cement industry ic -aditya vikram jha- rkg

R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 1

Cement & Construction Initiating Coverage | 18th Nov, 2011

ACC CMP 1144 Ambuja CMP 146 UltraTech CMP 1143 HOLD TP 1218 HOLD TP 160 HOLD TP 1211

Market Data*

Company ACC Ambuja UltraTech

Bloomberg ACC IN ACEM IN UTCEM IN

Reuters ACC.BO ABUJ.BO ULTC.BO

Div Yield (%) 2.7 1.7 0.5

52 Week High 1146.5 166.5 1188.0

52 Week Low 917.0 112.0 890.0

Eq. Cap. (`mn) 1877.4 3065.3 2740.5

FV (`) 10 2 10

M. Cap (` mn) 210481.3 225526.1 309695.4

Avg.10d NSE Vol. 249886 1850679 135916.8

Key Financials

ACC CY10 CY11E CY12E

Revenue (` mn) 77173 93175 102029

EBITDA (` mn) 15540 18054 19406

PAT (` mn) 11201 11391 12213

Growth (%) -4.0 21.0 10.0

EPS (`) 59.7 60.6 65.1

PE (x) 18.0 16.0 15.0

PBV (x) 2.9 2.7 2.5

EV/EBITDA (x) 10.3 11.6 9.0

ROE (%) 17.9 17.0 16.9

Ambuja CY10 CY11E CY12E

Revenue (` mn) 73764 80553 94815

EBITDA (` mn) 18236 19665 23581

PAT (` mn) 12636 12237 15146

Growth (%) 4.0 9.0 18.0

EPS (`) 8.3 8.6 9.9

PE (x) 18.0 19.0 15.2

PBV (x) 3.0 2.2 2.4

EV/EBITDA (x) 11.3 10.5 9.2

ROE (%) 17.9 15.8 17.1

UltraTech FY11 FY12E FY13E

Revenue (` mn) 132099 177214 197467

EBITDA (` mn) 25424 37189 43559

PAT (` mn) 14024 20094 23048

Growth (%) 87.0 34.0 11.0

EPS (`) 87.8 51.2 73.3

PE (x) 22.1 16.0 14.0

PBV (x) 2.9 2.4 2.1

EV/EBITDA (x) 12.4 8.2 7.6

ROE (%) 18.4 17.4 17.0

Price Trend

80

90

100

110

120

130

140

Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

ACC Ambuja UltraTech

The lumpy picture…..

The Indian cement industry, which has been in an uptrend since ’09, is

caught up in growing concerns of impending overcapacity by FY’12,

which is believed to be overdone. We believe that FY’12-13 would

continue to witness oversupply, while FY’12 could witness demand-

supply parity, based on our analysis of incremental supply and expected

fragile demand. While the industry would continue to face cost

pressures as well as Government intervention. However, we rule out

aggressive price hikes by cement players and thus prefer stocks with

strong volume growth and/or cost savings.

Volume sacrifice will lead to stable pricing

We expect companies to sacrifice volumes and operate capacities at

lower utilization rates to control pricing in the markets. We believe

cement realizations for the companies will be slightly higher in FY’12,

even if the retail prices come down by 3‐4%, due to benefit of excise

duty cuts not passed on to the consumers. For FY’13, we are

estimating a 5% Y-o-Y increase in realizations, only to start from

H2FY’13, as capacity addition may slow down.

Excess Supply concerns persist

We are estimating addition of 48mn tonnes of capacity by FY’13.

However we do not see pricing disruptions due to this supply due to 1)

slow progress in plant stabilization, 2) delay in market establishment

and 3) pricing discipline exhibited by the players. Moreover we believe

that the industry may resort to measures like increased OPC

production (to cater to infrastructure demand and to keep clinker

utilization levels optimal) and reduced blending ratios to contain the

additional supply.

Cost pressures to be passed on

The cement industry is likely to face severe cost pressures from rising

cost of coal, pet coke, fly ash and freight. However, these would be

passed on in a scenario of supply tightness, although we rule out

aggressive price hikes due to fear of Government intervention.

Cement Demand growth to be robust at 10% p.a.

We believe that the strong growth in dispatches shown by the industry

in the last 6 months as a result of government expenditure and rural,

semi urban housing demand is likely to continue for the next couple of

years. The government in the recent budget 2010‐11 has announced

massive infrastructure spending which coupled with target of

~US$540bn infrastructure investments during XIth plan will lead to

healthy demand for cement. Reform to stall further, current valuation

priced worst scenario.

Key Risks: Key risks to our call are 1) faster of capacity addition

leading to short term supply glut in the market, 2) aggressive pricing

and 3) increase in operating costs like coal, freight and power.

Research Analyst:

Aditya Vikram Jha [email protected]


TABLE OF CONTENTS

Industry Page

Industry at a glance ………………………………………………………….. 3

Demand driver..………………………………………………………………… 3

Industry Characteristics …………………………………………………… 4

Structural improvement …………………………………………………… 5

Pricing analysis ………………………………………………………………… 6

Cost analysis … …………………………………………………………………. 7

Profitability analysis ………………………………………………………… 9

Capex Analysis ………………………………………………………………….. 9

Cement Industry & Valuation……………………………………………… 10

Companies

UltraTech Cement ……………………………………………………………… 13

ACC…………………………………………………………………………………… 18

Ambuja Cement…………………………………………………………………. 22


Industry at a glance

Over the past several years, Indian cement

industry has grown in tandem with India’s

economic growth, which helps the country to

become the second largest producer and

consume of cement in the world. The demand

for cement is correlated with country’s GDP

growth, since infrastructure and housing

construction is the key growth driver for both

GDP and cement industry. The average growth

in demand for cement industry was around was

8.25%, while average GDP growth was 7.4%

during the period FY’01-FY’11. Cement

consumption in India reached ~210MT at the

end of March 2011, with domestic market value

of the industry reached more than `800 billion. Cement companies have increased their production and capacity over

the year to keep pace with the increasing demand in the country. Its installed capacity increased from ~115 MTPA in

FY’01 to ~327 MTPA in FY’11, while its production increased from ~94 MTPA in FY’01 to ~241 MTPA in FY’11.

Demand drivers

India’s cement industry has demonstrated healthy growth in the past

decade, primarily driven by increased investments in the residential

real estate and infrastructure. During FY’06-FY’11, the residential

real estate sector alone contributes ~62% of the total domestic

cement demand in the country, given the intense shortage of housing

in the country, this segment has been the primary driver for the

cement industry, though its share is expected to come down ~55% in

FY12-FY14 from ~62% during FY06-FY11. Over the years, increasing

real estate requirement in urban India has been the primary

contributor to the cement demand, however going forward demand

could be driven by semi-urban and rural housing needs. The total

shortage in housing during 2010 was around 46.5 million units, which may slightly decline to 41.4 million units by the

end of 2014. The decrease is due to the government’s thrust on improving rural housing by providing houses to

homeless under various development schemes and by enabling sum development programs in urban areas under

JNNURM. However, housing shortage in urban areas

will continue to rise owing to migration towards

urban areas and increasing trend of nuclear families.

Housing shortage in urban areas is likely to touch a

walloping 21.7 million units by the end of 2014. On

the other hand rural areas will witnessed a reduction

in housing shortage due to migration and conversion

of kutcha houses into pucca houses. Election has also

gained importance in cement consumption as

development activity increases during election

seasons. Over the next 12 months, many of the key

states like Uttar Pradesh, Gujarat, Goa, Manipur,

Punjab and Uttrakhand, will be going for elections and the cement demand are expected in this regions. While in 2014

there is National election.

