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Doubling capacity in favourable region… Heidelberg Cement India (HCIL), erstwhile Mysore cements, is promoted by the world’s third largest cement manufacturer, HeidelbergCement AG after it was acquired in July 2006. HCIL is doubling its cement capacity to 6.0 MTPA by CY12E from the current capacity of 3.1 MTPA. The company is expected to benefit from the increasing exposure to the high growth markets of the central region where cement demand is expected to grow at CAGR of ~9% over FY10-13E against overall industry growth of ~6% during the same period. We expect the cement sales volume of the company to grow at ~26% CAGR (CY10-12E) to 4.3 MTPA in CY12E from 2.7 MTPA in CY10. We expect HCIL’s net sales to grow at ~32% CAGR (CY10-12E) and EBITDA to grow at CAGR of ~23% during the same period.

Doubling capacity with increasing favourable regional exposure HCIL currently has ~58% exposure to the central region, which is the most balanced region considering the demand supply scenario. After the expansion, its exposure is set to increase to ~78%. This would benefit the company on account of robust demand from the region. In FY10, cement consumption grew ~17% YoY in the region compared to ~10% YoY by the overall industry. We expect the cement demand to grow at a CAGR of ~9% over FY10-13E against industry growth of ~6% during the same period. Also, cement prices are expected to increase in the region on the back of expected high utilisation rates of over 100%.

HeidelbergCement AG: Ushering in a strong foothold Germany-based HeidelbergCement AG, the world’s third largest cement producer, turned around HCIL by wiping out all the losses incurred by the company through infusing a sum of | 360 crore by making a preferential allotment of ~6.65 crore shares to itself at a price of | 54 per share. The increase in operational efficiencies after acquisition resulted into net cash and equivalents of | 493 crore by the end of CY09 as against net debt of | 302 crore in FY06.

Valuations

At the CMP of | 39, HCIL is trading at 26.7x and 17.8x its CY11E and CY12E EPS, respectively. On an EV/tonne basis, the stock is trading at $91 and $52 its CY11E and CY12E capacities, respectively. We have used the replacement cost method to value the stock and assigned value of $55/tonne to its CY12E capacity of 6 MTPA, which is nearly 55% discount to current replacement cost of $125/tonne. Hence, we are initiating coverage on HCIL with BUY rating and target price of | 44. Exhibit 1: Valuation Metrics | crore CY07 CY08 CY09 CY10E CY11E CY12E

Net Sales 594.6 761.3 936.4 865.5 975.0 1509.4

EBITDA 103.3 88.7 159.7 98.9 82.3 150.2

Net Profit 97.7 125.4 134.0 63.3 33.1 49.6

P/E (x) 6.3 4.9 6.6 14.0 26.7 17.8

Target P/E (x) 8.6 5.5 7.4 15.7 29.9 20.0

EV/EBITDA (x) 6.8 6.3 2.4 6.7 15.5 9.4

P/BV (x) 1.7 1.0 1.2 1.1 1.1 1.0

RoNW (%) 26.8 20.6 18.2 8.1 4.1 5.8

RoCE (%) 24.4 10.9 18.1 8.9 3.8 6.9

Source: Company, ICICIdirect.com Research

Heidelberg Cement India (MYSCEM) | 39

Rating Matrix Rating : Buy

Target : | 44

Target Period : 12-15 months

Potential Upside : 12%

Annual Performance (| Crore) | Crore CY08 CY09 CY10 CY11E CY12E

Net Sales 761.3 936.4 865.5 975.0 1509.4

EBITDA 88.7 159.7 98.9 82.3 150.2

Net profit 125.4 134.0 63.3 33.1 49.6

Current & target multiple

CY08 CY09 CY10 CY11E CY12E

EPS 7.9 5.9 2.8 1.5 2.2

P/E (x) 4.9 6.6 14.0 26.7 17.8

EV/EBITDA (x) 6.3 2.4 6.7 15.5 9.4

P/BV (x) 1.0 1.2 1.1 1.1 1.0

Target P/E (x) 5.5 7.4 15.7 29.9 20.0

Target EV/EBITDA (x) 7.5 3.1 7.8 16.8 10.1

Target P/BV (x) 1.1 1.3 1.3 1.2 1.2

Stock Data

Bloomberg Code

Reuters Code

Face Value (|)

Promoters Holding (%)

Market Cap (| Cr)

52 Week H/L

Sensex

Average Volumes

HEIM IN

HEID.BO

10

68.6

883.8

65 / 32

17988

313095

Comparative return matrix (%) 1 M 3 M 6 M 1 Yr

Heidelberg -2.8 -14.8 -25.5 -26.3JK Cement -4.6 -12.3 -21.6 -30.0JK Lakshmi 2.2 -16.6 -26.8 -38.8Mangalam 3.6 -15.5 -28.8 -36.4

Price movement

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Analyst’s name

Vijay Goel [email protected]

Rashesh Shah [email protected]

Hitesh Taunk [email protected]

Initiating Coverage


March 23, 2011



Company background Heidelberg India Cement Ltd (HCIL), earlier known as Mysore Cement Ltd, was set up by the SK Birla Group in 1958. HCIL is a subsidiary of Cementrum I BV (a company incorporated under the laws of The Netherlands, which is 100% controlled by HeidelbergCement AG). After taking over the controlling stake from Birlas in July 2006, HeidelbergCement AG infused a sum of | 360 crore by making a preferential allotment of ~6.65 crore shares to itself at a price of | 54 per share (at EV/tonne of US$109). The Heidelberg group’s capabilities and global experience in the cement business played out a turnaround story for this company in 2007 soon after the acquisition.

