ultratech cement - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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14 April 2015

Asia Pacific/India

Equity Research

Cement

Ultratech Cement

(ULTC.BO / UTCEM IN) COMPANY UPDATE FOCUS LIST STOCK

Organic path towards 100 mt capacity

■ Stay positive on cement upcycle, and prefer companies adding capacities. In our view, Ultratech is the best proxy to participate in a cement upcycle, given its edge over peers on (1) scale, (2) resource base, and (3) financial flexibility. Strong balance sheet enables Ultratech to further add capacity. Further to our report on the consolidation of BK Birla assets (link), we list the new projects Ultratech is working on (>30 mt capacity), which could take Ultratech's capacity organically to 100 mt by 2020 (from 75 mt in FY16E).

■ Near-term organic expansions for Ultratech. We identify eight projects and, out of these, the three most compelling are: (1) a 2.5 mt plant in Madhya Pradesh (location Dhar)—reduces freight distance by >250 km in catering to western MP, eastern Gujarat and northern Maharashtra, (2) a 3 mt plant in Rajasthan (at Nawalgarh), which can reduce the freight distance by 400 km in catering to the northern India market, and (3) a 2.4 mt brownfield expansion at Awarpur in Maharashtra, which should address the current high utilisation.

■ Consolidation of BK Birla cement assets should be accretive. Recent media articles (Business Standard) suggested that Ultratech is looking to merge the cement division of Century Textile (refer to our report of 27 Jan 2015, link). In our view, consolidation should be value-accretive as Ultratech could improve profitability of BK Birla cement assets by >50%. Competition Commission of India (CCI) approval may require reorganisation of output in Maharashtra, Karnataka, and MP.

■ Expect demand acceleration over the next two years. FY15 cement demand stayed weak as the government curtailed spending in 2H15. We expect demand to rebound to 8% in FY16, driven by recovery in rural housing and road projects. Margins should expand as supply growth is ~6%. Our TP of Rs3,900 is based on 18x FY17E EPS, and a Rs400/share value accretion from the consolidation of BK Birla assets.

Share price performance

60

80

100

120

0

1000

2000

3000

4000

Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the S&P

BSE SENSEX IDX which closed at 29044.44 on 13/04/15

On 13/04/15 the spot exchange rate was Rs62.4/US$1

Performance over 1M 3M 12M Absolute (%) 2.0 3.4 33.3 — Relative (%) 0.1 -2.8 4.9 —

Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 200,778.8 232,386.1 272,589.4 323,000.6 EBITDA (Rs mn) 36,159.8 40,676.1 60,353.3 81,208.8 EBIT (Rs mn) 25,637.2 29,374.4 47,353.3 67,408.8 Net profit (Rs mn) 21,444.7 20,829.6 35,845.0 51,636.6 EPS (CS adj.) (Rs) 78.20 75.95 130.71 188.29 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rs) n.a. 87 126 172 EPS growth (%) -19.3 -2.9 72.1 44.1 P/E (x) 38.4 39.5 23.0 15.9 Dividend yield (%) 0.30 0.32 0.56 0.80 EV/EBITDA (x) 23.1 21.2 14.3 10.4 P/B (x) 4.8 4.4 3.8 3.1 ROE (%) 13.3 11.6 17.6 21.4 Net debt/equity (%) 7.0 20.7 16.8 8.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rating OUTPERFORM* Price (13 Apr 15, Rs) 3,001.90 Target price (Rs) 3,900.00¹ Upside/downside (%) 29.9 Mkt cap (Rs mn) 823,735 (US$ 13,202) Enterprise value (Rs mn) 862,725 Number of shares (mn) 274.40 Free float (%) 34.6 52-week price range 3,374.9 - 1,970.3 ADTO - 6M (US$ mn) 12.8

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Anubhav Aggarwal

91 22 6777 3808

[email protected]

Badrinath Srinivasan

91 22 6777 3698

[email protected]

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x612747&serialid=R99VUbMJl%2b2lCMdx3C8Owf8czyEFEQRfpjPi4qhjfu4%3d


14 April 2015

Ultratech Cement

(ULTC.BO / UTCEM IN) 2

Focus charts and tables Figure 1: Greenfield/brownfield projects Ultratech is working on

Plant State Unit type Expansion type Capacity Remarks

Nawalgarh Rajasthan Integrated Greenfield 3.0 Clearance received

Pali Rajasthan Integrated Greenfield 3.3 Clearance received

Dhar Madhya Pradesh Integrated Greenfield 2.5 Awaited

Jawad Madhya Pradesh Integrated Brownfield 6.3 Clearance received

Satna Madhya Pradesh No data No data No data Yet to be filed

Awarpur Maharashtra Integrated Brownfield 2.4 Clearance received

Kurnool Andhra Pradesh Integrated Greenfield 6.0 Clearance received

Karur Tamil Nadu Integrated Greenfield 5.5 Clearance received

Source: Ministry of Mines, Credit Suisse research

Figure 2: Ultratech capacity map + new projects Ultratech is working on

Pipavav 5.8 MT (1 MT)

Bhatinda (G), 1.8 MT

Awarpur 3.6 MT

(Expansion to 6.0 MT)

Jharsugda (G) 1 MT

Ginigera (G) 1.3 MT

Hirmi 1.9 MT

Raipur 4.2 MT

Jawad, 3 MT


Hotgi (G), 3.4 MT

Panipat (G) 1.3 MT

Aligarh (G) 1.3 MT

Kotpulli, 3.1 MT

Durgapur (G)