Increasing investment activity in infrastructure sector have resulted in a consequent growth in the demand for

cement, Economic growth during the past few years has increased the need of quality infrastructure facilities in the

country. The government has increased its total investment in the sector from $24 billion (5% of country’s GDP) in

-2

0

2

4

6

8

10

12

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11

Gro

wth

%Source: CMA, Planing Commission, R K Global Research

Comparison of India GDP and cement consumption growth

Cement consumption growth GDP growth

Demand driver : Segment break up

Source: R K Global Research

15.118.4 19.3 20.5 21.7

34

30.126.7 26

19.7

-2

3

8

13

18

23

28

33

38

2001 2005 2008 2010 2014

Mil

lio

n U

nit

s

Source: CRISIL, R K Global Research

Housing shortage in India

Urban Rural

Residential

real estate

55%

Industrial

5%

Commercial

real estate

12%

Infra-

development

28%


FY’02 to $83.5 billion (7.2% of Country’s GDP) in FY’10. The total investment target for infrastructure sector during

11th five year plan is $514 billion (9% of country’s

GDP) i.e. 2.3 times more than investment during

10th five year plan. The bulk of the investment

planned during the 11th five year plan is likely to

be observed by the power, road and highway,

railway and port segment. In the draft bill of 12th

five year plan, the total planned investment in

infrastructure has increased from 8% of GDP in

FY’12E to 10.3% of GDP in FY’17. The total

investment in infrastructure is planned to be ~$1

trillion during twelfth plan period. As a result, the

share of infrastructure sector in cement

consumption is expected to increase from 20%

during FY06-FY10 to 28% during FY10-FY14. In

the infrastructure segment, road has been the biggest contributor to the cement demand and are likely to maintain

their position in the Twelfth Five Year Plan well. In the near term the cement industry is expected to go through tough

phase stained by increase in capacity

additions, sluggish demand resulting in

fall in capacity utilization and

profitability. From FY12- FY14, the

industry is expected to add ~65MT of

capacity, which is unlikely to be

absorbed during the same period. The

capacity utilization is expected to be

remaining ~74% only to go up from

H2FY13. Cement price and margin for

cement producers are expected to follow

capacity utilization trend. Most

expansion plans of large cement

producers are either completed or are on the verge of completion. This resulting in marginal fall in market share of

top 3 cements producers. While this happens to be temporary phenomenon and the future sky should appear to be

clear. However the south region will remain most affected due to capacity addition and capacity utilization is expected

to drop from ~72% in FY11 to ~ 68.5% in FY12, after which it will increase marginally.

Industry Characteristics

Cement industry can be characterized according to a) Cyclicality b) Seasonality c) Regional dynamics.

Cyclicality:

Indian cement industry has demonstrated an overall growth over the last few decades, since significant capacities

added during up cycle continued to be underutilized due to reduced growth in cement dispatches. FY’11 saw

moderation in prices and resultant fall in margins due to commission of the new capacities in the country. As of March

2011, the industry had effective surplus capacity of ~50MT, which is likely to increase to ~80MT by the end of FY12.

The industry is expected to witness this cycle, even in future, the down cycle in the industry in the anticipated future,

are likely to be primarily driven by the capacity overhang with slowing down in demand due to delay decision making

procedure on infrastructure by the government.

Down Cycle factors

1. Sluggish economic growth2. Decline in consumption3. Excess Capacity4. Decline in operating rate5. Decline in margins and price

Up cycle factors

1. Strong economic growth2. Increase in consumption3. Increase in operating rate4. Increase in margins and price5. Ecterance of new player and increase in capacity by existing players

Cyclicity of India's cement industry

24 26 32 3947

55

67

81

97

120132

55.2

5.45.6

5.86 6

6.5

7.2

8.28

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

20

40

60

80

100

120

140

FY'02 FY'04 FY'06 FY'08 FY'10 FY12E

Inv

estm

ent

(% o

f G

DP

)

Inv

estm

ent

( B

illi

on

USD

)

Source: Planning Commission, R K Global Research

Government investment in infrastructure

Infra investment % of GDP

8289

93 9588 85

7975

8692

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13E FY'14E

%

Mil

lio

n t

inn

es

Source: CMA, R K Global Research

Incremental demend, effective capacity addition and operating rate

Incremental demand Addition to effective capacity Operating rate


Seasonality:

The seasonal nature of the industry affects demand and supply scenario, demand does not remain uniform

throughout the year and witness periodic fluctuations. The demand decline during monsoons (July – September

quarter) and is highest during January-March quarter.

Regional dynamics:

The bulky nature of cement and its key ingredient, limestone,

and the freight cost associated with these commodities over

long distance, the industry has formed regional characteristics.

A cement plant is generally located near limestone mine with

only exception being of split grinding units, the cement

produced in a particular region predominantly get consumed

in the same region. The presence of limestone deposit plays an

important role in concentration of the industry in a particular

region, and are only concentrated in some regions of India like:

Rajasthan, Gujarat, Chattisgarh, Maharashtra, Madhya Pradesh,

Andhra Pradesh and Karnataka, most of the cement plant are

located in and around these states and cater to demand

originated from within these states and from neighboring regions, resulting the industry has classified into five

region- north, south, east west and central, while demand and supply also vary regionally.

Structural improvement

The cement industry has witnessed several structural improvements over the year like a) Increasing concentration

level, b) Improvement in efficiency, c)Entry of global players in Indian market and d) Increasing use of captive

thermal power plants.

Increasing concentration level:

The primary structural improvement in Indian cement industry has been the increase in construction, resulting

change in market share of large players. The share of top 3 players in total capacity has increased from 39% in FY’05

to 47% in FY’11, with their capacity increasing from 53 million tonnes to 109 million tonnes during the same period.

This concentration has not only inculcated an enhanced supply discipline within the industry, but has also made it

difficult for cement producers to only compete on price any more. It is also seen that cement makers are also focusing

on branding and product differentiating and generate higher realization compared to unbranded cement. For example

ACC, Ambuja and UltraTech Cement’s retail selling prices are 3-4% higher than that of unbranded cement.

Improvement in efficiency:

The industry has also witnessed enhancement in efficiencies across the board over the years. Most cement producers

are now equipped with energy-efficient kilns and waste-heat recover plants. Apart from cost savings, these measures

have also reduced the cost differential between different players.

Entry of global player in Indian market:

The shape on Indian cement industry change with the entrance of global player in 2005, although Lafarge was the first

entrant in the year 1998, the focus of other player gained momentum with entry of Holcim. As on date, most global

major have either entered the Indian cement industry or are closely evaluating the feasibility of investing in the

country.

Global players in India

Player Year of Entry Capacity add-up till FY'10 (MTPA) Lafarge 1998 6.6 Italcementi 2000 3.4 Holcim 2005 46 Heidelberg 2006 3.1 Cimpor 2007 1.1 CHR 2009 3.2 Vicat 2010 2.5 Source: Merger Market, Company, CMA, RK Global Research

East 17%

West19%

central15%

North20%

South29%

Demand break -up by region



Captive power plants:

The cement industry has witnessed a boost in captive power generation to improve operating margins and ensure

regular supply of electricity. At an all India level 65% of the cement produced in FY’11 was through captive power as

compared to 45.3% in FY’01

Improved blending ratio:

Ordinary Portland Cement (OPC) has been the

most common type of cement in India, though

the industry player’s has introduced different

variety of blended cement, such as fly ash (by

product of power plants) and slag (waste

material from steel plants) due to cost

effectiveness of the blended cement, by blending

fly ash or slag with Ordinary Portland cement

(OPC), cement manufacturers can lower power,

fuel, and raw material costs, thereby improving

their operating margins. examples: Pozzolona

Portland Cement (PPC), Slag cement and other

type of blended cement having similar strength

with lower production cost, therefore, the industry has witnessed a rise in blending ratios over a period of time, as

well as in the share of blended cement in overall cement production to 73% in FY’11 from 57% in FY’05.

Pricing and Cost Analysis

Pricing Analysis:

Being cyclical nature, the demand and supply

scenario changes time to time, resulting in

large fluctuation in cement price and

utilization rate. The price tends to increase

during the period of high demand and higher

capacity utilization, while witness a

downward movement if the industry is in low

capacity utilization. However the cement

prices have seen overall CAGR growth of

~6%. Cement price witnessed a turnaround in

2005 with increase in demand due to increase

in investment in road development and

accelerating growth in housing construction and increase in demand from the Middle East. Moreover, during this

period, there was no significant capacity addition, which leads to decline in demand–supply gap and higher utilization

rate. However, since FY’10, the cement industry is

suffering from sluggish demand growth, over

capacity and rise in input cost, resulting in the

prices to decline across regions, the decline which

started in the southern region widen the price

differential, between southern and other region,

leading to cement flows from southern region to

others parts of India, which in turn resulted a fall

in cement price across India. Companies in the

southern region were affected the most as cement

prices in the region has witnessed a sharp decline,

However there was a price recovery in Oct 2011

with across region by around ~`22 per 50kg bag

due to increase in cement prices by large players.