Currently, HCIL has clinker capacity of 1.6 MTPA and cement capacity of 3.1 MTPA. It manufactures and sells Portland Pozzolana Cement (PPC) through its four manufacturing facilities located at Ammasandra, Karnataka (0.6 MTPA), Damoh, Madhya Pradesh (1.0 MTPA), Jhansi, Uttar Pradesh (0.8 MTPA) and Dolvi, Maharashtra (0.7 MTPA). The company is mainly focused on the central region with its two units Damoh and Jhansi together contributing ~58% of the company’s total capacity. The Dolvi unit of the company was a result of the acquisition of Indo Rama Cement in April 2008. Other than UP and MP, the other selling markets are Bangalore, Mumbai and Pune.

Exhibit 2: HCIL plant locations - India


Share holding pattern (Q4CY10)

Shareholder Holding (%)Promoters 68.55FIIs 5.67MFs 3.86Others 21.92

Promoter and Institutional holding trend (%)

68.6 68.6 68.6 68.6 68.6

5.3 8.4 9.7 9.4 9.5

0

20

40

60

80

Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10

Promoters FIIs & MFs



Exhibit 3: Corporate history of Heidelberg Cement India

1958 1962 1966 1978 1983 1989 1989 2006 2008

Incorporation of Mysore Cements Ltd (MCL)

First Plant at Ammasandra with the capacity of 1 LTPA (lakh tonnes)

Capacity of Ammasandra unit doubled to 2 LTPA in 1966 and 4 LTPA in 1968 & 6 LTPA in 1978

Setting up of 5 LTPA Greenfield plant at Damoh (MP) in 1983 & expansion to 6 LTPA in 1989

Seting up of 5 LTPA Greenfield plant at Jhansi

Acquisition of MCL by Heidelberg AG

Merger of Indorama Cement Ltd with MCL


Exhibit 4: Global Footprint: Heidelberg AG




About HeidelbergCement AG HeidelbergCement AG is a global market leader in aggregates and the world’s third largest player in the fields of cement, concrete and other downstream activities, making it one of the world’s largest manufacturers of building materials. In 2009, the group turnover amounted to approximately €11 billion. The core activities of HeidelbergCement include the production and distribution of cement and aggregates, the two essential raw materials for concrete.

Turnaround after acquisition by HeidelbergCement AG In July 2006, after taking over the company from the Birlas, Heidelberg AG infused a sum of | 360 crore by making a preferential allotment of ~ 6.65 crore shares to itself at a price of | 54 per share. This resulted in a turnaround for Heidelberg Cement India (then called Mysore Cements). The deal was done at a valuation of US$109 EV/tonne.

After the acquisition, HeidelbergCement AG wiped out all losses incurred by Mysore Cements. In CY09, the company reported a net profit of | 134 crore against a net loss of | 90 crore in FY06. The increase in operational efficiencies resulted into net cash and equivalents of | 493 crore by the end of CY09 as against net debt of | 302 crore in FY06.

Exhibit 5: Income statement | Crore FY05 FY06 CY06 (9M) CY07 CY08 CY09

Net Sales 396.1 424.2 414.4 594.6 760.2 936.4

Total Expenditure 366.4 409.7 355.2 491.3 672.6 776.7

EBITDA 29.7 14.5 59.2 103.3 87.6 159.7

Other Income 7.0 10.0 5.1 12.5 44.5 45.2

Depreciation 20.3 19.3 12.2 14.5 21.4 25.8

Interest Cost 40.6 41.6 16.8 3.0 4.1 4.4

PBT -24.1 -36.4 35.3 98.3 106.7 174.7

Exceptional income 0.0 -52.8 -7.7 0.0 0.0 0.0

Tax 0.6 0.8 36.5 0.7 -17.9 40.7

PAT -24.7 -90.0 -8.9 97.7 124.6 134.0

EBITDA Margin (%) 7.5 3.4 14.3 17.4 11.5 17.1

PAT Margin (%) -6.2 -21.2 -2.2 16.4 16.4 14.3

Sales Volume (mn tonnes) 2.0 2.1 1.6 2.1 2.4 2.7

Realisation 1951 2054 2628 2799 3143 3528

EBITDA/Tonne 146 70 375 486 362 602


Exhibit 6: Balance sheet | Crore FY05 FY06 CY06 (9M) CY07 CY08 CY09

Equity Capital 96.2 103.7 171.5 171.5 240.1 240.1

Reserves & Surplus -84.6 -168.7 99.2 193.1 369.8 496.1

Total Debt 305.8 306.3 0.0 0.0 10.0 2.0

Total Liabilities 317.4 241.3 270.7 364.6 619.9 738.2

Net Block including CWIP 229.4 201.8 182.7 188.1 329.8 375.1

Investments 59.9 9.3 0.1 0.1 0.1 0.1

Cash 2.9 4.1 65.3 180.7 337.8 495.4

Net Current Asset excluding cash -11.1 -10.1 22.7 -4.4 -47.8 -115.9

Deffered Tax 36.3 36.2 0.0 0.0 0.0 -16.5

Total assets 317.4 241.3 270.7 364.6 619.9 738.2

Net Cash -243.0 -292.9 65.4 180.9 327.9 493.5


Net Sales & Profit after tax

396 424 414595

760936

98 134

-9-25 -90

125

-200

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1000

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CY07 CY08 CY09

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CY07 CY08 CY09

%

-25-20-15-10-505101520

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EBITDA Margin (LHS)

PAT Margin (RHS)

Reduction in debt and Interest cost

-400

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Investment Rationale

Heidelberg Cement is expected to post cement volume growth of ~26% CAGR during CY10-12E on account of expansion of its cement capacity by 2.9 MTPA to 6 MTPA in CY12E. The company’s exposure will increase in the central region to ~78% from Q2CY12E onwards as against ~58% currently. As the central region is the most balanced region considering the demand supply scenario, the increasing exposure in the region would benefit the company in growing its output coupled with expectation of firm pricing. We expect the topline to grow at ~32% CAGR during CY10-12E to | 1509.4 crore while the EBITDA is expected to grow at ~23% CAGR to | 150.2 crore during the same period. The EBITDA margin is expected to improve significantly from a loss of | 90 per tonne in Q4CY10 to | 281 per tonne in CY11E and | 346 per tonne in CY12E on the back of an increase in realisation.

