 80% of its cement production is Portland pozzolano cement and it has a lead distance of less than 400km, compared with the industry average range of 400-600km.

Around 80% of its power requirement comes from its own plants. To be fully self-sufficient, it is adding a 23 MW waste-heat-recovery plant and two 30 MW thermal plants at its MP and Rajasthan cement units. These would take captive power capacity to around 140 MW. Once these are commissioned in FY12, the company would have surplus power, which it plans to sell. Based on the expanded cement capacity of 9.3m tons, the power required would be 105 MW, leaving a surplus of around 35 MW. The cost-control measures along with relatively better realizations (due to its better market mix) would result in good profitability.

Jute business: back on track

The jute business, which has been a drag for the last fifteen years, is finally showing signs of a turnaround. It reported a Rs90m and Rs99m PBIT in 4QFY10 and FY10, respectively. All this has been achieved due to various management initiatives such as modernization of machinery, reduction in wastage and use of jute caddies as fuel in the boilers. We expect the division to improve on its PBIT in FY11/12. However, its contribution to the total PBIT would be a negligible 2-3%.

Fig 9 – Peer comparison: Power and fuel cost

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ACC Ambuja UltraTech India Cement Shree Birla Corp

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Source: Anand Rathi Research, Companies

Fig 10 – Peer comparison: Freight cost

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Source: Anand Rathi Research, Companies

On commissioning of the power plants (in FY12), the company

would have surplus power, which it plans to sell




We expect Birla Corp to be free-cash-flow positive until FY12, despite a Rs10bn capex over FY10-12. Accordingly, we estimate net cash of Rs8bn (FY10) by FY12 (per share: Rs102). Birla Corp is one of the best placed mid-cap companies in the sector, given its strong balance sheet, to fund future growth plans. Its greenfield project (Rs12bn), to be set up over three years, could be funded almost entirely through internal accruals. Plans for the project would be finalized by 4QFY11.


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Valuation

At our target price of Rs490, the stock would trade at 4x FY12 EV/EBITDA, a ~50% discount to our target multiple for large-cap cement companies and in line with its eight-year average multiple. The target price implies a PE of 6.7x and an EV per ton of US$70.


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Our target price of Rs490 implies a 34% return from the present Rs367. At the going price of Rs367, the stock trades at a PE of 5x, an EV/EBITDA of 2.7x and an EV/ton of $46 FY12 estimates.

Risks to valuation

The court case between the Lodha and Birla families would affect growth plans; industry capacity ramping up quicker and bunching of capacities; steep rise in prices of coal; lower demand in the next two years.

Its greenfield project (Rs12bn), to be set up over three years, could be funded almost entirely through

internal accruals



Fig 13 – Income Statement (Rsm) Year-end 31 Mar FY08 FY09 FY10 FY11e FY12eNet Sales 17,248 17,907 21,570 22,965 26,800 Sales Growth (%) 10 4 20 6 17 Less Expenditure Raw Material 1,668 2,403 2,578 3,200 3,500 Stores & Spares 1,467 1,685 1,628 1,800 1,950 Staff Cost 1,415 1,486 1,463 1,609 1,770 Power & Fuel 3,283 3,682 3,821 4,300 4,800 Freight charges 2,016 2,443 2,709 3,300 3,700 Other Expenditure 1,631 1,949 2,321 2,516 3,544 EBITDA 5,767 4,259 7,051 6,240 7,536 EBITDA Margin (%) 33.4 23.8 32.7 27.2 28.1 Growth (%) 16.9 (26.1) 65.6 (11.5) 20.8 - Interest 217 221 270 270 270 - Depreciation 414 434 556 748 894 + Other Income 376 760 1,383 1,403 1,403 Profit Before Tax 5,512 4,365 7,608 6,625 7,775 - Tax 1,576 1,130 2,036 1,789 2,099 Tax rate (%) 28.6 25.9 26.8 27.0 27.0 Adjusted PAT 3,936 3,235 5,572 4,836 5,676 PAT Margin (%) 22.8 18.1 25.8 21.1 21.2 Growth (%) 20.6 (17.8) 72.2 (13.2) 17.4 Extraordinary Items - - - - -Reported PAT 3,936 3,235 5,572 4,836 5,676 FDEPS (Rs / Share) 51.1 42.0 72.4 62.8 73.7 CEPS (Rs / Share) 56.5 47.6 79.6 72.5 85.3 DPS (Rs / Share) 4.0 4.5 6.0 6.5 7.0


Fig 14 – Balance Sheet (Rsm) Year-end 31 Mar FY08 FY09 FY10 FY11e FY12eSources of Funds Share Capital 770 770 770 770 770 Reserves and Surplus 9,280 12,107 17,138 21,389 26,434 Deferred Tax Liability 667 772 772 872 972 Net Worth 10,717 13,649 18,681 23,031 28,176 Debt 2,723 2,765 7,090 7,090 7,090 Capital Employed 13,439 16,414 25,771 30,121 35,266 Application of Funds Gross Block 11,734 13,542 13,296 19,930 25,660 Less: Depreciation 6,726 6,942 7,498 8,246 9,140 Net Block 5,008 6,601 5,798 11,684 16,520 Capital WIP 1,267 888 4,069 2,865 2,020 Investments 6,340 5,523 12,958 12,958 12,958 Sundry Debtors 317 200 400 500 600 Inventories 2,005 1,929 2,200 2,800 3,000 Loans & Advances 1,612 2,041 2,500 3,000 3,500 Current Assets 3,933 4,170 5,100 6,300 7,100 Current Liabilities 2,717 3,296 3,300 4,400 4,400 Provisions 705 669 804 849 894 Current Liabilities 3,422 3,965 4,104 5,249 5,294 Working Capital 511 205 996 1,051 1,806 Cash 314 3,197 1,950 1,563 1,962 Net Current Assets 825 3,402 2,946 2,614 3,768 Capital Deployed 13,439 16,414 25,771 30,121 35,266 W C Turnover (days) 10 7 10 16 19 BV (Rs / Share) 129 166 231 287 352




Fig 15 – Cash Flow Statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

PAT 3,936 3,235 5,572 4,836 5,676

+ Depreciation 414 434 556 748 894

+ Deffered Tax (80) 105 - 100 100

Cash profit 4,270 3,775 6,128 5,685 6,669

- Incr/(Decr) in WC 91 (306) 791 55 755


- Capex 1,426 1,648 2,935 5,430 4,885

Free cash flow 2,753 2,432 2,403 199 1,029

- Dividend 360 405 541 586 631

+ Equity raised 0 - - - -

+ Debt raised (104) 42 4,326 - -

- Investments 2,139 (817) 7,435 - -

- Misc. items 180 2 0 0 (0)