1.23

1.25

1.32

1.31

1.34

1.21

1.27

1.30

1.31

1.32

1.2

1.2

1.2

1.3

1.3

1.3

1.3

1.3

1.4

FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13 FY'14

Cem

ent

pro

du

ctio

n /

clin

ker

pro

du

ctio

n

source: R K Global research

Blending ratio: Cement vs Clinker production

130

150

170

190

210

230

250

270

290

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 H1FY'12

Cem

ent

pri

ce (`

per

50

kg

bag

)

Source: CMA

Cement Price

Kolkata Delhi Mumbai Chennai All India

50

55

60

65

70

75

80

85

90

95

100

50

100

150

200

250

300

FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E

Cap

acit

y U

tili

zati

on

(%

)

Cem

ent

Pri

ce (`

per

50

kg

bag

)

Source: CMA, E&Y, R K Global research

All India cement price and utilization trend

All India average annual price Capacity Utilization

Decline in price growth

due to economic

slowdown and capacity

addition

Increase in Price due to

robust demand from real

estate industry


Cost Analysis:

The operating cost of Indian cement companies have grown at a CAGR of ~5.2% from FY’04. Over the years, the share

of energy cost has declined, while that of freight cost has seen a rise in total operating cost. The average cost of cement

companies increased at a CAGR of mere 6% from FY’04, largely due to commission of captive power plant, use of

energy efficient kilns by cement companies, as well as increase in share of blended cement in overall production. The

share of raw material cost has also increased due to rise in input cost as well as 25% increase in royalty on limestone.

Raw Material:

Raw material costs account for ~25% of the key operating cost of cement manufacturing. Limestone accounts for 40%

of the total raw material cost, with other materials such as gypsum, fly ash, slag, bauxite, red oxide and other

consumable contributing the remaining cost. In recent years, there has been a rise in the cost of these consumable,

which has resulted in raw material costs, almost doubling over the last five year.

Power:

The cement industry is one of the top five

energy-intensive under EC Act, 2011.

Power cost account for ~20% of the

operating cost. ~95kwh of power is

required to produce one tone of cement.

Therefore, availability of stable and

continues power supply is very important

for cement industry. However the

demand and supply scenario of power is

very bleak in the country. The demand for

power is growing at a CAGR of 6.3% from

FY’05 to FY’11, the supply increased at a

CAGR of only 5.9% during the same

period. As a result, India continues to be

deficit in power supply with the power shortage in the country increasing from around 7.3% in FY’05 to 10.4% in

FY’11. However, cement industry has witnessed an increased thrust in captive power generation to improve

operating margin and ensure regular supply of electricity. At an all India level, ~66% of the cement production in

FY’11 was through captive power.

Currently, ~3230 MW of cement power

capacities have been installed by cement

players. Due to cost efficient, a larger

portion of capacity installed are coal

based, followed by diesel based

capacities and wind based. Captive

power plant also act as cost savings for

cement companies as their average cost

of generating captive power is ~50%

lower than that of the power source

from the third parties. By FY’14, captive

power is expected to contribute ~80%

of the cement industry’s power

requirements. Over the next 2 years

around ~500 MW of coal based captive power capacity is expected to add up. This is ~25.6% growth over existing

coal based power capacity. The cost of generating power from coal based power plant is ~`2.6 per kwh, which is 35%

less than the selling price of SEBs. With rise in the number of captive thermal power plant, the power cost of cement

companies are likely to decline over the next four to five years. Further, India’s cement industry generates 18MW of

electricity by processing heat generated from producing cement, as per CMA estimation, the industry has the potential

to generate 500-600 MW of electricity by tapping the heat. Increased use of captive power today not only reduces the

cost of manufacturing cement, but also provides revenue generating opportunities. The ECA Act 2007 allows

7.8

7.5

8.8

7.1

7.3 8.3

9.9

9.8

11.1

10.1

10.4

10.6

5

6

7

8

9

10

11

100000

200000

300000

400000

500000

600000

700000

800000

900000

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E

Sho

rtag

e %

Mil

lio

n U

nit

s (M

U)

Sourav: Central Electricity Authority

Power demand-supply position in India

Demand Supply Shortage %

45.3

41.3

41.9

39.2

47.8

49.4

48.2

48.6

56.5 64

66.5

69.4

20

25

30

35

40

45

50

55

60

65

70

20

40

60

80

100

120

140

160

180

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E

Cem

ent

Pro

du

ctio

n(%

)

Cem

ent

Pro

du

ctio

n (

MT

)

Source: CMA, Crisil, R K Global Research

Cement roduction by use of captive power

Cement production by use of captive power (MT)Cement production by use of captive power to total production (%)


companies to sell power from their captive units without seeking prior licenses. Open access has enabled captive

power producer across industries, including cement, to channel power to any destination, in the mean while

increasing power deficit gap has lead to scale up power tariffs from merchant companies. Cement manufacturers

with excess captive power are exporting power to other industries.

Coal:

The cement industry is third largest consumer of coal in India after power and steel. Coal cost account for ~25-305 of

key operating costs. Coal is primarily required for the production of clinker with the consumption of ~700 kcl per kg

of clinker. Although India has abundant coal reserve of ~276.8 billion tones, only 40% are confirmed, while the

quality of the coal is a serious concern, as Indian coal has high ash content and low calorific value. Due to low calorific

value, India’s import good quality coal from Australia, Indonesia, Russia and South Africa. India’s total coal import is

expected to increase from 59 million tonnes in FY’09 to 152 million tonnes in FY’14. However, the coal-sourcing

arrangement of cement companies has evolved over period of time. While their fuel supply agreements with

government collieries have been their traditional source, Indian cement companies are now increasingly looking for

mine- acquisition opportunities in domestic as well as overseas territories.

Coal procurement optins

Suitable for plant located near coal qurries

Supply dependent on demand from other key sectors including power and steel

Fuel Supply Agreement (FSA)

Suitable for plant located ports

Prone to fluctuation in international coal price

Imports

Suitable for procuring interim shortfall and urgent requirements.

Subject to prevalent market prices.

Open marketpurchases

Lignite and pet coke

Suitable for procuring shortfall

Alternative fuel

Suitable for large cement plants

Efficiency subject to expertise in coal mining

Acquisitins of coal mines

Suitability

Limitations


Profitability Analysis:

As we know cement industry is highly

cyclical and therefore the profitability of

cement companies is highly dependent on

business cycle. The Industry has seen a

turnaround from FY’05, while its EBITDA per

tonne touched the highest level of ~`1300

during FY’08. However, with economic

slowdown, excess capacity and rise in input

cost, leads to the fall in average EBITDA per

tonne to ~`900 during FY’11. However

increase in price and decreasing production

by the industry players may help the cement

industry to scale up EBITDA per tonne

slightly too ~`956 during FY’12.

Capex Analysis:

Capex expenditure requiring setting up greenfield projects has increased substantially from 2005 to 2008 due to

surge in the price of all the constituents elements, primarily land and steel. The cost of a greenfield cement plant per

tonne went up from $90 in 2005 to $110 during FY’10, a similar rise of about 40% also occurred in brown field

project. Still price rose at a CAGR of ~12% from FY’03 to FY’11, resulting in the price rise of kiln and other machinery.

Similar is the case with copper price, while land and civic construction cost increased by ~50-100% (depending on

the location of the project. Although steel price rose during FY’11, they are still 20% less than the one prevailing

during FY’09. This resulted in reduced

replacement cost, which was estimated at

~USD 100 per tonne for 2009. Current

replacement costs are estimated to be

around USD 110-120 per tonne. Over the

medium to long term, steel price are

expected to rise by 17-18%. Another

important component i.e. land, is also

expected to increase by 20-21% per

annum. Consequently, the replacement cost

of the cement plant is expected to increase

in line with steel and land costs.