Capacity expansion to ‘cement’ future volume growth

Heidelberg Cement has a current cement grinding capacity of 3.1 MTPA and plans to double the capacity to 6 MTPA by expanding the capacities of its grinding units in Damoh (MP) and Jhansi (UP) by 1 MTPA and 1.9 MTPA, respectively. These capacities are expected to be commissioned by the end of Q1CY12. Along with the grinding expansion, the company is also expanding its clinker capacity to 3.5 MTPA from the current capacity of 1.6 MTPA by setting up a 1.9 MTPA clinker unit at Damoh (MP), which is also expected to come on stream by Q1CY12. Exhibit 7: Capacity details (current and post expansion)

Million tonnes per annum Location Current Post expansion

Clinker Capacity

Ammasandra Karnataka 0.4 0.4

Damoh MP 1.2 3.1

Total 1.6 3.5

Cement Capacity

Ammasandra Karnataka 0.6 0.6

Damoh MP 1.0 2.0

Jhansi UP 0.8 2.7

Dolvi Maharashtra 0.7 0.7

Total 3.1 6.0


Exhibit 8: Clinker and cement capacity

1.6 1.6 1.6 1.6 1.6 1.6

3.5

2.1 2.1

3.1 3.1 3.1 3.1

6.0

0

1

2

3

4

5

6

7

CY06 CY07 CY08 CY09 CY10 CY11E CY12E

mili

on to

nnes

Clinker Capacity Cement Capacity


Capacity expansion at Damoh and Jhansi unit (central

region) would benefit the company to drive sales volume

growth at 26% CAGR in CY10-CY12E to 4.1 MT in CY12E



Cement sales volume to grow at ~26% CAGR in CY10-12E

We expect the cement sales volume to grow at ~26% CAGR (CY10-12E) to 4.3 million tonnes (MT) in CY12E from 2.7 MT in CY10. For CY11E, we are expecting sales volumes to grow ~8% YoY to 2.9 MT on account of an improvement in the capacity utilisation rate. As the clinker and grinding capacities are expected to be commissioned by Q2CY12E, the major impact on volume growth will be seen in CY12E. We estimate volume growth of ~48% YoY in CY12E on account of capacity expansions and expectation of a higher capacity utilisation rate.

Exhibit 9: Cement sales volume and capacity utilisation trend

1.6

2.22.6 2.7 2.7

2.9

4.3

91

9285

76

101

7986

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CY06 CY07 CY08 CY09 CY10 CY11E CY12E

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Cement sales volume Capacity Utlisation


Strategically positioned in lower disruption regions Heidelberg Cement sells ~58% of the total cement volume in the central region, the best placed region in India considering the demand-supply scenario. The company sells the rest of the volume in the western and southern region with ~23% and ~19% contribution. As the company is expanding its clinker and grinding capacities in the central region, it would help it to increase its exposure in the region to ~78%.

Exhibit 10: Current regional exposure

Western23%

South19%

Central58%

Source: Company, ICICIdirect.com, Research

Exhibit 11: Regional exposure post expansion

South10%

Western12%

Central78%

Source: Company, ICICIdirect.com, Research



Exhibit 12: Region wise demand-supply scenario

Northern region

Million tonnes FY08 FY09 FY10 FY11E FY12E FY13E

Effective Capacity 35.5 47.8 49.6 61.7 63.7 65.7

Production 36.5 41.1 46.2 48.4 51.5 56.2

Capacity Utilisation (%) 103 86 93 78 81 86

Consumption 36.5 41.1 46.2 48.4 51.5 56.2

Consumption (%) 12.6 12.4 4.7 6.5 9.0

Surplus/Deficit -1.0 6.7 3.4 13.3 12.1 9.5

Central region



Production 24.8 26.1 30.0 32.3 35.3 38.4


Consumption 24.5 25.7 30.0 32.3 35.3 38.4

Consumption (%) 4.9 16.7 7.8 9.0 9.0

Surplus/Deficit 0.6 1.8 -2.3 -1.2 -3.2 -1.3

Eastern region



Production 23.2 26.0 29.5 31.1 33.3 36.3


Consumption 23.2 26.0 29.5 31.1 33.3 36.3

Consumption (%) 12.1 13.5 5.5 7.0 9.0

Surplus/Deficit 2.9 3.8 3.7 6.0 4.2 7.5

Western region



Production 28.7 28.5 30.6 32.1 34.2 37.2


Consumption 28.7 28.5 30.6 32.1 34.2 37.2

Consumption (%) -0.7 7.4 4.8 6.5 9.0

Surplus/Deficit 0.6 3.6 3.9 8.5 10.2 9.7

Southern region



Production 54.2 59.7 63.0 63.1 66.2 72.2


Consumption 54.1 59.7 63.0 63.1 66.2 72.2

Consumption (%) 10.4 5.5 0.1 5.0 9.0

Surplus/Deficit 1.7 6.8 20.0 38.5 41.3 38.0

All India



Production 167.4 181.4 199.3 207.0 220.4 240.3


Consumption 167.0 181.0 199.3 207.0 220.4 240.3

Consumption (%) 8.4 10.1 3.8 6.5 9.0

Surplus/Deficit 4.8 22.7 28.8 65.1 64.7 63.4


We expect 6.5% YoY growth in consumption in FY12E compared to 4.7% YoY growth in FY11E. Capacity utilisation rates are expected to improve in FY12E and FY13E on account of higher demand growth compared to effective capacity addition growth

We expect 9% YoY growth in consumption in FY12E compared to 7.8% YoY growth in FY11E. Utilisation rates are expected to remain above 100% on account of consumption growth keeping pace with the effective capacity addition growth

We expect 7% YoY growth in consumption in FY12E compared to 5.5% YoY growth in FY11E. Utilisation rates are expected to mprove in FY12E to 89% and decline to 83% in FY13E

We expect 6.5% YoY growth in consumption in FY12E compared to 4.8% YoY growth in FY11E. Utilisation rates are expected to decline further in FY12E to 77% from 79% in FY11E and improve to 79% in FY13E

We expect 5% YoY growth in consumption in FY12E compared to nil YoY growth in FY11E on the back of an increase in budget allocation in infrastructure projects in the region and expectation of improvement in the political scenario in AP. However, utilisation rates are expected to remain at 62% in FY12E and improve to 66% in FY13E

All India cement consumption growth is expected at 6.5% in FY12E as against 3.8% in FY11E. Capacity utilisation rates are expected to improve marginally to 77% in FY12E and 79% in FY13E from 76% in FY11E.