Net cash flow (30) 2,884 (1,247) (386) 399

+ Opening cash 344 314 3,197 1,950 1,563

Closing cash 314 3,197 1,950 1,563 1,962


Fig 16 – Ratio Analysis @Rs367 Year-end 31 Mar FY08 FY09 FY10 FY11e FY12e

Sales Growth (%) 10.1 3.8 20.5 6.5 16.7

PAT Growth (%) 20.6 (17.8) 72.2 (13.2) 17.4


PE (x) 7.2 8.7 5.1 5.8 5.0

P/C (x) 6.5 7.7 4.6 5.1 4.3

Dividend Yield (%) 1.1 1.2 1.6 1.8 1.9

P/B (x) 2.8 2.2 1.6 1.3 1.0

EV/Sales (x) 1.4 1.2 0.9 0.9 0.8

EV/EBITDA (x) 4.2 5.2 2.9 3.3 2.7

Net Debt / Equity (%) (39.4) (46.5) (43.9) (33.7) (28.9)


Dividend Payout (%) 7.8 10.7 8.3 10.4 9.5

RoE (%) 47.6 28.4 36.4 24.2 23.1

RoCE (%) 45.2 25.6 30.8 19.7 20.3



India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 12,962 15,032 16,198 19,546 22,752

Net profit (Rsm) 2,170 2,488 1,593 2,005 2,446

EPS (Rs) 11.9 12.9 8.3 10.4 12.7

Growth (%) 37.2 8.1 (36.0) 25.9 22.0

PE (x) 4.8 4.4 6.9 5.5 4.5

EV/EBITDA (x) 3.5 3.9 4.9 3.6 3.1

EV /Ton ($) 49 66 46 43 42

RoE (%) 72.0 44.7 22.6 23.7 23.8

RoCE (%) 53.0 38.1 19.6 21.6 23.3

Dividend yield (%) 2.0 2.6 2.6 3.1 3.5

Net gearing (%) 30.9 67.6 56.3 37.8 36.8


Cement

Initiating Coverage

4 June 2010

Orient Paper and Industries

Low costs, paper recovery; initiate at Buy

Buy. We initiate coverage on Orient, with a Buy rating and a target price of Rs85. We are positive on the company, given its low cement production costs, expansion in cement and electricals, and recovery in the paper business.

Expansion in cement and electricals to drive growth. Expansion in cement to 5m tons in 4QFY10 (from 3.4m tons) and in electricals (both in fans and CFLs) could fuel revenue. We estimate a 19% revenue CAGR over FY10-12.

Low-cost structure advantage in cement. Orient is one of India’s lowest-cost cement producers owing to larger blended sales, captive power, high-quality limestone and low coal costs.

Recovery in paper, growth in electricals lowers business risk. Having built a water reservoir, its paper business is set to recover in FY10-12. This, together with strong growth in electricals could increase non-cement earnings’ share to 26% in FY12.

Focus on cement, electricals. Orient intends to focus on the high-growth, high-returns businesses of cement and electricals, where it is formidable. Of the planned capex of Rs18.4bn (FY10-14), Rs16bn is for a greenfield cement project (in Karnataka).

Valuations. Our sum-of-parts value is Rs85: Rs66 for cement at 4.5x FY12 EV/EBITDA (implied EV/ton: US$60) and Rs15/4 for the electricals/ paper business at 4x/3x EV/EBITDA.


Key data OPI IN / ORPP.BO

52-week high/low Rs66/Rs31 Sensex/Nifty 16742/5020 3-m average volume US$0.8m Market cap Rs11bn/US$244mShares outstanding 192.83mFree float 56.5%Promoters 43.5%Foreign Institutions 3.5%Domestic Institutions 31.9%Public 21.1%


Orient

Sensex

40

45

50

55

60

65

70

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr-1

0

May

-10

Source: Bloomberg

4 June 2010 Orient Paper and Industries - Low costs, paper recovery; initiate at Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12eNet sales 12,962 15,032 16,198 19,546 22,752 Sales growth (%) 17.6 16.0 7.8 20.7 16.4 - Op. expenses 9,358 11,091 13,101 15,530 17,918 EBIDTA 3,604 3,941 3,097 4,016 4,834 EBITDA margins (%) 27.8 26.2 19.1 20.5 21.2 - Interest 197 207 345 400 500 - Depreciation 344 378 573 765 815 + Other income 197 232 163 188 188 - Tax 1,090 1,100 748 1,033 1,260 PAT 2,170 2,488 1,593 2,005 2,446 PAT growth (%) 47.9 14.6 (36.0) 25.9 22.0 Reported PAT 2,045 2,001 1,593 2,005 2,446 FDEPS (Rs/share) 11.9 12.9 8.3 10.4 12.7 CEPS (Rs/share) 13.3 15.1 14.3 16.4 19.0 DPS (Rs/share) 1.1 1.5 1.5 1.8 2.0 Source: Company, Anand Rathi Research


Share capital 263 203 203 203 193 Reserves & surplus 5,079 6,805 8,667 10,677 13,073 Shareholders’ fund 5,341 7,008 8,870 10,880 13,265 Debt 1,716 4,660 5,162 5,162 5,162 Minority interests - - - - -Capital employed 7,057 11,668 14,032 16,043 18,428 Fixed assets 5,337 10,432 11,727 12,562 15,047 Investments 92 92 471 471 471 Working capital 1,369 811 1,367 1,737 2,280 Cash 260 333 467 1,273 630 Capital deployed 7,057 11,668 14,032 16,043 18,428 No. of shares (m) 192.7 192.8 192.9 192.9 192.9Net Debt/Equity (%) 30.9 67.6 56.3 37.8 36.8 W C turn (days) 39 26 25 29 32 Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12ePAT 2,170 2,488 1,593 2,005 2,446 + Depreciation 344 378 573 765 815 + Deffered Tax 78 47 600 400 400 Cash profit 2,591 2,913 2,766 3,170 3,661 - Incr/(Decr) in WC (49) (558) 556 370 544 Operating cash flow 2,640 3,471 2,210 2,801 3,118 - Capex 2,167 5,474 1,868 1,600 3,300 Free cash flow 473 (2,002) 342 1,201 (182)- Dividend 314 339 338 395 451 + Equity raised 1,600 (14) (16) (0) -+ Debt raised (1,654) 2,884 503 - (10)- Investments (42) 0 379 - -- Misc. items 58 456 (23) - -Net cash flow 89 73 134 806 (643)+ Opening cash 171 260 333 467 1,273 Closing cash 260 333 467 1,273 630 Source: Company, Anand Rathi Research

Fig 4 – PE Band

Orient

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5x

6x

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(Rs)



Orient

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Fig 6 – Segmental Break up

0%

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30%

40%

50%

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100%

FY09 FY10 FY09 FY10

Revenue PBIT

Cement Paper Electrical




Investment Argument and ValuationExpansion of its cement capacity (from 3.4m tons to 5m in 4QFY10) and in its electricals business is likely to result in a 19% revenue CAGR over FY10-12. Orient is one of India’s lowest-cost cement producers, given its advantages of higher blended sales, captive power, high-quality limestone, low coal cost and lower lead distance. This, along with the smart recovery in the paper business, bodes well for it.

Expansion in cement and electricals to drive growth

Orient has expanded capacity in both cement and electricals. Ahead, this is likely to drive revenue growth. Its cement capacity expansion of 1.6m tons was completed in early 4QFY10, taking its capacity to 5m tons. During Mar-Apr ’10, it sold at a normalized rate of 4.4m tons, implying an 88% utilisation rate. We estimate a 16% CAGR in cement sales (by volume) over FY10-12.