490

490

365

375

410

540

1020

1300

1100

1175

900

956

0

200

400

600

800

1000

1200

1400

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12EE

BIT

DA

(`

/ to

nn

e

Source: E&Y, CMIE, R K Global Research

EBITDA (Per tonne)

311

373

582

582

600

621

1,032

723

766

833

0

200

400

600

800

1000

1200

FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E

Av

g st

eel

pri

ce (

USD

/Mt)

Source: Index Mandi, R K Global Research

Steel price


Cement Industry and Valuations:

The cement industry in India has undergone a major shift over the last few years, Increase in industrial investment,

infrastructure and revival of real estate sector in last 3-4 years resulting in demand for cement to grow at a CAGR of

10.6% over the last 5 years.

The Indian cement Industry attracts investors primarily due to:

1. Low per capita consumption of cement:

India’s per capita production of 115 kilograms per year lags the world average of 250 kilograms & China’s

production of more than 450 kilograms per person. Also, the per capita consumption in India is estimated to be

150 kilograms per annum which is less than one-third China’s per capita consumption. Clearly, there remains

room for growth in the industry in India. Given the sustained growth in the housing sector, the Government’s

emphasis on infrastructure (at both the national and the state level) and increased global demand, the outlook for

cement industry is exceedingly bright.

2. Direct correlation national GDP:

Cement enjoys a positive correlation with economic growth, because it plays a critical role in construction and infrastructure creation, the backbone of an economy.

The cement industry which offers high visibility of revenue and earnings in phase of high growth typically loses its

shine during the time of economic slowdown. Cement stocks in India normally outperform the boarder market

indexes during the high growth period of FY’04-06; they underperform during FY07-09, just to recover again from

FY’10 onwards, however the short

term scenario looks scary, the

broader is expected to remain under

pressure on account of growing

concern for world major economy,

despite stable domestic economy,

slowdown in demand of cement and

expected widening in demand-supply

scenario due to excess capacity

addition, for short duration, cement

stocks may be seen under pressure.

Valuation:

Valuation in the cement sector is

closely related to its business cycle.

While replacement cost (EV/tonne) is

considered more relevant in boom periods, valuation during recessionary periods is influenced by operating cash

flow generating capacity of an individual cement company. We analyzed such factors which largely influence

valuation of a sector. By identifying historical trends we try to identify which companies are better equipped to

survive the slowdown and why they fetch premium valuations over other companies, in term of p/e multiples. P/E

valuation is also influenced by the leverage and coverage ratio of the companies. Acc and Ambuja trades at a premium

vis-a vis peers, due to better leverage and interest coverage ratios.

Name of Company Capacity (MTPA)

Mcap (`Million)

EV/tonne ($)

P/E (x)

P/B (x)

EV/EBITDA (x)

52 wks P/E

High Low

Average 115.4 17.8 2.3 9.8

ACC 24 212490.2 142.6 19.1 3.0 10.8 20.7 9.5

Ambuja 21 224356.6 170.2 18.9 2.7 10.0 21.1 11.6

UltraTech 52 303752.2 128.0 15.1 2.6 12.2 40.1 10.0

India Cement 15.5 21103.2 63.6 8.5 0.6 9.6 66.8 8.4

Madras Cement 11.3 25308.0 90.3 8.0 1.3 8.0 20.4 6.6

Shree Cement 13.5 70456.6 98.0 37.4 3.4 8.5 97.3 9.8

0

20

40

60

80

100

120

140

160

180

ACC Ambuja Cement

UltraTech Cement

India Cement

Madras Cement

Shree Cement

EV/tonne vis-a-vis Average Replacement cost of top 6 companies

EV/tonne($) Average Replacement Cost ($/tonne)


5

10

15

20

25

30

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011

ACC

EBIDTM % (LHS) TTP p/e x (RHS)

5

10

15

20

25

20

22

24

26

28

30

32

34

36

2006 2007 2008 2009 2010 2011

Ambuja Cement


5

10

15

20

25

30

35

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011

UltraTech Cement


6

16

26

36

46

56

66

76

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011

India Cement


4

6

8

10

12

14

16

18

20

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011

Madras Cement


4

24

44

64

84

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011

Shree cement


0.08 0.01

0.39

0.69

1.64

1.01

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

ACC Ambuja Cement

UltraTech Cement

India Cement

Madras Cement

Shree Cement

Source: Company, ACE Equity

Leverage ratio

Debt/Equity (FY'11/CY'10)

26.74

35.13

7.45

1.63 3.12 1.63

0

5

10

15

20

25

30

35

40

ACC Ambuja Cement

UltraTech Cement

India Cement

Madras Cement

Shree Cement

Source: Comapny, ACE Equity

Coverage ratio

Interest Coverage ratio


We have valued cement stocks using relative valuation method based on EV/EBIDTA multiples. We believe

EV/EBIDTA is a superior way of valuing cement stocks compared to other measures like P/E or EV/ton. EV/EBIDTA

captures the earnings capacity or the efficiency of the plants and also takes care of the capital structure of the

company. As against this, P/E or EV/ton may not be completely reliable as companies have had negative earnings in

the past distorting the P/E ratios and huge dispersion in premium or discount on EV/ton to replacement cost for

different companies. Replacement cost can be difficult to ascertain because of difference in cost of green field and

brown field expansion. Also EV/ton fails to look at the age of the plants thereby valuing the old and new plants or

green field or brown field capacities at the same valuation. Moreover, recently many companies have started putting

up captive power capacities which entails huge investments and leads to lower costs which does not get reflected in

EV/ton valuation method.

To arrive at our target multiples for individual stocks we have taken average EV/EBIDTA multiples since January

2000 which includes two cement cycles. What we observe is that the behavior of multiples during different stages of

cement cycle is different for different companies. For example, EV/EBIDTA of ACC was higher than Ambuja during

FY’01 down cycle due to very low operating profits of ACC (lower denominator). The EV/EBIDTA of ACC reverted to

mean during current cycle when its profitability improved to be at par with peers. On the contrary, Ambuja’s

EV/EBIDTA average is lower as the company’s operating profits have always been on the higher side as the company

has shown higher profits even in down cycles by maintaining higher utilization rates.

0.00

0.50

1.00

1.50

2.00

2.50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


EV/EBITDA to OPM ratio

ACC Ambuja

EV/EBITDA to OPM ratio

in the past higher EV/EBITDA of ACC was due to lower OPM as reflacted in this chart. However with similar profitabality of both these companies they are trading at a similar valuations now


ACC Cement |Cement & Constructions

Higher capacity utilization at existing cement units and 4.4mn

tonnes of additional cement capacity commissioned in 1HFY11

are likely to help UTCL deliver ~10% volume growth in FY12.

Waste gas utilization and setting up of logistic infrastructure and

captive power plants. Acquisition of stake in Dubai based Star

Cement Co. LLC is likely to enhance UTCL’s global reach, adding

3mn tonnes of grinding capacity. Net profit is likely to report a

CAGR of 22.6% during FY12- FY13.

Profitability and size of the company has improved and so should

valuations ‐Ultratech inherited comparatively inefficient plants from

L&T. Throughout the last4‐5 years, up gradation and modernization

initiatives by the company, has led to improved profitability of the

plants. We expect UltraTech’s profitability to be at par with other

industry majors like ACC and Ambuja which should lead to reduction

in Ultratech’s valuation discount to these two companies.

New capacity to support CAGR of 10.5%.

Higher capacity utilization at existing cement units and 4.4mn tonnes

of additional cement capacity commissioned in 1HFY11 are likely to

help UTCL deliver 11% volume growth in FY12. Brownfield expansion

is likely to boost volumes beyond FY13f. The pan‐India presence is

likely to reduce the impact of regional price volatility on profitability

Product and process changes likely to preserve profitability

Utilization of waste gases and setting up low‐cost captive thermal

power plants are likely to reduce the dependence on high‐cost

purchased power. Setting up of logistic infrastructure, bulk cement

terminals and material evacuation facilities are likely to help reduce

freight cost from `653 per tonne in FY12 to `620 per tonne in FY13.

Volumes for the ready‐mix concrete business are likely to grow at a

CAGR of 15% for the next three years.