Increasing exposure to central region to improve utilisation rates The increase in exposure to the central region, which contributes ~15% of the total cement consumption in India, would benefit the company and enable it to increase its sales volume on account of high utilisation rates led by the most balanced demand supply situation. We expect the capacity utilisation rate to remain above ~100% as incremental demand would keep pace with addition of effective capacities. Uttar Pradesh (UP) and Madhya Pradesh (MP) are the major cement consuming states in the region that contributes ~70% and ~30% of the total consumption in the central region. Lower per capita cement consumption in MP and UP (137 kg/capita in MP and 104 kg/capita in UP) indicates sustainable future growth in demand. Government housing projects (rural and urban) and hydro power projects are the major demand drivers in the region, backed by key government projects such as Pradhan Mantri Gram Sadak Yojna, Bharat Nirman and the Indira Awaas Yojna.

After demand growth of ~10% YoY in FY10, it has slowed down to 3.8% YoY in FY11 due to the slowdown in construction activities in the infrastructure and housing segment, prolonged monsoon, political uncertainty in Andhra Pradesh, Gujjar agitation in Rajasthan, shortage of railway wagons and unavailability of key raw materials in some states of the country.

Exhibit 13: Consumption growth (YoY)

13 11

22

13 12

56

4

12

-1 -1

75

65 5

11

5

17

8 9

15

4

12 13

57

26

13

23

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6

0

5

-3-5

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5

10

15

20

25

30

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

North West Central East South

Central region outperformed with ~17% YoY in FY10 consumption growth against average industry growth of ~10%

Source: CMIE, ICICIdirect.com Research

Exhibit 14: Capacity utilisation (%)

9378 81 8689

79 77 79

108 104 110 10489 84 89 83

7662 62 66

0

20

40

60

80

100

120

FY10 FY11E FY12E FY13E


Source: CMIE, ICICIdirect.com, Research

Exhibit 15: Surplus/(Deficit) MTPA

3

13 12 104

8 10 10

-2 -1 -3 -1

4 6 4 8

20

38 41 38

-10

0

10

20

30

40

50

FY10 FY11E FY12E FY13E


Source: CMIE ICICIdirect.com, Research

The central region reported ~17% YoY demand growth in

FY10 as compared to ~10% YoY growth by the industry.

In FY11E, the region is expected to report ~8% YoY

growth (~6.5% in YTD FY11E) against 3.8% YoY by the

industry. We expect all-India demand growth of ~6.5% in

FY12E led by 9% growth in the central region



Improving utilisation to led realisation growth

In FY10, cement prices in the central region increased ~10% YoY against all-India average price increase of ~4% YoY on account of better consumption growth compared to other regions. However, all-India average cement prices have corrected by ~3% YoY in April-September 2010, led by ~8% QoQ decline in Q2FY11 on account of low consumption growth of 2-3% during the monsoon season. In Q3FY11, the all-India average price has increased ~3% YoY led by artificial price hikes in the southern region. During April-August 2010, cement prices in the central region moved in line with the all-India average cement prices but from September 2010 onwards all-India average cement prices surpassed the average central region prices on the back of artificial price hikes in the southern and western region. Despite high growth in the central region and better utilisation rates compared to the industry, prices have been low compared to the all-India average prices. We expect cement prices in the central region to increase, going forward, on account of an increase in utilisation rates led by balanced demand-supply situation. We have factored in ~5% YoY increase in realisation for the company in FY12E and FY13E. Exhibit 16: Retail cement prices (|/50 kg bag)

165

185

205

225

245

265

285

Apr-0

9

Jun-

09

Aug-

09

Oct-0

9

Dec-

09

Feb-

10

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0

Jun-

10

Aug-

10

Oct-1

0

Dec-

10

Feb-

11

West North East Central South All India Avearge

Source: Dealers, ICICIdirect.com Research

Capex to be funded through mix of debt and internal accruals

HCIL has planned a capex of ~| 1220 crore over CY09-12E for the expansion of clinker and grinding capacities. The project cost for 1.9 MT clinker expansion at Damoh, MP is ~| 570 crore while for the 2.9 MT grinding expansions at Damoh, MP and Jhansi, UP it is ~| 580 crore. In addition to these, HCIL will be setting up a conveyor belt from limestone mines to the clinkerisation unit. This would help company to reduce its freight cost in the near future.

The company has already done capex of ~| 410 crore in CY10 through its internal accruals. The balanced capex of ~| 810 crore would be funded through debt and internal accruals. The company plans to raise debt of $125 million (~| 562 crore) from parent company, Heidelberg AG to fund the capex.