Orient’s electricals business has seen a 24% CAGR over the last five years, driven primarily by volume growth. We expect it to maintain such growth over FY10-12, driven by higher volumes and robust growth in CFLs. Orient is the second-largest fan manufacturer in the country (an 18% market share) and the largest exporter, with a strong brand. It has expanded capacity from 2.7m units in FY06 to 5m units now.

In order to monetize its brand and distribution network, it ventured into CFLs in FY09 and broke even by FY10 itself. It has moved to fifth position (a 5% market share) in the CFL category in two years. It aims to grow the business aggressively by marketing products manufactured in-house as well as outsourced. It plans to double its manufacturing capacity from the present 5m units. We expect the segment to contribute 25% of the electricals division revenue in FY12 (from 9% in FY09).

Capacity expansion at competitive cost

Orient’s cement expansion from 2.4m to 5m tons (clinker from 2m to 3.4m tons) was carried out at Rs4.9bn (US$42 per ton). At a conservative EBITDA per ton of around Rs800, that translates to a payback period of less than two-and-a-half years. We expect the company’s ability to set up projects at a lower cost to be replicated in future (including greenfield), resulting in industry-leading return ratios.

Low-cost structure advantage in cement

Orient is one of the lowest-cost producers of cement in the industry (lowest in its region) due to its efficient plants and certain logistical advantages.

Expansion of cement capacity (from 3.4m to 5m tons in 4QFY10) and

in electricals is likely to result in a 19% revenue CAGR over FY10-

12



Fig 7 – Cost-structure advantage Heads Advantages

Product mix A greater share of blended sales (90%), resulting in a cement-clinker conversion ratio of over 1.4x vs the industry range of 1.2x to 1.4x

Market mix Orient’s sales mix is distributed between the leading consuming states of India: Maharashtra (70%) and AP (30%). Its average lead distance is around 300km vs the industry range of 450 to 600km. This results in low freight costs

Power Orient’s power consumption per ton of cement is around 77 units vs industry range of 80 to 95 units. Also, availability of captive power from 4QFY10 reduces costs to Rs2.2 per unit at its Devapur plant vs the grid price of Rs3.1. This gives it strategic advantage vs regional peers in power cuts in AP (no impact on production)

Coal Orient obtains 75% of the coal it requires through Singareni Collieries (<100km); the balance through the auction market. Its average cost of coal is around Rs2,800 a ton vs the industry range of Rs3,000 to Rs4,500

Raw material High-quality limestone is available at captive mines located next to the plant, implying low transportation costs. Fly ash is sourced from NTPC’s Ramagundam plant and the Bhusawal thermal power station for Devapur (AP) and Jalgaon (Maharashtra). Cost of transporting (50km distance) this translates to Rs220 a ton vs the industry range of Rs300 to 500


Recovery in paper, growth in electricals to lower business risk

Ahead, we expect Orient’s earnings-concentration risk to ease, with non-cement earnings share to rise to 26% in FY12 (from 7% two years earlier). This would follow from the recovery in paper and strong growth in electricals.

Orient is well-established in the writing/printing paper and tissue paper sub-segments, with capacities of 75,000 and 25,000 tons, respectively. It is the market leader in tissue paper, with a 40% market share. It is backward integrated, with captive sources of raw material. In the past, the division has had an RoCE of over 20%.

However, its performance in the past two years (losses in FY10 for the first time in four decades) has been affected by water shortages and technical glitches. Having undertaken refurbishment/modernisation together with brownfield expansion in tissue paper, the company is now building a reservoir at its Amlai plant at a cost of Rs250m.

Starting 2QFY11, this would have capacity to store water for up to three months usage and avoid any production loss. From a loss of Rs431m in FY10, we estimate the unit to breakeven in FY11 (1QFY11 production loss) and return to normal profitability in FY12.

Fig 8 – Cost per ton comparison (FY10)

1,500

1,700

1,900

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2,700

2,900

Shre

eC

emen

t

Orie

nt P

aper

Birla

Cor

p.

Indi

a C

emen

t

ACC

Ultr

aTec

h

Ambu

ja

(Rs/ton)

Source: Companies, Anand Rathi Research

Fig 9 – Coal and power consumption per ton of cement (FY09)

Ambuja

ACC

India Cem

UltraTech

Orient

Shree

200

250

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450

500

550

600

650

700

200 225 250 275 300 325 350 375

Coa

l Cos

t (R

s/to

n)

Power Cost (Rs/ton)

Source: Companies, Anand Rathi Research

We expect Orient’s earnings-concentration risk to ease, with the share of non-cement earnings to rise

to 26% in FY12 (from 7% two years earlier)



Performance in electricals would be led equally by fans and CFLs. While profit growth in fans would be modest due to pressure from rising raw materials, the CFL business is expected to grow rapidly due to robust volume growth (50% over FY10-12). We expect the CFL business to deliver an EBITDA of Rs120m in FY12 (FY10 nil) of the total estimated EBITDA of Rs895m in the electricals division. This is expected to lead to an 18% EBIT CAGR over FY10-12 in electricals. This business has delivered a RoCE of around 30% in the last six years and this is expected to continue.

Focus on cement, electricals. Strong balance sheet to support growth

Orient wants to focus on the high-growth, high-returns businesses of cement and electricals, in which it is formidable in the regions where it operates. It is exploring both organic and inorganic opportunities in the two divisions. In cement, it plans to set up over FY10-14, a 4m-ton greenfield project in Karnataka at a cost of Rs16bn. This would be financed largely through internal accruals, given the strong cash generation expected over the next four years. Accordingly, its current leverage of 0.6x is expected to be marginally lower over the next two years.

In paper, the company has no plans to expand capacity, given the lower RoCE (vs the other businesses). It plans to set up a 55 MW thermal plant in order to reduce costs and to sell surplus power in the open market (30 MW).

In order to monetise its strong brand and distribution network, it plans to diversify its electricals products basket by venturing into associated products such as household appliances: toasters, press irons, heaters, mixers, etc.

Monetizing idle assets

Since 1999, labour problems have shut down Orient’s second paper plant in Brajrajnagar (Orissa). Thus, the plant has suffered huge operational losses. The company plans to utilize available land (850 acres) for a greenfield industrial project. The location (proximity to the Sterlite and Bhushan plants), its size and availability of basic township infrastructure (roads, water, power, houses) make it a valuable possession, given prevailing prices in that region. The probable industries that can be housed in the area are power and cement.

The company’s stake of 1.5m shares in Century Textiles is currently valued at Rs700m. Based on funds that may be required, it plans to divest this (non-strategic) in course of time.

Fig 10 – Business Segments - RoCE

-20

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Cement Paper Electricals

(%)


Fig 11 – FCF vs Net-Debt-to-Equity

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In cement, it plans to set up over FY10-14 a 4m-ton greenfield

project in Karnataka at a cost of Rs16bn

Its 1.5m shares in Century Textiles are valued at Rs700m.