Acquisition to de-risk business and enhance geographical reach

Acquisition of 80% stake in Star Cement Co. LLC, Dubai, is likely to

increase cement grinding capacity by 3mn tonnes. The acquisition is

likely to enhance global reach as Star Cement has cement plants in the

UAE, Bahrain and Bangladesh and a bulk cement terminal at Sudan.

We foresee the acquisition of the cement unit to be 3% EPS accretive.

Volume growth, cost reduction to boost net profit

We forecast revenues to report a CAGR of 12.3% during FY11‐FY13

driven by strong volume growth. Cement prices are likely to decline by

3.4% in FY12 due to weak demand in 1HFY12. As the pace of industry

capacity addition slows, cement prices are likely to revive by 1% in

FY12f. EBITDA/tonne is likely to increase from `935 in FY11 to `1,052

in FY12. Net profit is likely to grow at a CAGR of 22.6% during

FY11f‐FY13.

UltraTech Cement | Cement & Constructions

Market Data Bloomberg Code UTCEM IN Reuters Code ULTC.BO SENSEX 16123 NIFTY 4832 Dividend Yield (%) 0.5 52 Week High/ Low(`) 1207/883 Equity Capital(` mn) 2740.4 Face Value (`) 10 Market Cap (` mn) 313494.9 Avg. 10 day Vol. NSE 135916.8 Time Period (Months) 12

Key Market Ratios TTM EPS (`) 51.2 TTM Book Value (`) 389.0 TTM PE (x) 22.1 TTM P/BV (x) 2.9 TTM EV/EBIDTA (x) 12.4 EV/TTM Sales (x) 2.6 Mcap/TTM Sales (x) 2.4

Share-Holding Pattern (%)

Price v/s Sensex

63.3%

12.9%

7.8%

7.8%

8.1%

Promoters FII's DII's Public Others

70

75

80

85

90

95

100

105

110

Nov-10 Mar-11 Jul-11 Nov-11

Ultratech sensex


New capacity to support CAGR of 10.5% in volumes till Mar12

Higher capacity utilization at existing cement units and 4.4mn tonnes of additional cement capacity commissioned in

1HFY11 are likely to help UTCL deliver 11% volume growth in FY12. Brownfield expansion at the Karnataka and

Chhattisgarh units are likely to boost volumes beyond FY13 and help maintain market share. The pan‐India presence

is likely to reduce the impact of regional price volatility on profitability. The price increase of `50 per bag in south

India and `20 per bag in north and west India since Aug11.

Cement dispatches to grow by 11% in FY12

Higher capacity utilization at the 4.4mn tonne additional cement capacity commissioned in 1HFY11 and at existing

cement units is likely to help UTCL deliver volume growth in FY12 and FY13 Capacity utilization at the

recently‐commissioned Kotputli (3.1mn tonnes) and Aligarh (1.3mn tonnes) units stood at 47.8% and 12.8%,

respectively, in Sept11. UTCL operated its other cement plants at a capacity utilization of 76.8% during 1HFY12. We

forecast overall capacity utilization to remain muted from 79.5% in FY12 to 90.6% in FY12. Cement dispatches are

likely to increase by 6.9% y‐o‐y in FY11f to 39.8mn tonnes, includes 1QFY11 volumes of Samruddhi Cement

(GRASIM’s cement division), and by 11% in FY12f to 44.2mn tonnes.

Expansion at Karnataka, Chhattisgarh to yield benefits

beyond FY12

UTCL plans to incur capital expenditure of INR56bn to

expand cement capacity by 9.2mn tonnes beyond FY12f.

UTCL plans to set up these cement plants along with clinker

units in Karnataka (4.4mn tonnes) and Chhattisgarh (4.8mn

tonnes). These cement plants will be supported by setting

up of bulk packaging terminals across various states. Work

on brown field cement plants is likely to be commissioned

by end 4QFY11f. The expansions are likely to help maintain

UTCL’s all‐India market share in the long run as cement

demand would continue to grow. UTCL has strong presence

in the southern, western and northern regions with 25.9%,

26.3% and 23%, respectively, of its capacity in these

markets. This is likely to reduce the impact of regional price

volatility on profitability. As cement is a regional product,

its price depends on the demand‐supply dynamics in that particular region. Cement prices in the South have increased

by `22 per bag since mid Sep, whereas in the West and North the average price increase has been in the range of `15-

20 per bag.

Acquisition to de‐risk business and enhance geographical reach

Acquisition of 80% stake in Star Cement Co. LLC, Dubai, is likely to increase cement grinding capacity by 3mn tonnes.

Based on the enterprise value of USD420mn, the deal is valued at an EV/tonne of USD140. The acquisition has

enhanced global reach as Star Cement has cement plants in the United Arab Emirates, Bahrain and Bangladesh and a

bulk cement terminal at Sudan. Star Cement has market share of 10% in Dubai and 20% in Bahrain; it plans to

enhance its cement capacity to 8mn tonnes by 2015. We foresee the acquisition of the cement unit to be 3% EPS

accretive.

Acquisition to help foray into Africa and north east India

The acquisition is likely to help de‐risk UTCL’s business model from domestic commodity price movements and is

likely to help enhance its presence in the African, Bangladesh and north east Indian markets. Star Cement plans to

enhance its cement capacity to 8mn tonnes by 2015. Currently, the company has market share of 10% in Dubai and

20% in Bahrain. UTCL exports majority of its clinker and cement volumes to these regions. During FY10, UCTL

exported 1.92mn tonnes of clinker and 0.5mn tonnes of cement.

Norhtern23%

Eastern14%

Southern26%

western26%

Central11%

Regional Capacity Distribution

Source: Cpmany, R K Global Researvh


Middle East market to remain in surplus over the near term

We foresee the acquisition of the cement unit to be 3% EPS accretive. The United Arab Emirates market is currently in

surplus with average ex‐factory cement prices at `2700 per tonne. A slowdown in the real estate market in Dubai

since early 2009 has impacted cement consumption. Star Cement Co. LLC currently generates an EBITDA/tonne of

`400 with 85% capacity utilization. The increasing geographical presence is likely to help UTCL choose the best

market for its cement products, depending upon the EBITDA per tonne and logistic costs.

Volume growth, cost reduction to boost net profit till FY13

We forecast UTCL’s revenue to grow at a CAGR of 12.3% during FY11‐FY13. Cement prices are likely to decline by

3.4% in FY13 due to weak demand in 1HFY13. As the pace of industry capacity addition slows, cement prices are

likely to revive by 1% in FY12. The RMC division and other auxiliary businesses are likely to contribute `25.6bn to

revenues in FY12. Reduced dependence on high‐cost power from the grid and setting up of logistic infrastructure is

likely to reduce input cost. EBITDA/tonne is likely to increase from `935 in FY12 to `1052 in FY13. Net profit

estimates for FY12 are likely to be `26.8bn, translating into an EPS of `97.6.

Sales volume for UTCL, including sales

volume of Samruddhi Cement for FY11, is

likely to grow at a CAGR of 10.5% during

FY11‐FY13. We estimate sales volume for

FY11f to increase by 6.7% to 39.8mn tonnes

due to weak infrastructure and construction

demand in 1HFY12. Sales volume in FY12 and

FY13 is likely to grow by 11% and 10%,

respectively, as demand revives. Cement

prices is likely to remain stable in FY12. As

the pace of industry capacity addition slows,

cement prices are likely to revive by 1% in

H2FY13 and 2.5% in FY13f. Improved

demand in the RMC division and other

auxiliary businesses is likely to contribute

`25.6bn to revenues in FY12. EBITDA per tonne for UTCL is likely to increase from `935 in FY11 to `1052 in FY12.

Correspondingly EBITDA margins are likely to increase from 25.7% to 27.8%. Commissioning of low‐cost captive

power plants has reduced the dependence on high‐cost purchased power from 64% in FY08 to 22% in FY10. This is

likely to decline to 5% by FY13f, once UTCL sets up thermal power plants of 25MW of and waste heat recovery

systems of 38MW. Also, setting up logistic infrastructure and material evacuation facilities is likely to help reduce

freight cost from `653 per tonne in FY12 to `630

per tonne in FY13.