The gap between all-India average cement price and

central region prices have widened in September-

December 2010 compared to April 2010 after the artificial

price hikes in the southern region



Assumptions Exhibit 17: Assumptions | per tonne CY06 CY07 CY08 CY09 CY10 CY11E CY12E

Sales Volume (mtpa) 1.6 2.2 2.6 2.7 2.7 2.9 4.3

Net Realisation 2563 2701 2979 3448 3178 3325 3479

Total Expenditure 2205 2232 2632 2860 2815 3045 3133

Stock Adjustment -21 -36 20 -1 4 0 0

Raw material 311 391 602 814 773 753 685

Power & Fuel 777 780 757 650 715 878 1002

Employees 179 313 244 257 237 294 270

Freight 296 261 464 418 424 445 467

Others 664 522 547 722 663 675 709

EBITDA 358 469 347 588 363 281 346


Raw material cost The company purchases clinker for the Dolvi (Maharashtra) unit and its cost contributes ~45% of the total raw material cost for the company. The raw material cost per tonne is expected to come down to | 753 per tonne in CY11E and | 685 per tonne in CY12E from | 773 per tonne in CY10 on account of an increase in cement sales volume. This will lead to a decline in contribution of clinker purchase cost to the total raw material cost (~38% in CY12E).

Power & fuel cost The company meets ~80% of its total power requirement through grid and sources ~80% of its total coal requirement (used in kiln and 8 MW captive power plant) through domestic linkage coal. On account of a change in coal mix by the company (80% domestic coal and 20% petcoke) and increase in coal prices by Coal India, we expect the power & fuel cost to increase to | 878 per tonne in CY11E and | 1002 per tonne in CY12E from | 715 per tonne in CY10.

Freight cost The company has an average lead distance of 350-375 km between its grinding units and selling markets. The company transports 50% of its total cement output through rail and 50% through road. The freight cost is expected to increase to | 445 per tonne in CY11E and | 467 per tonne in CY12E from | 424 per tonne in CY10.

Exhibit 18: Movement of EBITDA per tonne

363281

346

147

23

163

5621 12

154

6923

124

2234

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600

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CY11

E

CY12

E

Rs p

er to

nne

Increase in realisation

Decline in RM cost

Increase in P&F cost Increase in

employee cost

Increase in freight cost Increase

in others cost

Increase in realisation

Increase in P&F cost Increase

in freight cost

Increase in others cost

Decline in RM cost

Decline in employee cost




Risk & concerns

Delay in commissioning of capacities Any delay in commissioning of capacities may hamper sales volume growth and, hence, the earnings. The capacities are expected to be commissioned by Q1CY12E. Lower than expected realisation growth We have factored in a 5% YoY increase in cement sales realisation in CY11E and CY12E each. This is on account of high growth and better capacity utilisation rates in the central region (refer Exhibit 14) where the company sells ~58% of its volume currently and is expected to sell over ~70% after commissioning of new capacities in CY12E. Any slowdown in demand could lead to a decline in cement prices in the region and decline in margins of the company. Hence, we have done a sensitivity analysis to see the impact of an increase or decrease in realisation on the earnings of the company. Exhibit 19 shows the impact on EBITDA per tonne and EPS of the company in CY11E and CY12E if the realisation in CY11E declines by 5% YoY, remains constant YoY, increases 5% YoY (base case), increases 10% YoY and increases 15% YoY. Similarly, we have done the same exercise for CY12E. Exhibit 19: Sensitivity analysis on earnings with change in realisation

5% dec 0% inc Base case (5% inc) 10% inc 15% incCY11E Realisation (|/Tonne) 3020 3178 3325 3496 3655

EBITDA per tonne (CY11E) -24 134 281 452 612

EBITDA per tonne (CY12E) 61 219 346 537 697

EPS (CY11E) -1.2 0.2 1.5 2.9 4.3

EPS (CY12E) -1.5 0.6 2.2 4.6 6.7

5% dec 0% inc Base case (5% inc) 10% inc 15% incCY12E Realisation (|/Tonne) 3159 3325 3499 3658 3824

EBITDA per tonne (CY12E 26 192 346 525 691

EPS (CY12E) -1.9 0.2 2.2 4.5 6.6

Change in Realisation in CY11E over CY10 keeping other variables constant

Change in Realisation in CY12E over CY11 keeping other variables constant


Exhibit 20: Net realisation trend

3781 3711 3586 3464 3448 3358 33323071

28793178 3325 3479

0

500

1000

1500

2000

2500

3000

3500

4000

Q1CY

09

Q2CY

09

Q3CY

09

Q4CY

09

CY09

Q1CY

10

Q2CY

10

Q3CY

10

Q4CY

10

CY10

CY11

E

CY12

E

| pe

r ton

ne




Higher than expected increase in coal prices The company meets 80% of its coal requirement through domestic linkage sources and 20% through petcoke. Higher than expected coal prices could lead to a decline in margins. We expect coal prices (used in raw meal or kiln operations) to increase ~45% YoY to | 4178 per tonne in CY11E from implied cost of | 2889 per tonne in CY10. For CY12E, we expect the coal cost to increase by ~11% YoY to | 4875 per tonne. Exhibit 21: Power and fuel cost per tonne

700621

766680 650 674 671

865

688 715

8781002

0

200

400

600

800

1000

1200

Q1CY

09

Q2CY

09

Q3CY

09

Q4CY

09

CY09

Q1CY

10

Q2CY

10

Q3CY

10

Q4CY

10

CY10

CY11

E

CY12

E

| pe

r ton

ne


Exhibit 20 shows the impact on EBITDA per tonne and EPS of the company in CY11E and CY12E if the coal cost (used in raw meal) in CY11E increases by 10% YoY, increases by 25% YoY, increases by 45% YoY (base case), increases by 50% YoY and increases by 65% YoY. Similarly, we have done the same exercise for CY12E where we have seen the impact on CY12E earnings if the CY12E coal cost declines by 20% YoY, declines by 10% YoY, increases by 17% YoY (base case), increases by 20% YoY and increases by 30% YoY. Exhibit 22: Sensitivity analysis on earnings with change in coal cost

10% inc 25% inc Base case (45% inc) 50% inc 65% incCY11E Coal Cost (|/Tonne) 3178 3611 4178 4333 4767