Based on funds that may be required, it plans to divest this (non-strategic) in course of time



Valuation

Our sum-of-parts value for Orient is Rs85: Rs66 for cement at 4.5x FY12 EV/EBITDA, in line with midcap cement companies, Rs15 for the electrical business at 4x FY12 EV/ EBITDA, a 50% discount to the industry and Rs4 for the paper business at 3x FY12 EV/EBITDA, a 33% discount to the industry. The overall implied EV/EBITDA of 4.2x is also in line with the average multiple for the last eight years.

We have not assigned any value to the company’s investment in Century Textiles (Rs4/share). The implied valuation of the cement business on our target price is US$60 EV/ton.

Our target price of Rs85 implies a 49% return from the present Rs57. At the going market price of Rs57, the stock trades at a PE of 4.5x, an EV/EBITDA of 3.1x and an EV/ton of US$42 on FY12 estimates.

Fig 12 – Sum-of-parts valuation Segments (FY12e) EV/EBITDA EV Per share

- Cement 4.5 15,952 83

- Paper & Board 3.0 1,084 6

- Electric Fans 4.0 3,532 18

TOTAL 20,569 107

Debt 5,162 27

Cash + Investments 1,108 5

Target Price 16,515 85



EV/EBITDA Mean

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(x)



Cement capacity ramping up quicker or bunching of capacities, leading to sustained pricing pressure

Steep rise in international prices of coal

Lower demand offtake in the next two years

Depressed performance from the paper division due to equipment-related issues

Lower demand from the electricals business or rise in cost of metal prices



Fig 13 - Income Statement (Rsm) Year end 31 March FY08 FY09 FY10 FY11e FY12e

Net Sales 12,962 15,032 16,198 19,546 22,752

Sales Growth (%) 18 16 8 21 16

Less Expenditure

Raw Material 3,650 4,274 5,364 6,500 7,500

Stores & Spares 661 725 543 650 700

Staff Cost 753 869 1,055 1,160 1,277

Power& Fuel 1,710 2,146 2,680 3,200 3,700

Freight charges 1,555 1,883 1,887 2,100 2,400


EBITDA 3,604 3,941 3,097 4,016 4,834

EBITDA Margin (%) 27.8 26.2 19.1 20.5 21.2

Growth (%) 36.6 9.4 (21.4) 29.7 20.4

- Interest 197 207 345 400 500

- Depreciation 344 378 573 765 815

+ Other Income 197 232 163 188 188


- Tax 1,090 1,100 748 1,033 1,260

Tax rate (%) 33.4 30.7 31.9 34.0 34.0

Adjusted PAT 2,170 2,488 1,593 2,005 2,446

PAT Margin (%) 16.7 16.5 9.8 10.3 10.8

Growth (%) 47.9 14.6 (36.0) 25.9 22.0

Extraordinary Items (125) (487) - - -

Reported PAT 2,045 2,001 1,593 2,005 2,446

FDEPS (Rs / Share) 11.9 12.9 8.3 10.4 12.7

CEPS (Rs / Share) 13.3 15.1 14.3 16.4 19.0

DPS (Rs / Share) 1.1 1.5 1.5 1.8 2.0


Fig 14 - Segment-wise Performance Year end 31 March FY08 FY09 FY10 FY11e FY12e

Cement

Revenue (Rs m) 7,332 8,717 8,948 10,768 11,897

PBIT (Rs m) 3,120 3,426 2,539 2,800 3,150

Margin (%) 42.6% 39.3% 28.4% 26.0% 26.5%

Sales (m ton) 2.6 2.9 3.3 4.1 4.4

NSR (Rs per ton) 2,821 3,021 2,741 2,618 2,700

EBITDA (Rs per ton) 1,211 1,174 843 801 814

Paper

Revenue (Rs m) 2,742 2,900 2,394 2,554 3,405

PBIT (Rs m) 267 36 (431) (50) 250

Margin (%) 9.8% 1.2% -18.0% -2.0% 7.3%

Sales (ton) 75,628 64,988 59,055 60,000 80,000

NSR (Rs per ton) 36,257 44,624 40,535 42,562 42,562

Electric

Revenue (Rs m) 2,855 3,414 4,808 6,225 7,450

PBIT (Rs m) 219 339 617 635 857

Margin (%) 7.7% 9.9% 12.8% 10.2% 11.5%

Fans sales (m units) 3.5 3.7 5.0 6.0 7.0

Fans NSR (Rs per unit) 805 846 822 850 850

CFL sales (m units) 0.2 4.7 9.0 15.0 20.0

CFL NSR (Rs per unit) 55 61 78 75 75




Fig 15 - Balance Sheet (Rsm) Year end 31 March FY08 FY09 FY10 FY11e FY12e

Sources of Funds

Share Capital 263 203 203 203 193


Deferred Tax Liability 455 502 1,103 1,503 1,903

Net Worth 5,341 7,008 8,870 10,880 13,265

Debt 1,716 4,660 5,162 5,162 5,162



Gross Block 7,684 8,503 16,435 17,535 17,935


Net Block 3,340 3,845 11,227 11,562 11,147

Capital WIP 1,997 6,587 500 1,000 3,900

Investments 92 92 471 471 471

Sundry Debtors 1,358 1,407 1,844 2,200 2,500

Inventories 990 1,097 1,503 1,600 1,800

Loans & Advances 812 1,028 1,173 1,200 1,300

Current Assets 3,161 3,532 4,520 5,000 5,600


Provisions 409 728 807 863 920


Working Capital 1,369 811 1,367 1,737 2,280

Cash 260 333 467 1,273 630

Net Current Assets 1,629 1,144 1,834 3,010 2,910


W C Turnover (days) 39 26 25 29 32

BV (Rs/Share) 24 33 40 48 59


Fig 16 – Cash Flow Statement Year end 31 Mar FY08 FY09 FY10 FY11e FY12e

PAT 2,170 2,488 1,593 2,005 2,446

+Depreciation 344 378 573 765 815

+Deffered Tax 78 47 600 400 400

Cash profit 2,591 2,913 2,766 3,170 3,661

- Incr/(Decr) in WC (49) (558) 556 370 544


-Capex 2,167 5,474 1,868 1,600 3,300

Free cash flow 473 (2,002) 342 1,201 (182)

-Dividend 314 339 338 395 451

+ Equity raised 1,600 (14) (16) (0) -

+ Debt raised (1,654) 2,884 503 - (10)

-Investments (42) 0 379 - -

-Misc. items 58 456 (23) - -

Net cash flow 89 73 134 806 (643)

+Opening cash 171 260 333 467 1,273

Closing cash 260 333 467 1,273 630




Fig 16 - Ratio Analysis @ Rs57 Year end 31 March FY08 FY09 FY10 FY11e FY12e

Sales Growth (%) 17.6 16.0 7.8 20.7 16.4

PAT Growth (%) 47.9 14.6 (36.0) 25.9 22.0


PE (x) 4.8 4.4 6.9 5.5 4.5

P/C (x) 4.3 3.8 4.0 3.5 3.0

Dividend Yield (%) 2.0 2.6 2.6 3.1 3.5

P/B (x) 2.3 1.7 1.4 1.2 1.0

EV/Sales (x) 1.0 1.0 0.9 0.7 0.7

EV/EBITDA (x) 3.5 3.9 4.9 3.6 3.1

Net Debt / Equity (%) 30.9 67.6 56.3 37.8 36.8


Dividend Payout (%) 11.9 14.5 18.2 16.8 15.8

RoE (%) 72.0 44.7 22.6 23.7 23.8

RoCE (%) 53.0 38.1 19.6 21.6 23.3



India I Equities


[email protected]