0

1000

2000

3000

4000

5000

6000

7000

0

5

10

15

20

25

30

35

40

45

50

FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E

Source: Company, R K Global Research

Sales volume and realizations

Sales Volume Realization (RHS)

17%

19%

21%

23%

25%

27%

29%

31%

33%

500

600

700

800

900

1000

1100

1200

1300

FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E FY'14E

In `

Source: Company, ACE Equity, R K Global Research

EBITDA/tonne and EBITDA margin

EBITDA/tonne EBITDAM (RHS)


Stable valuation

We have valued UltraTech at a target multiple of 8x EV/EBIDTA which is lower than that of ACC and Ambuja to reflect

the historical discount. If we value UltraTech at the same multiples, then our target price will go up by another 7%. On

an EV per tonne, UltraTech is trading at $128 slight higher than industry average of $115. Even on a P/E basis, it is

trading comparatively lower valuations to its peers despite the fact that it does not have the lowest earnings risk in

the industry. At CMP of `1143, stock is trading at EV/EBIDTA of 10.1x and EV per tonne of $128. We initiate our

coverage on the company with ‘Hold’ rating and target price of ~`1211.

1.5

3.5

5.5

7.5

9.5

11.5

13.5

15.5

17.5

19.5

21.5

April-07 April-08 April-09 April-10 April-11

EV/EBITDA(x)

3.5

8.5

13.5

18.5

23.5

28.5

33.5

38.5

43.5

Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11

P/E


Financial Summery

Income Statement (`Mn)

Balance Sheet (` Mn)

Descriptions FY'10 FY'11 FY'12 FY'13


Revenue 70497 132099 177214 197467

SOURCES OF FUNDS

Expenditure 50827 106781 140073 153960

Share Capital 1245 2740 2740 2740

EBITDA (ExOI) 19711 25424 37189 43559

Total Reserves 44822 103872 122035 143172

Interest 1175 2771 2778 4600

Shareholder's Funds 46067 106660 124824 145961

PBDT 18536 22653 34411 38959

Total Debt 16045 41446 44304 61304

Depreciation 3881 7657 9214 9517

Total Liabilities 70419 165407 186428 224566

PBT(OI) 14655 14996 25197 29442

APPLICATION OF FUNDS

Other Income 1227 2867 3674 3674

Gross Block 80781 179423 196657 237933

PBT 15882 17863 28871 33116

Less: Acc. Dep. 31365 65420 74634 84151

PAT 10932 14042 20094 23048

CWIP 2594 11053 27192 43402

Net Fixed Asset 52011 125056 149215 197184

Financial Ratios

Cash At Bank 837 1448 4826 1103

Description FY'10 FY'11 FY'12 FY'13

Investments 16696 37303 37303 37303

Per Share (`)

Total CA 14724 37586 44495 44102

Adj.EPS 87.8 51.2 73.3 84.1

Total CL 12991 34539 44576 49015

CEPS 119.1 79.4 106.9 119.2

Net Current Asset 1713 3047 (81) (4913)

DPS 6.0 6.0 6.0 6.0

Total Asset 70419 165406 186428 224565

Book value 370.2 389.4 456.2 534.1

Margin Ratios (%)

Cash Flow Statement (` Mn)

PBIDTM 28% 19% 19% 26%


EBIDTM 28% 19% 18% 25%

CASH FLOW FROM OPERATIONS

Pre-Tax Margin 23% 14% 12% 19%

PAT 10932 14042 20094 23048

PATM 16% 11% 8% 13%

Depreciation 3881 7657 9214 9517

CPM 35% 27% 26% 33%

Changes In WC -893 (692) 6494 1110

Performance Ratios (%)

Changes in Diff.tax 1078 0 0 0

ROE 26.6 18.4 17.4 17.0

Net Cash From Operations 14998 21007 35802 33675

ROIC 32.7 21.4 24.0 25.7

CASH FLOW FROM INVESTMENTS

ROCE 25.2 17.5 18.0 18.4

CAPEX (2741) (107101) (33372) (57487)

Sales/FA 1.4 1.1 1.2 1.0

Investments (6358) (20608) 0 5000

Efficiency Ratios (%)

Cash In Investment Activities (8517) (16489) 3674 8674

Revenue Growth

87% 34% 11%

CASH FLOW FROM FINANCING

EBIDTA Growth

29% 46% 17%

Dividends Paid (728) (1911) (1911) (1911)

EBIT Growth

12% 57% 22%

Incresase/decrease in debt (5371) 25401 (4089) (5000)

PAT Growth

28% 43% 15%

Others 0 0 0 0

EPS Growth

-42% 43% 15%

Cash In Financing Activity (7410) (4309) (1831) 10489

Valuation ratios(x)

Increase/ Decrease in Cash (208) -55 3378 -3722

EV/Tonne 11268 13747 11642 11642

Cash At The Beginning 1045 837 1448 4862

EV/EBIDTA 7.6 12.4 8.2 7.6

Cash At The End 837 1448 4862 1103

Mcap/Sales 2.0 2.4 2.2 2.2

P/BV 3.1 2.9 2.4 2.1

DuPoint Analysis

P/E 13.2 22.1 16 14

Description FY'10 FY'11 FY'12 FY'13

PAT/PBT 0.7 0.8 0.7 0.7

PBT/EBIT 1.0 1.0 1.0 1.0

EBIT/Sales 0.2 0.1 0.2 0.2

Sales/TA 1.0 0.8 1.0 0.9

TA/NW 1.5 1.6 1.5 1.5


ACC Q3CY11 earnings were lower than estimates primarily due

to higher than expected other expenditure, which was up 21% Y-

o-Y. Expected expansion at Jamul (Chhattisgarh) has not been

announced, and is now unlikely in the current year. Driven by

capacity additions at Wadi (Karnataka) and Chanda

(Maharashtra), dispatches grew 18% Y-o-Y. Strong prices in

South, helped realizations improve 11% Y-o-Y.

Volume under pressure

Volume growth to remain muted: Volume growth of the company

deteriorated in CY11 on YTD basis to 5% mainly due to respite in

demand from infrastructure projects and slowdown in housing

demand due to inflationary pressure and rising interest costs.

Consequently, we are expecting mere 4.2% Y-o-Y volume growth for

the company in CY11E.

Balanced geographical presence: ACC has well diversified presence

across all regions in India with maximum exposure to Northern

markets. This insulates the company from any weakness in a

particular region. Further ACC has initiated cost cutting program

which is likely to yield higher margins for the company going

forward. Most of the company’s plants are currently running at full

capacity (except for Jamul plant) leading to greater utilization and

lower operating costs.

Reducing operating costs: The Company embarked on cost control

initiatives 2‐3 quarters back to shed its inefficient plants tag and

improve profitability. Increased use of captive power, optimum

energy consumption and controlled freight costs has helped the

company reduce operating costs by 8% Y-o-Y in CY’10. We are

conservatively estimating 1% decline in operating costs per ton for

CY’11.

Strong balance sheet: The Company’s balance sheet is very healthy

at 0.1x debt to equity ratio. We expect that the company can complete

its capex program of `300bn using internal accruals and without

resorting to high amount of debt.

ACC Cement | Cement and Construction

Market Data Bloomberg Code ACC IN Reuters Code ACC.BO SENSEX 16123 NIFTY 4832 Dividend Yield (%) 2.7 52 Week High/ Low(`) 1237/917 Equity Capital(` mn) 1877.4 Face Value (`) 10 Market Cap (` mn) 214977.8 Avg. 10 day Vol. NSE 249886 Time Period (Months) 12



Price v/s Sensex

48.2%

15.5%

16.1%

19.5%

0.8%


77

82

87

92

97

102

107

112

117

122

Nov-10 Feb-11 May-11 Aug-11 Nov-11

Sensex ACC


Balanced geographical presence ACC is the only company in India with cement plants present in

all regions. This balanced geographical spread insulates the

company from demand supply imbalances in one region.

Because of this wide presence, the company’s dispatches are

also spread well across the country with highest exposure to

the Northern region 41% of total dispatches. We believe that

lower capacity additions in East and strong demand in North is

likely to keep prices stable with an upward bias in these

regions. ACC with almost 59% exposure to these two regions is

likely to benefit from the same.

Operating costs have reduced

The company embarked on cost control initiatives 2‐3 quarters

back to shed its inefficient plants tag and improve profitability.