EPS (CY11E) 2.4 2 1.5 1.3 0.9

EPS (CY12E) 4.4 3.5 2.2 1.8 0.9

20% dec 10% dec Base case (17% inc) 20% inc 30% incCY12E Coal cost (|/Tonne) 3342 3760 4875 5014 5431

EBITDA per tonne (CY12E 526 477 346 330 281

EPS (CY12E) 4.5 3.9 2.2 2 1.4

Change in coal cost in CY11E over CY10 keeping other variables constant

Change in coal cost in CY12E over CY11 keeping other variables constant




Financials Topline to grow at 32% CAGR in CY10-12E We expect net sales to grow at 32% CAGR during CY10-12E from | 865.5 crore in CY10 to | 1509.4 crore in CY12E. The growth in topline will be driven by sales volume growth of ~26% CAGR to 4.3 MT in CY12E from 2.7 MT in CY10. We expect the realisation to increase by 5% YoY each in CY11E and CY12E on account of the company’s presence in the high growth markets of the central region. Exhibit 23: Net sales and YoY growth (%)

594.6761.3

936.4 865.5975.0

1509.4

0

200

400

600

800

1000

1200

1400

1600

CY07 CY08 CY09 CY10 CY11E CY12E

| Cr

ore

-20

-10

0

10

20

30

40

50

60

%

Net Sales Growth (%)


EBITDA margin expected to improve in CY12E after decline in CY11E We expect the EBITDA margin to decline to 8.4% in CY11E on account of an increase in power & fuel cost, employee cost and freight cost. Total expenditure per tonne is expected to increase ~8% YoY in CY11E to | 3045 per tonne from | 2815 per tonne in CY10. However, the margin is expected to improve to 10% in CY12E, mainly driven by an improvement in realisation. The EBITDA is expected to grow at ~23% CAGR during CY10-12E to | 150.2 crore in CY12E from | 98.9 crore in CY10. Exhibit 24: EBITDA and EBITDA margin (%)

103.388.7

159.7

98.982.3

150.2

0.020.040.060.080.0

100.0120.0140.0160.0180.0


| Cr

ore

0.02.04.06.08.010.012.014.016.018.020.0

%

EBITDA EBITDA Margin (%)




Net profit to increase after CY11E The reported net profit is expected to decline ~48% YoY in CY11E to | 33.1 crore from | 63.3 crore in CY10 on account of a decline in operating margin, increase in interest and depreciation cost. In CY12E, we expect the net profit to increase ~50% YoY to | 49.6 crore on the back of an improvement in operating margin. The depreciation cost is expected to increase by ~25% YoY in CY11E and ~46% in CY12E on account of planned capex of ~| 1200 crore during the period. The interest cost is also expected to increase to | 7.3 crore in CY11E and to | 27 crore in CY12E from | 4.2 crore in CY10 on account of debt borrowing of | 562 crore during the period.

Exhibit 25: PAT and PAT margin (%)

97.7

125.4134.0

63.3

33.149.6

0

30

60

90

120

150


| Cr

ore

0

4

8

12

16

20

%

PAT PAT Margin


Return ratios to remain under pressure

On the back of huge capital outflow of over | 1200 crore, the return ratios would remain under pressure in CY11E and CY12E. Return ratios, RoNW and RoCE are expected to decline to 3.8% and 4.1%, respectively, in CY11E from respective ratios of 8.9% and 8.1% in CY10 on account of a decline in earnings in CY11E. In CY12E, the ratios are expected to improve to 6.9% and 5.8%, respectively.

Exhibit 26: Return ratios

6.93.8

8.9

18.1

10.9

24.4

5.84.1

8.1

26.8

20.6 18.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0


%

ROE ROCE




Valuation After the expansion of 2.9 MTPA in CY12E, the cement capacity will double in CY12E to 6.0 MTPA from the current capacity of 3.1 MTPA. We expect HCIL’s net sales to grow at ~32% CAGR (CY10-12E) and EBITDA to grow at ~23% CAGR during the same period.

In the last downturn phase of FY01-04, the company (Mysore Cements prior to acquisition by HeidelbergCement AG) was trading near $30 per tonne with return ratios near zero. This was at nearly 50% discount to the replacement cost of $60 per tonne during the phase. Soon after the acquisition in July 2006, the company was trading near $100 per tonne. At the CMP of | 39 per share, the stock is trading at 26.7x and 17.8x its CY11E and CY12E earnings, respectively. It is trading at 15.5x and 9.4x its CY11E and CY12E EBITDA, respectively. On replacement cost basis, the stock is trading at $91 per tonne and $52 per tonne at its CY11E and CY12E capacities, respectively.

We have used the replacement cost method to value the stock and assigned value of $55 per tonne to its CY12E capacity of 6 MTPA. This is nearly a 55% discount to the current replacement cost of $125 per tonne. Hence, we are initiating coverage on Heidelberg Cement India with a BUY rating and a target price of | 44 per share.

Exhibit 27: EV/tonne chart

-400-200

0200

400600800

10001200

14001600

Mar

-01

Dec-

01

Sep-

02

Jun-

03

Mar

-04

Dec-

04

Sep-

05

Jun-

06

Mar

-07

Dec-

07

Sep-

08

Jun-

09

Mar

-10

Dec-

10

| Cr

ore

EV 45 60 102 30

$ 102

$ 60

$ 45

$ 30


Exhibit 28: EV/EBITDA chart

(500)

-

500

1,000

1,500

2,000

Mar

-01

Dec-

01

Sep-

02

Jun-

03

Mar

-04

Dec-

04

Sep-

05

Jun-

06

Mar

-07

Dec-

07

Sep-

08

Jun-

09

Mar

-10

Dec-

10

EV 14.2x 10.0x 5.0x

14.3 x

10 x

5 x




Exhibit 29: Valuation (replacement cost method)