[email protected]

Key financials #


Sales (Rsm) 102,151 108,287 124,627 136,416 147,327

EBITDA (Rsm) 30,467 24,940 37,926 37,885 43,226

Net profit (Rsm) 20,019 16,480 24,042 23,930 26,755

EPS (Rs) 218.3 179.7 262.2 261.0 291.8

Consolidated EPS 284.6 238.5 327.9 320.9 356.0

Growth (%) 32.6 (16.2) 37.5 (2.1) 10.9

PE- Consol (x) 6.2 7.5 5.4 5.5 5.0

RoE (%) 31.1 18.7 25.6 18.6 17.9

RoCE (%) 24.8 15.9 22.0 19.1 19.4

Dividend yield (%) 1.7 1.7 1.7 2.2 2.2

Net gearing (%) 22.8 21.4 0.7 (6.9) (21.3)W C turnover (days) 26 23 25 31 36 Source: Company, Anand Rathi Research # Based on old structure for comparison purposes

Cement

Update

4 June 2010

Grasim

VSF doing well; retain Buy

Raising estimates. Post de-merger, Grasim would hold 60.3% of the merged cement entity (largest in India with 49m ton capacity). We raise FY11e/12e earnings 6%/4%, given new volume and realization assumptions for both the cement and VSF divisions. Post-restructuring, our new target price is Rs2,375.

Cement expansion to drive revenue growth. In FY10, Grasim completed its 8m-ton expansion in Rajasthan. Backed by this, we expect it to post a 10% CAGR in cement sales over FY10-12.

Strong comeback in VSF. Demand revival in developed markets and lower cotton supply have led to robust volume growth in the VSF division (29% in FY10). We do not expect any major squeeze on operating margins (currently at 35-36%). Grasim plans to add 80,000 tpa capacity in Gujarat at a capex of Rs10bn.

Strong balance sheet to support future growth. We expect Grasim to remain FCF positive until FY12, with net cash of Rs34bn by FY12. This would support its future growth plans, which include adding 13m tons in cement over five years.

Valuations. Our fair price is based on the new holding structure (post-restructuring). We value its holding in UltraTech (60.3% stake in merged entity) and other investments at a holding company discount of 30%, VSF/chemicals business at 6x/4x EV/ EBITDA. Our revised target price is Rs2,375.

Rating: Buy Target Price: Rs2,375 Share Price: Rs1,778

Key data GRASIM IN/ GRAS.BO

52-week high/low Rs2,938 / Rs872 Sensex/Nifty 17022 / 51103-m average volume US$13.6m Market cap Rs163 bn/US$3.6bnShares outstanding 91.7mFree float 74.8%Promoters 25.2%Foreign Institutions 37.2%Domestic Institutions 20.6%Public 17.0%


Grasim

Sensex

1,700

1,950

2,200

2,450

2,700

2,950

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10M

ar-1

0

Apr-1

0

May

-10

Source: Bloomberg


4 June 2010 Grasim – VSF doing well; retain Buy



Net sales 102,151 108,287 124,627 136,416 147,327 Sales growth (%) 17.7 6.0 15.1 9.5 8.0 - Op. expenses 71,684 83,347 86,701 98,531 104,101 EBIDTA 30,467 24,940 37,926 37,885 43,226 EBITDA margins (%) 29.8 23.0 30.4 27.8 29.3 - Interest 1,070 1,397 2,075 2,000 2,000 - Depreciation 3,533 4,570 5,643 6,542 7,846 + Other income 3,778 3,505 4,253 4,842 4,842 - Tax 9,623 5,999 10,420 10,256 11,467 PAT 20,019 16,480 24,042 23,930 26,755 PAT growth (%) 33.6 (17.7) 45.9 (0.5) 11.8 Consolidated PAT 26,091 21,867 30,069 29,427 32,638 FDEPS (Rs/share) 218.3 179.7 262.2 261.0 291.8

Consol. EPS (Rs/share) 284.6 238.5 327.9 320.9 356.0 DPS (Rs/share) 30.0 30.0 30.0 40.0 40.0 Source: Company, Anand Rathi Research


Share capital 966 1,021 1,021 1,021 1,021 Reserves & surplus 86,510 102,398 128,473 150,612 175,576 Shareholders’ fund 87,476 103,420 129,495 151,633 176,598 Debt 32,019 33,950 26,738 21,031 15,324 Minority interests Capital employed 119,495 137,369 156,233 172,665 191,922 Fixed assets 70,540 83,078 86,679 95,524 92,677 Investments 40,808 46,091 46,090 46,090 46,090 Working capital 6,872 7,067 10,067 13,067 16,067 Cash 1,275 1,134 13,397 17,984 37,088 Capital deployed 119,495 137,369 156,233 172,665 191,922 No. of shares (m) 96.6 96.6 96.6 96.6 96.6Net Debt/Equity (%) 22.8 21.4 0.7 (6.9) (21.3)W C turn (days) 26 23 25 31 36 Source: Company, Anand Rathi Research


PAT 20,019 16,480 24,037 23,930 26,755 + Depreciation 3,533 4,570 5,643 6,542 7,846 + Deferred Tax 243.8 2575 1891.3 2500 2500 Cash profit 23,795 23,624 31,571 32,972 37,102 - Incr/(Decr) in WC (887) 194 3,000 3,000 3,000 Operating cash flow 24,683 23,430 28,571 29,972 34,102 - Capex 28,101 17,108 9,244 15,387 5,000 Free cash flow (3,418) 6,322 19,327 14,585 29,102 - Dividend 3,164 3,164 3,218 4,291 4,291 + Equity raised (56) 53 5 - - + Debt raised 2,503 1,931 (7,211) (5,707) (5,707) - Investments (1,939) 5,283 (1) - - - Misc. items (2,307) - (3,361) - - Net cash flow 111 (141) 12,263 4,587 19,104 + Opening cash 1,164 1,275 1,134 13,397 17,984 Closing cash 1,275 1,134 13,397 17,984 37,088 Source: Company, Anand Rathi Research

Fig 4 – PE Band

Grasim

4x

6x

8x

10x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Rs / Share



Grasim

3x

4x

5x

6x

0

50

100

150

200

250

300

350

400

May

-05

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

Rs bn


Fig 6 – P/BV Band

Grasim

1x

1.5x

2x

2.5x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

May

-05

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Rs / Share




Investment Argument and ValuationPost de-merger, Grasim will hold 60.3% of the merged cement entity (with 49m tons, the largest in India). We raise FY11e/12e earnings 12%/21%, given new volume and realization assumptions for both the cement and VSF divisions. Our fair price for Grasim at Rs2,375 is based on the new holding structure (post-restructuring).