These measures seem to have worked well for the company as

the company’s operating costs have gone down substantially over the last two quarters. Increased use of captive

power, optimum energy consumption, has helped the company reduce operating costs by 4% Y-o-Y in 2QCY’11. We

are conservatively estimating 1% decline in operating costs per ton for CY’11.

Lower impact of fuel costs versus peers

~90% of ACC’s coal requirements are sourced domestically. Imported coal is primarily used at its 1mnte plant in

Tamil Nadu. However, Coal India (CIL) has raised coal prices by an average of 10-15% since April’ 2011. Further, of

the total domestic coal consumed, ~20-25% has to be sourced from open markets (due to shortage of domestic coal),

where prices are ~25-30% higher than CIL rates. This exposes the company to significant variations in the coal cost

depending on the share of coal purchased from open markets. However, we believe that ACC’s fuel costs are going to

be more benign than most of its peers who use imported coal or pet coke. Savings in power costs unlikely ~70% of

ACC’s power requirements are met captively. This share has raised post commissioning of a 25MW captive power

plant (CPP) at Lakheri, Rajasthan along with capacity augmentation in CY07. Another 30MW CPP in Orissa and the

Bargarh expansion is expected by end CY08 following which, we expect share of captive power to be ~82%. ACC

would continue to purchase power from the grid for its

Himachal Pradesh plant as it is inexpensive hydro

power. We believe CPP additions are too small to have

substantial impact on power cost savings.

Healthy balance sheet

ACC’s debt equity ratio stands at comfortable 0.1x as on

CY’10. The net debt to equity ratio is still comfortable

making it a negative financial debt company. The

company has adopted prudent policies to conserve cash

and as a result has received AAA rating for both its

debenture program and working capital facilities from

Crisil.

50

55

60

65

70

75

80

85

90

95

100

0

5

10

15

20

25

CY'06 CY'07 CY'08 CY'09 CY'10 CY'11E

%MT

Cement Production & Capacity Utilization

Production Utilization


Expensive valuations At CMP of `1144, stock is trading at EV/EBIDTA of 10.1x and EV/tonne of $142. We initiate our coverage on the

company with ‘Hold’ rating and target price of ~`1218. We have valued the company at EV/tonne of $142 very close

to its group company Ambuja’s valuation) for its CY12E year end capacity. We believe that any downside in the stock

below `987 will be an entry level for the investors given ACC being one of the cost efficient players, completion of its

capex plan and pan India presence adds advantage.

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EV/EBITDA(x)


Financial Summery



Descriptions CY'09 CY'10 CY'11 CY'12


Revenue 80272 77173 93175 102029

SOURCES OF FUNDS

Expenditure 55469 61633 75121 82623

Share Capital 1879 1880 1879 1879

EBITDA (ExOI) 24803 15540 18054 19406

Total Reserves 58283 62815 67520 73056

Interest 843 568 568 558


PBDT 23960 14972 17486 18848

Total Debt 5669 5238 5092 5046

Depreciation 3421 3927 4652 5073


PBT(OI) 20539 11045 12834 13775


Other Income 2404 3570 3203 3420

Gross Block 68263 80770 95770 96770

PBT 22943 14615 16037 17195

Less: Acc. Dep. 26680 29945 34597 39670

PAT 16067 11201 11391 12213

CWIP 21562 15628 5628 9628

Net Fixed Asset 63145 66452 66801 66728

Financial Ratios

Cash At Bank 7464 10800 15293 19504

Description CY'09 CY'10 CY'11 CY'12

Investments 14756 17027 17027 17027

Per Share (Rs)

Total CA 22945 27533 31743 37306

Adj.EPS 85.6 59.7 60.6 65.1

Total CL 31522 37464 37464 37464

CEPS 103.7 76.1 85.4 92.3

Net Current Asset (8578) (9931) (5721) (158)

DPS 26.3 30.4 20.0 20.0

Total Asset 69324 73548 78107 83596

Book value 320.1 344.2 369.3 398.7

Margin Ratios (%)


PBIDTM 24% 31% 20% 19%


EBIDTM 27% 33% 24% 21%



PAT 16067 11201 11391 12213

PATM 17% 20% 15% 10%

Depreciation 3421 3927 6452 5073

CPM 32% 38% 30% 27%

Changes In WC 6138 4690 282 (1352)



ROE 29.40 17.90 17.00 16.90


ROIC 34.90 36.80 32.80 37.80


ROCE 27.80 15.90 16.30 16.30

CAPEX (15840) (7234) (5000) (5000)

Sales/FA 1.3 1.2 1.4 1.5

Investments (7966) (2270) 0 0


Cash In Investment Activities (23806) (9505) (5000) (5000)

Revenue Growth 12% -4% 21% 10%


EBIDTA Growth 7% -37% 16% 7%

Dividends Paid (5051) (6677) (6677) (6677)

EBIT Growth 6% -46% 15% 7%

Incresase/decrease in debt 849 (431) (146) (47)

PAT Growth 33% -30% 2% 7%

Others (131) 9 0 0

EPS Growth 33% -30% 2% 7%

Cash In Financing Activity (4333) (7099) (6832) (6724)

Valuation ratios(x)

Increase/ Decrease in Cash (2379) 3337 4493 4211

EV/Tonne 7573 9259 7586 7586


EV/EBIDTA 6.7 10.3 11.6 9.0

Cash At The End 7464 10800 15293 19504

Mcap/Sales 2.0 2.6 2.4 2.2

P/BV 3.1 2.9 2.7 2.5

DuPoint Analysis

P/E 10.2 18.0 16 15


PAT/PBT 0.7 0.8 0.7 0.7

PBT/EBIT 1.1 1.3 1.2 1.2

EBIT/Sales 0.3 0.2 0.1 0.1

Sales/TA 1.2 1.0 1.2 1.2

TA/NW 1.2 1.1 1.1 1.1


Ambuja Cement Ltd (ACL) has increased its grinding capacity by 22% in

the past 1 year, however, same has not translated into volume growth

for the company due to slowdown in demand. Despite capacity addition,

we are expecting the company to record just 6% CAGR in its volume over

CY09-12E due to overall slowdown in cement demand. Also, we are

expecting the company’s profitability to remain stagnant due to not fully

passing on the increase in costs to the end users on account of

oversupply in the industry. Hence, in the near term, we are not expecting

any upside in the stock price of the company. We are initiating our

coverage on the stock with a ‘Hold’ view and target price of `128.

However, we feel that any further downside in the stock will trigger an

opportunity for the investors to enter the stock.

Volume pressure

Volume growth to remain muted: Volume growth of the company

deteriorated in CY11 on YTD basis to 4% mainly due to lull demand

from infrastructure projects and slowdown in housing demand due to

inflationary pressure and rising interest costs. Consequently, we are

expecting mere 4.7% Y-o-Y volume growth for the company in CY11E.

Higher exposure towards North and West regions – risk to

earnings:

ACL has almost 75% of its exposure towards North and West regions

in which we are expecting over supply in coming years. We appreciate

that ACL does not have any exposure towards Southern region which

currently is in worst situation, but, major exposure towards Northern

and Western regions in which over capacity is likely to observe, is

expected to limit the capacity utilization of the company.

Steep rise in input costs: Despite lower clinker purchase cost due to

commission of clinkerization units, we are expecting total cost of the

company to go up significantly in coming years due to higher coal cost

and freight cost. We are expecting total cost/tonne of the company to

move up by 9% Y-o-Y in CY11E to `2991 mainly due to 30% hike in

coal cost by Coal India and increase in fuel prices.

Muted volume growth in CY11

Ambuja Cement reported 6.4% Y-o-Y growth in its volumes to 20MT in

CY10 as compared to 18.8MT in CY09. However, growth of the

company remained deteriorated in CY11 on YTD basis to 4% mainly

due to lull demand from infrastructure projects and slowdown in

housing demand due to inflationary pressure and rising interest

costs.