RemarksCement Capacity (CY12E) MTPA 6.0Target EV/Tonne $ 55Target EV | Crore 1518.0Net Debt (CY12E) | Crore 525.9Target Market Cap | Crore 992.1No. of Shares Crores 22.7Target Price |/Share 44CMP |/Share 39Potential Upside % 12.3


Exhibit 30: Peer group valuation

MCap (| Cr) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12EACC* 18640 16.6 24.1 18.7 10.6 13.1 9.7 2.9 2.9 2.7 122 125 119Ambuja Cement* 19276 15.5 18.2 16.0 9.3 9.5 7.9 2.6 2.4 2.2 142 139 130Ultratech Cement 26214 11.0 19.7 18.4 13.2 10.7 8.6 2.6 2.1 2.2 251 119 119Shree Cement 6013 8.9 32.3 16.7 4.0 7.9 5.5 3.1 2.9 2.5 126 118 95India Cement 2703 8.3 68.4 21.1 5.2 11.5 7.8 0.8 0.8 0.8 73 76 82JK Cement 937 4.1 51.6 15.0 4.3 10.2 6.9 0.9 0.9 0.9 52 57 58JK Lakshmi Cement 537 2.3 12.9 6.6 1.8 5.8 5.0 0.5 0.5 0.5 35 41 47Orient paper 945 5.9 8.8 6.4 4.5 5.1 3.9 1.3 1.2 1.0 45 39 33Mangalam cement 302 2.5 16.4 14.0 1.0 5.9 4.5 0.8 0.8 0.7 21 27 26Birla Corporation 2464 4.4 7.7 7.7 2.4 5.0 5.7 1.4 1.2 1.1 62 63 56Heidelberg Cement* 884 14.0 26.7 17.8 6.7 15.5 9.4 1.1 1.1 1.0 48 91 52

P/BV (x) EV/Tonne ($)P/E (x) EV/EBITDA (x)

Source: Company, ICICIdirect.com Research * FY11E and FY12E indicates CY11E and CY12E