Cement expansion to drive growth

During FY10, Grasim commissioned two new units of 4m tons each, at Rajasthan, taking capacity to 25.7m tons. Based on normal ramp-up time-frame, we expect a 10% aggregate volume CAGR over FY10-12. Realizations for FY11 and FY12 are expected to be flat, leading to an 10% revenue CAGR over the period.

Fig 7 – Expansion to lead to strong volume growth (grey cement)

12

14

16

18

20

22

24

26

28FY

07

FY08

FY09

FY10

FY11

e

FY12

e

Capacity Cement Despatches

(m ton)


Favorable regional mix

With the commissioning of new capacities in FY10, over 75% of Grasim’s capacity would be concentrated in the high-growth regions of the East, Central, North and West. Utilization rates and prices are expected to be better in these regions than in the South. This bodes well for Grasim, and is likely to lead to strong volume growth and stable realizations.

Fig 8 – Cement regional mix (FY10)

North33%

South23%

East13%

West9%

Central22%

Source: Company

We expect a 10% cement volume CAGR over FY10-12

Over 75% of Grasim’s capacity would be concentrated in the high-

growth regions of the East, Central, North and West



Strong comeback in VSF

Revival in demand in developed markets and less cotton available have led to robust volume growth in the VSF division (29% in FY10). Strong demand has led to healthy realization growth. Realizations are now at an all-time high Rs114/kg, in contrast with an average Rs97 in FY09 and Rs106 in FY10.

During early FY10, VSF inventories in the industry had risen sharply, leading to a price correction. With inventory cleared and demand increasing, we believe that the company would be able to pass on any cost increases, thus maintaining margins at highs of 35-36% over FY10-12.

Fig 9 – VSF – Volume and realization

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

80

85

90

95

100

105

110

115

120

125

130

Volume Realization (RHS)

(tons) (Rs/kg)


Seeing the strong growth in the segment, the company plans to add 80,000 tpa in Gujarat at a capex of Rs10bn. This would drive future growth. It has already acquired land and environmental clearances. Post-commissioning, in FY13, Grasim’s VSF capacity would rise to 413,975 tons.

Strong balance sheet to support future growth

During FY10, Grasim completed its expansions and is expected to continue to generate positive free-cash-flow till FY12. We estimate net cash to rise to Rs34bn by FY12 (Rs375per share). This would take its net gearing from positive 0.2x in FY09 to a negative 0.2x in FY12. Without increasing leverage to a great extent, this would support future growth plans, which include adding 13m tons of cement in the next five years.

Fig 10 – Net debt-to-equity vs FCF

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY06

FY07

FY08

FY09

FY10

FY11

e

FY12

e

-30

-20

-10

0

10

20

30


(Rsm) (%)


We estimate net cash to rise to Rs34bn by FY12 (Rs375per

share)

VSF realizations are now at an all-time high Rs114/kg, in

contrast with an average Rs97 in FY09 and Rs106 in FY10



Change in estimates

We raise FY11 and FY12 net sales estimates by, respectively, 7% and 9%, to factor in higher volumes and realizations from the cement business and greater VSF profitability. The resultant increase in EBITDA (by 8% and 16% for FY11 and FY12, respectively) is likely to raise net profit. Accordingly, we raise our FY11 and FY12 net profit estimates, by 6% and 14%, respectively.

Fig 11 – Revised estimates FY11e FY12e


Net sales (Rs m) 127,531 136,416 7.0 135,682 147,327 8.6

EBITDA (Rs m) 35,083 37,885 8.0 37,292 43,226 15.9

PAT (Rs m) 22,576 23,930 6.0 23,572 26,755 13.5

EBITDA margin (%) 27.5 27.8 26 27.5 29.3 186

EBITDA per ton (Rs) * 1,032 1,053 2.1 1,032 1,134 9.9

NSR per ton (Rs)* 4,030 4,216 4.6 4,066 4,230 4.0

Volumes (m ton)* 22.1 22.3 1.2 23.4 24.4 4.4

Consol PAT 27,967 29,427 5.2 28,713 32,638 13.7

Source: Anand Rathi Research, * Cement

Valuation

We value Grasim’s holding in UltraTech (merged entity) and other investments at a holding company discount of 30% to the current market price, the VSF/chemicals business at 6x/4x EV/ EBITDA. Post-restructuring, our revised target price is Rs2,375.

Fig 12 – Sum-of-parts valuations FY12 Holding co. Disc Stake

(%) # Equity Shares

(m) Value (Rs m)

Value (Rs/share)

Grasim stake in UltraTech 30.0% 60.3% 274.0 110,069 1,200

Value of Other Investments 30.0% 18,433 201

VSF- 6x FY11 EV/EBITDA 81,698 891

Chemicals- 4x FY11 EV/EBITDA 6,253 68

EV 216,452 2,361

Net Debt (1,345) (15)

Equity Value 217,797 2,375


Our target price of Rs2,375 implies a 34% return from the present Rs1,778. At the going market price of Rs1,778, the stock trades at a consolidated PE of 5.5x, and 5x FY11 and FY12 estimates respectively.

Risks to valuation

Capacity ramping up quicker and bunching up of capacities; Steep rise in prices of international coal; lower demand offtake of cement in the next two years; lower demand offtake of VSF in the next two years.



Fig 13 – Income statement (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12eNet Sales 102,151 108,287 124,627 136,416 147,327 Sales Growth (%) 17.7 6.0 15.1 9.5 8.0 Less Expenditure Raw Material 27,954 31,175 27,502 34,700 34,700 Staff Cost 5,501 6,004 6,796 7,200 7,200 Power& Fuel 14,765 19,296 19,972 18,000 18,000 Freight charges 10,479 12,232 14,649 15,000 15,000 Other Expenditure 12,985 14,640 17,787 23,631 29,201 EBITDA 30,467 24,940 37,922 37,885 43,226 EBITDA Margin (%) 29.8 23.0 30.4 27.8 29.3 Growth (%) 26.5 (18.1) 52.1 (0.1) 14.1 - Interest 1,070 1,397 2,075 2,000 2,000 - Depreciation 3,533 4,570 5,643 6,542 7,846 + Other Income 3,778 3,505 4,253 4,842 4,842 Profit Before Tax 29,642 22,478 34,457 34,185 38,222 - Tax 9,623 5,999 10,420 10,256 11,467 Tax rate (%) 32.5 26.7 30.2 30.0 30.0 Adjusted PAT 20,019 16,480 24,037 23,930 26,755 PAT Margin (%) 19.6 15.2 19.3 17.5 18.2 Growth (%) 33.6 (17.7) 45.9 (0.5) 11.8 Extraordinary Items (2,307) - (3,361) - -Reported PAT 22,326 16,480 27,398 23,930 26,755 Consolidated PAT 26,091 21,867 30,069 29,427 32,638 FDEPS (Rs / Share) 218.3 179.7 262.2 261.0 291.8 Consolidated FDEPS (Rs/Share) 285 238 328 321 356 CEPS (Rs / Share) 284.6 238.5 327.9 320.9 356.0 DPS (Rs / Share) 30.0 30.0 30.0 40.0 40.0