Ambuja Cement | Cement & Constructions

Market Data Bloomberg Code ACEM IN Reuters Code ABUJ.BO SENSEX 16123 NIFTY 4832 Dividend Yield (%) 1.7 52 Week High/ Low(`) 165/111 Equity Capital(` mn) 3066.0 Face Value (`) 2 Market Cap (` mn) 227499.2 Avg. 10 day Vol. NSE 1850679 Time Period (Months) 12



Price v/s Sensex

50.4%

23.7%

14.6%

11.1%0.1%


70

75

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85

90

95

100

105

110

115

120

Nov-10 Feb-11 May-11 Aug-11 Nov-11

Sensex Ambuja


Higher exposure towards North and West regions – risk to earnings Ambuja Cement has almost 75% of its exposure towards North and West regions in which we are expecting over supply in coming years. We appreciate that ACL does not have any exposure towards Southern region which currently is in worst situation, but, major exposure towards Northern and Western regions in which over capacity is likely to observe, is expected to limit the capacity utilization of the company. Lower clinker purchase cost In CY10, the company has purchased only 0.36MT of clinker as compared to 1.7MT in CY09 due to commissioning of two new clinkerization units at Bhatapara and Rauri in Q1CY10. As a result of these new clinker plants, the company’s clinker purchase cost has gone down significantly in CY10 to `1,237mn from `5,707mn in CY09. Going ahead, we are expecting no major cost of clinker purchased due to substituting own produced clinker for purchased clinker to a large extent. Despite lower clinker purchase cost, we are expecting total cost of the company to go up significantly in coming years due to higher coal and freight cost. We are expecting total cost/tonne of the company to move up by 9% YoY in CY11E to `2,991 mainly due to 30% hike in coal cost by Coal India and increase in fuel prices.

Cost structure per tonne `/tonne CY08 CY09 CY10 CY11E CY12E

Raw material 319 503 288 303 318

Power & fuel cost 754 757 836 939 1003

Freight cost 623 717 793 872 916

Total 2546 2772 2742 2991 3126

Growth% 15% 9% -1% 9% 5%

Completion of major capex cycle….. Ambuja Cement has just commissioned 2MTPA grinding capacity at Bhatapara and Maratha (1MTPA each) in June‐July’11, taking total cement grinding capacity to 27MTPA. The company is also planning to increase its clinker capacity by setting up 2.2MTPA clinkerization unit in Rajasthan. The company is in right direction to maintain its objective of maintaining its market share of around 10%. Improving efficiency of logistic operations Currently, the company is having 7 ships with 20,500DWT capacity to transport the cement from Ambujanagar to Panvel and Surat. These ships are just sufficient to meet the present requirement. To cater the growing market needs of South Gujarat and Mumbai, the company had ordered three more ships with total capacity of 11800 DWT. Out of these three ships, one ship was delivered in CY10 for western coastal transportation and the remaining two ships are expected to be brought into the system in the 2HCY11. The said ships are expected to improve the efficiency of logistic operations of the company and is expected to save cost , however, we have not considered the same in our valuation as it is very difficult to calculate savings in freight cost on account of the logistic improvement

Net sales to grow at a CAGR of 9.7% over CY09-12E

Ambuja Cement’s Net sales grew at a CAGR

of 8.7% over CY07‐10 mainly driven by

robust volume growth. Volume of the

company recorded strong growth of 20%

during the same period while realization

increased by 6.5%. Going ahead, due to

capacity addition, we are expecting the

company to report volume growth of 19%

during CY09‐12E. Realization of the

company during same period is likely to

increase by 3% driven largely by cost push

increases. We are expecting the company’s

Net sales to grow at a CAGR of 9.7% over

CY09‐12E.

18.522 22

2527 27

17 18 19 20 21 22

340035003600370038003900400041004200

0

5

10

15

20

25

30

CY07 CY08 CY09 CY10 CY11E CY12E

`/t

on

ne

MT

source: Comapny, R K Global Research

Capacity Volume Realization (RHS)


No major upside in the stock

At CMP of `146, stock is trading at EV/EBIDTA of 10.1x and EV/tonne of $169. We initiate our coverage on the

company with ‘Hold’ rating and target price of ~`161. We have valued the company at EV/tonne of $169 (much

above its group company ACC’s valuation) for its CY12E year end capacity. We believe that any downside in the stock

below `135 will be an entry level for the investors given Ambuja cement being one of the cost efficient players,

completion of its capex plan and location advantage.

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EV/EBITDA(x)

0

5

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25

Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11

P/E


Financial Summery





Revenue 70799 73764 80553 94815

SOURCES OF FUNDS

Expenditure 51706 55237 60888 71234

Share Capital 3047 3060 3060 3060

EBITDA (ExOI) 18669 18236 19665 23581

Total Reserves 61659 70228 77831 88330

Interest 224 487 61 57


PBDT 21003 20225 19604 23524

Total Debt 1657 650 565 565

Depreciation 2970 3872 4712 5022


PBT(OI) 18033 16619 14892 18502


Other Income 2558 2476 2588 3135

Gross Block 62241 87788 94788 99788

PBT 18033 16619 17481 21638

Less: Acc. Dep. 27841 31511 36223 41224

PAT 12184 12636 12237 15146

CWIP 27144 9307 6037 6037

Net Fixed Asset 61545 65585 64602 64581

Financial Ratios

Cash At Bank 8807 17482 25999 36899


Investments 7270 6260 6260 6260

Per Share (Rs)

Total CA 19793 31353 37502 53862

Adj.EPS 8.0 8.3 8.6 9.9

Total CL 17411 23942 21605 27444

CEPS 9.9 10.8 11.1 13.2

Net Current Asset 2384 7412 15897 26418

DPS 2.5 2.6 2.5 3.0

Total Asset 71226 79260 86746 97263

Book value 42.5 47.9 52.9 59.7

Margin Ratios (%)


PBIDTM 28% 27% 25% 21%


EBIDTM 31% 30% 27% 23%



PAT 12184 12636 12237 15146

PATM 23% 17% 17% 11%

Depreciation 2970 3872 4712 5022

CPM 36% 34% 33% 30%

Changes In WC 6562 3647 31 380



ROE 17.50 17.90 15.80 17.10


ROIC 35.20 38.70 30.10 33.80


ROCE 21.60 22.40 21.70 23.20

CAPEX (13115) (7912) (3730) (5000)

Sales/FA 1.2 1.1 1.2 1.5

Investments (3946) 1011 0 0


Cash In Investment Activities (17061) -6901 (3730) (5000)

Revenue Growth 10% 4% 9% 18%


EBIDTA Growth 8% -2% 8% 20%

Dividends Paid (4277) (4625) (4647) (4647)

EBIT Growth 4% -9% 4% 24%

Incresase/decrease in debt (1230) (1007) (85) 0

PAT Growth 6% 4% -3% 24%

Others 90 561 0 0

EPS Growth 2% 4% 4% 15%

Cash In Financing Activity (5417) (5071) (4733) (4647)

Valuation ratios(x)

Increase/ Decrease in Cash 288 8675 8517 10900

EV/Tonne 8309 9210 8368 8368


EV/EBIDTA 11.0 11.3 10.5 9.2

Cash At The End 8807 17482 25999 36899

Mcap/Sales 2.3 2.7 2.6 2.5

P/BV 2.4 3.0 2.2 2.4

DuPoint Analysis

P/E 18.0 18.0 19 15


PAT/PBT 0.68 0.76 0.70 0.70

PBT/EBIT 1.15 1.16 1.17 1.17

EBIT/Sales 0.22 0.19 0.19 0.20

Sales/TA 0.99 0.93 0.93 0.97

TA/NW 1.10 1.08 1.07 1.06


For Suggestions, clarifications & your valuable feedback write back to us at:

R K Global Research R K Global Institutional Sales R K Global Shares & Securities Ltd: R K Global Shares & Securities Ltd:

Flat No.: B12, Park Tower, 503 & 504 Adamji Building,

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Kolkata – 700 019 Mumbai- 400 009

Board: +91 (33) 4017 4999 Board: +91 (22) 4360 2222

E-Mail: [email protected] E-Mail: [email protected]

Locate Us…

Rating Criteria BUY Stock to generate return above 15% from CMP over the next 12 months period HOLD Stock to generate return between 0-15% from CMP over the next 12 months period SELL Stock to generate less than 0% from CMP over the next 12 months period

Coverage Terminology IC = Initiating Coverage RU = Result Update EU = Event Update

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