Exhibit 31: Profit and loss statement | Crore CY07 CY08 CY09 CY10 CY11E CY12E

Net Sales 594.6 761.3 936.4 865.5 975.0 1509.4

Growth (%) 43.5 28.0 23.0 -7.6 12.6 54.8

Change in stock -8.0 5.0 -0.3 1.0 0.0 0.0

Raw material cost 86.1 153.8 221.0 210.4 220.9 297.1

Power & Fuel cost 171.8 193.5 176.5 194.6 257.4 434.5

Employee cost 69.0 62.2 69.7 64.7 86.1 117.3

Freight cost 57.5 118.4 113.6 115.4 130.5 202.7

Others cost 114.9 139.7 196.1 180.5 197.9 307.5

Total Expenditure 491.3 672.6 776.6 766.6 892.7 1359.1

EBITDA 103.3 88.7 159.7 98.9 82.3 150.2

Growth (%) 74.5 -14.1 80.1 -38.1 -16.8 82.6

Other Income 12.5 44.3 45.2 30.1 10.5 3.4

Depreciation 14.4 21.4 25.8 28.9 36.0 52.6

EBIT 101.3 111.6 179.2 100.2 56.8 101.0

Interest 3.0 4.1 4.4 4.2 7.3 27.0

Exceptional Items 0.0 0.0 0.0 0.0 0.0 0.0

PBT 98.3 107.5 174.8 95.9 49.5 74.0

Growth (%) 256.2 9.3 62.6 -45.1 -48.4 49.5

Tax 0.6 -17.9 40.7 32.7 16.3 24.4

PAT 97.7 125.4 134.0 63.3 33.1 49.6

Growth (%) 28.4 6.9 -52.8 -47.6 49.5

Adjustments 0.0 0.0 0.0 0.0 0.0 0.0

Addjusted PAT 97.7 125.4 134.0 63.3 33.1 49.6

Adjusted EPS 6.2 7.9 5.9 2.8 1.5 2.2

Exhibit 32: Balance sheet

| Crore CY07 CY08 CY09 CY10E CY11E CY12E

Equity Capital 171.5 240.1 240.1 226.6 226.6 226.6

Reserves & Surplus 193.1 369.7 496.0 556.6 584.5 628.7

Shareholder's fund 364.6 609.8 736.1 783.3 811.1 855.4

Total Loans 0.0 10.0 2.0 0.0 405.0 562.5

Deffered Tax Liability 0.0 0.0 16.5 30.1 30.1 30.1

Sources of funds 364.6 619.8 754.5 813.4 1246.2 1448.0

Gross Block 679.4 851.6 913.2 953.2 1617.8 2136.8

Accumulated depn 504.1 579.0 599.6 628.0 664.0 716.6

Net Block 175.3 272.5 313.6 325.2 953.8 1420.2

Capital WIP 9.5 54.7 57.6 428.0 413.4 57.7

Total Fixed Assets 184.8 327.3 371.2 753.2 1367.2 1478.0

Intangible assets 1.5 2.5 3.9 5.7 8.2 10.7

Investments 0.1 0.1 0.1 0.0 0.0 0.0

Inventories 61.7 71.1 64.5 71.2 83.8 156.1

Debtors 12.5 19.9 22.2 24.3 29.1 53.6

Cash & Bank Balance 180.7 337.7 495.3 219.3 12.6 36.6

Loans & Advances 70.8 96.0 114.9 146.8 165.2 166.8

Other current assets 3.1 3.9 3.7 1.6 4.4 4.8

Total current assets 328.9 528.5 700.6 463.0 295.1 417.9

Creditors 93.7 158.6 213.8 300.1 314.2 347.4

Provisions 57.0 80.0 107.4 108.4 110.0 111.2

Total current liabilities 150.7 238.7 321.2 408.5 424.2 458.6

Net Current assets 178.1 289.9 379.4 54.5 -129.1 -40.6

Application of funds 364.6 619.8 754.6 813.4 1246.2 1448.0



Exhibit 33: Cash flow statement

| Crore CY07 CY08 CY09 CY10E CY11E CY12E

Profit after tax 97.7 125.4 134.0 63.3 33.1 49.6

Depreciation 14.4 21.4 25.8 28.9 36.0 52.6

Change in WC 22.3 45.2 68.1 48.8 -23.0 -64.4

CF from operations 134.4 192.0 227.9 141.0 46.1 37.8

Pur of fixed assets -16.1 -164.9 -71.1 -412.7 -652.5 -165.9

Sale of Investments 0.0 0.0 0.0 0.1 0.0 0.0

Inc in def tax liability 0.0 0.0 16.5 13.7 0.0 0.0

CF from Investing -16.1 -164.9 -54.6 -398.9 -652.5 -165.9

Change in networth 0.0 57.4 -3.4 -13.5 0.0 0.0

Change in debt 0.0 10.0 -8.0 -2.0 405.0 157.5

Others -2.9 62.4 -4.3 -2.6 -5.3 -5.3

CF from financing -2.9 129.8 -15.8 -18.1 399.7 152.2

Net Cash flow 115.4 156.9 157.6 -276.0 -206.7 24.1

Opening Cash balance 65.3 180.7 337.6 495.2 219.2 12.5

Closing Cash balance 180.7 337.6 495.2 219.2 12.5 36.6


Exhibit 34: Key ratios

Expenses (% of sales) CY07 CY08 CY09 CY10E CY11E CY12E

Raw material 13.1 20.9 23.6 24.4 22.7 19.7

Power & Fuel 28.9 25.4 18.9 22.5 26.4 28.8

Employee 11.6 8.2 7.4 7.5 8.8 7.8

Freight 9.7 15.6 12.1 13.3 13.4 13.4

Others 19.3 18.3 20.9 20.9 20.3 20.4

Profitability ratios CY07 CY08 CY09 CY10E CY11E CY12E

EBITDA Margin (%) 17.4 11.7 17.1 11.4 8.4 10.0

PAT Margin (%) 16.4 16.5 14.3 7.3 3.4 3.3

Per Share Data CY07 CY08 CY09 CY10E CY11E CY12E

Revenue per share 37.6 48.2 41.3 38.2 43.0 66.6

Book Value per share 23.1 38.6 32.5 34.6 35.8 37.7

Cash per share 11.4 21.4 21.9 9.7 0.6 1.6

EPS 6.2 7.9 5.9 2.8 1.5 2.2

Cash EPS 7.1 9.3 7.1 4.1 3.1 4.5

DPS 0.0 0.0 0.2 0.0 0.2 0.2




Exhibit 35: Key ratios

Return ratios CY07 CY08 CY09 CY10E CY11E CY12E

RoNW (%) 26.8 20.6 18.2 8.1 4.1 5.8

RoCE (%) 24.4 10.9 18.1 8.9 3.8 6.9

RoIC (%) 27.0 17.3 23.2 11.8 4.0 5.1

Financial Health ratio CY07 CY08 CY09 CY10E CY11E CY12E

Operating CF (| Cr) 134.4 192.0 227.9 141.0 46.1 37.8

FCF (| Cr) 108.8 -13.0 116.1 -297.5 -609.6 -104.5

Capital Empl. (| Cr) 364.6 619.8 754.5 813.4 1246.2 1448.0

Debt To Equity (x) 0.0 0.0 0.0 0.0 0.5 0.7

Net Debt to Equity (x) 0.0 0.0 0.0 0.0 0.5 0.6

Debt To Cap Empl (x) 0.0 0.0 0.0 0.0 0.3 0.4

Interest Coverage (x) 29.2 16.4 30.4 16.6 6.3 3.6

Debt to EBITDA (x) 0.0 0.1 0.0 0.0 4.9 3.7

Dupont Ratio Analysis CY07 CY08 CY09 CY10E CY11E CY12E

PAT/PBT 99.3 116.7 76.7 66.0 67.0 67.0

PBT/EBIT 110.7 159.6 130.5 136.9 106.9 75.8

EBIT/Net Sales 14.9 8.8 14.3 8.1 4.7 6.5

Net Sales/Total Asset 163.1 122.8 124.1 106.4 78.2 104.2

Total Asset/Net Worth 100.0 101.6 102.5 103.8 153.6 169.3

RoNW (%) 26.8 20.6 18.2 8.1 4.1 5.8

Turnover Ratios CY07 CY08 CY09 CY10E CY11E CY12E

Asset Turnover 1.6 1.5 1.4 1.1 0.9 1.1

Inventory Turnover 9.6 11.5 13.8 12.8 12.6 12.6

Debtor Turnover 47.6 47.0 44.5 37.3 36.5 36.5

Creditor Turnover 6.3 6.0 5.0 3.4 3.2 4.6

FCF Calculation (| Cr) CY07 CY08 CY09 CY10E CY11E CY12E

EBITDA 103.3 88.7 159.7 98.9 82.3 150.2

Less: tax 0.6 -17.9 40.7 32.7 16.3 24.4

NOPAT 102.6 106.6 119.0 66.3 65.9 125.8

Capex -16.1 -164.9 -71.1 -412.7 -652.5 -165.9

Change in WC 22.3 45.2 68.1 48.8 -23.0 -64.4

FCF 108.8 -13.0 116.1 -297.5 -609.6 -104.5

Valuation CY07 CY08 CY09 CY10E CY11E CY12E

P/E (x) 6.3 4.9 6.6 14.0 26.7 17.8

EV/EBITDA (x) 6.8 6.3 2.4 6.7 15.5 9.4

EV/Sales (x) 1.2 0.7 0.4 0.8 1.3 0.9

EV/Tonne ($) 74.6 39.9 28.0 47.6 91.5 52.2

Dividend Yield (%) 0.0 0.0 0.4 0.0 0.5 0.5

P/BV (x) 1.7 1.0 1.2 1.1 1.1 1.0




RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

[email protected]

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

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