Fig 14 – Balance sheet (Rsm) Year end 31 Mar FY08 FY09 FY10 FY11e FY12eSources of Funds Share Capital 966 1,021 1,021 1,021 1,021 Reserves and Surplus 80,441 93,754 117,938 137,577 160,041 Deferred Tax Liability 6,069 8,644 10,535 13,035 15,535 Net Worth 87,476 103,420 129,495 151,633 176,598 Debt 32,019 33,950 26,738 21,031 15,324 Capital Employed 119,495 137,369 156,233 172,665 191,922 Application of Funds Gross Block 75,925 110,617 126,921 146,079 149,934 Less: Depreciation 35,649 39,725 45,368 51,910 59,757 Net Block 40,277 70,891 81,553 94,169 90,177 Capital WIP 30,263 12,186 5,127 1,355 2,500 Investments 40,808 46,091 46,090 46,090 46,090 Sundry Debtors 7,120 5,599 6,099 6,599 7,099 Inventories 9,784 13,782 15,282 17,282 19,282 Loans & Advances 11,412 10,463 11,463 11,963 12,463 Current Assets 28,316 29,845 32,845 35,845 38,845 Current Liabilities 16,042 16,869 16,869 16,869 16,869 Provisions 5,402 5,909 5,909 5,909 5,909 Current Liabilities 21,444 22,778 22,778 22,778 22,778 Working Capital 6,872 7,067 10,067 13,067 16,067 Cash 1,275 1,134 13,397 17,984 37,088 Net Current Assets 8,147 8,200 23,464 31,051 53,155 Capital Deployed 119,495 137,369 156,233 172,665 191,922 W C Turnover (days) 26 23 25 31 36 BV (Rs / Share) 887.5 1,033.3 1,297.1 1,511.3 1,756.4





PAT 20,019 16,480 24,037 23,930 26,755

+ Depreciation 3,533 4,570 5,643 6,542 7,846

+ Deferred Tax 243.8 2575 1891.3 2500 2500

Cash profit 23,795 23,624 31,571 32,972 37,102

- Incr/(Decr) in WC (887) 194 3,000 3,000 3,000


- Capex 28,101 17,108 9,244 15,387 5,000

Free cash flow (3,418) 6,322 19,327 14,585 29,102

- Dividend 3,164 3,164 3,218 4,291 4,291

+ Equity raised (56) 53 5 - -

+ Debt raised 2,503 1,931 (7,211) (5,707) (5,707)

- Investments (1,939) 5,283 (1) - -

- Misc. items (2,307) - (3,361) - -

Net cash flow 111 (141) 12,263 4,587 19,104

+ Opening cash 1,164 1,275 1,134 13,397 17,984

Closing cash 1,275 1,134 13,397 17,984 37,088


Fig 16 – Ratio analysis @Rs1778 Year end 31 Mar (Rs m) FY08 FY09 FY10 FY11e FY12e

Sales Growth (%) 17.7 6.0 15.1 9.5 8.0

PAT Growth (%) 33.6 (17.7) 45.9 (0.5) 11.8


PE- Consol (x) 6.2 7.5 5.4 5.5 5.0

Dividend Yield (%) 1.7 1.7 1.7 2.2 2.2

Net Debt / Equity (%) 22.8 21.4 0.7 (6.9) (21.3)

Working Capital Turnover (days) 26.1 23.5 25.1 30.9 36.1

Dividend Payout (%) 12.3 16.7 10.0 15.3 13.7

RoE (%) 31.1 18.7 25.6 18.6 17.9

RoCE (%) 24.8 15.9 22.0 19.1 19.4




Annexures



Annexture 1 – Clinker and Cement grinding capacity data Clinker Capacity

Additions

mn ton Mar'09 FY10 FY11e FY12e FY13e Mar'13

North 33.1 12.7 1.0 - 0.7 47.6

South 60.9 13.3 11.5 7.6 5.3 98.6

East 15.5 3.0 3.4 - 1.5 23.4

West 25.4 2.0 3.3 2.0 3.3 36.0

Central 22.5 1.5 3.4 - 3.6 31.0

All India 157.4 32.5 22.7 9.6 14.5 236.6

Cement Grinding Capacity

Additions


North 51.1 14.9 1.4 - 1.2 68.6

South 77.5 17.4 14.8 9.9 7.5 127.1

East 30.9 6.2 3.2 - 2.5 42.8

West 32.4 4.8 5.1 2.4 4.0 48.6

Central 27.3 5.4 4.8 - 4.9 42.4

All India 219.2 48.7 29.3 12.3 20.1 329.5

Cement Capacity based on regional blending ratio

Additions


North 44.8 16.5 1.3 - 0.9 63.6

South 78.4 16.8 14.5 9.6 6.7 126.0

East 26.2 4.9 5.6 - 2.5 39.1

West 31.5 2.4 4.0 2.4 4.0 44.4

Central 31.9 2.1 4.8 - 5.1 43.9

All India 212.8 42.6 30.2 12.0 19.2 316.9

Blending Ratio (x)

FY09 FY10 FY11e FY12e FY13e

North 1.35 1.29 1.29 1.29 1.29

South 1.29 1.26 1.26 1.26 1.26

East 1.70 1.64 1.64 1.64 1.64

West 1.24 1.22 1.22 1.22 1.22

Central 1.42 1.40 1.40 1.40 1.40

All India 1.36 1.33 1.33 1.33 1.33




Annexture 2 – Companywise capacity addition data Estimated Capacity Additions

m ton Mar'10 FY11e FY12e FY13e Mar'13

Grasim 25.7 - - - 25.7

Ambuja 25.0 2.0 - - 27.0

ACC 24.3 6.0 - - 30.3

UltraTech 23.1 - - - 23.1

JP Associates 18.6 2.2 6.4 2.6 29.8

India Cements 14.1 1.4 - - 15.5

Shree Cements 12.0 1.5 - - 13.5

Madras Cem 11.5 - - 1.9 13.3

Dalmia 9.0 - - - 9.0

Chettinad 8.2 - 1.9 - 10.1

Lafarge 8.0 - - - 8.0

Century Textiles 7.8 - - - 7.8

JK Cement 7.5 - - - 7.5

Kesoram 7.3 - - - 7.3

Binani 6.3 - - - 6.3

Birla Corp 5.8 1.8 - 1.8 9.4

JK Lakshmi 5.6 - - - 5.6

OCL 5.3 - - - 5.3

Orient Paper 5.0 - - - 5.0

Penna Cement 4.5 1.6 - - 6.1

Rain Commodities 4.0 - - - 4.0

Zuari 3.4 2.0 - - 5.4

My home Inds. 3.2 1.5 - - 4.7

Heidelberg Cmt 3.1 - - 2.3 5.4

Mehta Group 2.7 - - - 2.7

Sanghi 2.6 - - - 2.6

Mangalam 2.0 - - - 2.0

Prism 2.0 3.0 - - 5.0

Andhra Cements 1.4 1.8 - - 3.2

CMCL 1.1 - - 1.9 3.0

KCP Ltd 0.7 - 1.5 - 2.2

JSW - - - 3.0 3.0

ABG Cement - - - 4.0 4.0

Others 7.3 6.1 2.5 2.7 18.5

All India 267.9 30.8 12.3 20.1 331.0




Annexture 3 – Regional data (m ton) NORTH FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e

Closing Capacity 25.5 26.6 28.4 31.1 34.9 48.6 51.1 66.0 67.4 67.4 68.6

Idle Capacity 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6

Effective Capacity 23.9 25.0 26.8 29.5 33.4 47.1 49.5 64.4 65.8 65.8 67.0

Cap Utilization (%) 100.1 103.1 103.1 105.3 102.0 90.7 85.2 81.8 81.0 89.6 100.0

Production 24.2 25.2 26.7 29.7 32.1 36.5 41.1 46.6 52.8 59.0 66.4

Growth (%) 13.2 4.0 5.9 11.1 8.2 13.6 12.9 13.2 13.3 11.7 12.6

Surplus/ (Deficit) (2.7) (2.6) (3.9) (5.1) (4.9) (3.1) (0.8) 2.0 2.6 0.0 (6.8)

SOUTH FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e


Idle Capacity 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5


Cap Utilization (%) 76.2 81.4 84.8 93.0 96.8 96.6 88.0 75.6 68.6 68.4 72.4

Production 33.4 36.1 39.0 44.9 49.3 54.2 59.7 64.0 69.0 77.3 88.2

Growth (%) 11.9 8.1 7.9 15.1 9.9 10.0 10.2 7.1 7.9 12.0 14.0

Surplus/ (Deficit) 4.7 3.7 1.9 (2.3) (4.4) (5.4) (2.5) 6.4 15.9 20.0 18.3

EAST FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e


Idle Capacity 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1


Cap Utilization (%) 81.0 78.3 87.0 89.3 93.8 93.1 90.9 89.1 88.3 96.4 105.1

Production 16.7 16.7 18.7 20.0 22.0 23.8 26.0 29.3 33.2 37.8 42.5

Growth (%) 0.1 (0.2) 12.4 7.0 9.7 8.5 8.9 12.7 13.2 13.9 12.5

Surplus/ (Deficit) 1.6 2.2 0.6 (0.2) (1.3) (1.5) (1.3) (1.1) (1.1) (3.2) (6.5)

WEST FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e


Idle Capacity 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2


Cap Utilization (%) 81.5 77.5 78.1 86.1 95.0 95.2 89.2 88.4 88.2 89.0 92.1

Production 19.3 21.0 22.8 24.9 27.3 28.8 28.5 30.6 34.9 38.5 42.8

Growth (%) 11.8 9.0 8.4 9.5 9.5 5.3 (1.0) 7.4 14.0 10.6 11.0

Surplus/ (Deficit) 1.5 2.2 2.7 1.2 (1.3) (2.0) (0.4) (0.3) (1.0) (1.0) (2.0)

CENTRAL FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e


Idle Capacity 3.0 3.0 3.0 3.0 3.0 3.0 3.0 (0.0) (0.0) (0.0) (0.0)


Cap Utilization (%) 98.3 99.6 99.8 101.2 108.0 106.8 107.1 105.0 97.9 102.7 108.8

Production 17.8 18.5 20.4 22.3 24.0 25.0 26.1 29.9 34.4 38.5 43.5

Growth (%) 6.8 3.7 10.4 9.2 7.9 4.1 4.2 14.9 14.8 12.1 12.8

Surplus/ (Deficit) (1.9) (1.9) (2.6) (3.1) (4.1) (4.3) (4.5) (6.4) (7.3) (5.7) (8.2)

ALL INDIA FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e


Idle Capacity 7.4 7.4 7.4 7.4 7.4 7.4 7.4 4.4 4.4 4.4 4.4


Cap Utilization (%) 85.4 86.5 89.2 94.6 98.7 95.8 90.2 84.3 80.6 84.0 89.9

Production 111.5 117.5 127.6 141.8 154.7 168.3 181.4 200.4 224.2 251.2 283.3

Growth (%) 9.4 5.4 8.6 11.2 9.1 8.8 7.8 10.5 11.9 12.0 12.8

Surplus/ (Deficit) 3.3 3.5 (1.4) (9.4) (16.0) (16.3) (9.5) 0.5 9.2 10.1 (5.2)

Source: CMA, Anand Rathi Research Note: (1)Capacity Utilization is calculated based on average capacity for the year (2) Surplus/(Deficit) is calculated based on new capacity utilization assumptions of 30%/70%/90% for Year1/2/3



Annexture 4 – Plant wise capacity estimate over FY11-14 2010-11e Capacity (m ton) Region State India Cement 1.4 North Rajasthan

Total North 1.4

ACC 3.0 South Karnataka

Zuari Cement (Italcementi) 2.0 South AP

Penna Cement 1.6 South AP

Andhra Cement 1.8 South AP

My Home 1.5 South AP

NCL Inds. 1.5 South AP

Bhavya Cement 1.5 South AP

Jaya Jyoti 2.0 South AP

Total South 14.8

Ambuja 1.0 East Chattisgarh

JPA- SAIL 2.2 East Chattisgarh

Total East 3.2

Deepak Cement 1.1 West Gujarat

ACC 3.0 West Maharashtra

Ambuja 1.0 West Maharashtra

Total West 5.1

Birla Corp 1.8 Central MP

Prism 3.0 Central MP

Total Central 4.8

Total All India 29.3

2011-12e Capacity (m ton) Region State Nil Nil North Total North Nil Raghuram Cement II (Bharti ) 2.50 South AP KCP 1.52 South AP Chettinad - II 1.88 South TN JPA 4.00 South AP Total South 9.90 Nil Nil East Total East Nil JPA: GACL: Line II 2.40 West Gujarat Total West 2.40 Nil Nil Central Total Central Nil


2012-13e Capacity (m ton) Region State Birla Corp 1.20 North Rajasthan Total North 1.20 Madras Cement- II 1.87 South TN Sagar-Vicat Cement 2.67 South Karnataka JSW 2.97 South Andhra Total South 7.51 CMCL 1.93 East Birla Corp 0.60 East Total East 2.53 ABG Cement 3.96 West Gujarat Total West 3.96 Heidelberg 2.31 Central MP JPA Line II (UP) 2.57 Central UP Total Central 4.88




2013-14e Capacity (m ton) Region State Lafarge 2.15 North Rajasthan JK Cement 2.15 North Rajasthan Total North 4.29 Chettinad 2.57 South Karnataka JPA 2.57 South Karnataka Total South 5.15 Emami 3.00 East Total East 3.00 Century- Manikgarh 3.43 West Maharashtra Nirma Cement 2.57 West Gujarat JPA GACL Line III 2.57 West Gujarat Total West 8.58 JPA- Sidhi II 2.57 Central MP JPA- UP Line III 2.57 Central UP Total Central 5.15



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Anand Rathi Ratings Definitions

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Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 31 Mar 10) Buy Hold Sell Anand Rathi Research stock coverage (118) 61% 12% 27% % who are investment banking clients 8% 0% 0% Other Disclosures This report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI.

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