1.2MT

Dadri (G) 1.3 MT

Jafarbad 0.5 MT

Shambhupura, 5 MT

Magdalla (G) 0.7 MT

Reddipalayam

1.4 MT

Arakonam (G) 1.4 MT

Malkhed 6.4 MT

Tadpatri 5.6 MTRatnagiri (G) 0.4 MT

Gujarat

Maharashtra

Andhra Pradesh

West Bengal

Tamil Nadu

Uttar

Pradesh

Karnataka

HP

Madhya

Pradesh

Orissa

Integrated Unit

Grinding Unit

Greenfield expansion

Brownfield expansion

JPA Kutch, 2.4mt

JPA Wanakbori

(G) 2.4mt

JPA Bela

2.6MT

JPA Sidhi

2.3MT

Kurnool 5-6 MT

Nawalgarh, 3.0 MT

Satna, capacity

unknown

Dhar 2.5MT

Pali 3.3 MT

Karur 5.5 MT

Source: Company data, Ministry of Mines, Credit Suisse research

Figure 3: Consolidation of BK Birla cement assets (23 mt

capacity), helps Ultratech further increase market share

Figure 4: Consolidation is accretive and could add >50%

to profitability of BK Birla cement assets FY12 FY13 FY14 1HFY15

Century

Cement Capacity (mt) 8.5 8.5 10.0 12.8

Utilisation 89% 90% 82% 80%

EBITDA/t 492 568 391 533

Kesoram



EBITDA/t 1,095 841 553 652.0

Mangalam



EBITDA/t 673 749 337 651.5

400

500

600

700

800

900

1,000

CurrentEBITDA/t

HigherASPs

Freightsavings

Fixed costsavings

Otherbenefits

EBITDA/t postconsolidation

Rs/t

BK Birla Cement assets

Consolidation synergies

* Exit capacity. Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates

14 April 2015

Ultratech Cement


Organic path towards 100 mt capacity

Ultratech working on more than 30 mt cement projects

In our recent note ("Galloping towards 100 mt capacity" link), we highlighted that Ultratech is

on its way to reach 100 mt capacity and at this size, it would become 3x the size of its

nearest peer in India and have a market share of 24% on a pan-India basis. Investor queries

on our note mainly centred around the following: if the consolidation of BK Birla group assets

with Ultratech is delayed, can Ultratech still reach 100 mt capacity organically?

In this note, we have gathered details of the greenfield and brownfield projects that

Ultratech is working on and identify those that Ultratech is likely to pursue in the near term.

Ultratech has applied for several greenfield projects in Rajasthan, Madhya Pradesh,

Andhra Pradesh and Tamil Nadu. Additionally, the company is working on a couple of

brownfield projects in Madhya Pradesh and Maharashtra. Total capacity of these projects

is about 30 mt and could help Ultratech reach 100 mt capacity organically by 2020 (with

already announced capacities, Ultratech will end FY16 at 75 mt).

Of the eight projects that we have identified, three make the most sense for Ultratech to

pursue in the near term: (1) a 2.5 mt integrated project in Madhya Pradesh (location Dhar)—

this can serve western MP, eastern Gujarat and northern Maharashtra more efficiently with

freight savings of more than 250 km, (2) a 3 mt integrated plant at Nawalgarh at Rajasthan

which can serve the northern India market more efficiently as it is 400 km closer than the

existing Shambupura plant, and (3) a brownfield expansion up to 2.4 mt at Awarpur in

Maharashtra which should address high utilisation at the Awapur plant currently.

Consolidation of BK Birla assets could be value-accretive Further to our detailed report on BK Birla group assets (link), media articles (Business

Standard) suggested that Ultratech is looking at a share swap proposal to merge the

cement division of Century Textile. In our view, the consolidation would be value-accretive

as it should improve the profitability of these assets by >50%, and thus our TP includes

Rs400 from the consolidation of cement assets of Century, Kesoram, Mangalam: 23 mt

capacity. We have evaluated the combined entity from the perspective of Competition

Commission of India (CCI) as well, and in our view, the merged entity may need

reorganisation of output in Maharashtra, Karnataka, and Madhya Pradesh. On the

consolidation of BK Birla assets, the news flow has started turning positive with Kesoram

planning business restructuring (source: ET), the issuance of Century Textiles warrants to

Mr Kumar Birla (expiry in Nov-15), and now Ultratech looking for a share swap proposal

with Century (source: Business Standard).

Expect demand acceleration over the next two years

Cement demand declined in the Mar-15 quarter while weak demand was also reported

across several other sectors. This was largely driven by the government curtailing its

expenditure to meet the FY15 fiscal deficit target. Over the past three years, there has

been continued postponement of expenditure into the subsequent year with the declining

proportion of the government's annual expenditure in the March quarter and the rising

share of the June quarter. On the cement demand front, this has led to a strong 1H on a

high base for the past two years, and a weak 2H on a weak base.

Therefore, FY15 was another weak year with cement demand growth of 4%. We expect

demand to accelerate in FY16 to ~8% with the recovery driven by (1) a pick-up in rural housing

and (2) a pick-up in highway projects with the possibility of higher use of concrete roads (higher

cement intensity). With cement supply CAGR expected at 6% (FY14-17), margins for the

industry should expand if demand growth is >6% for the next two years. Ultratech is the best

proxy to participate in a cement upcycle, given its edge over peers on (1) scale, (2) profitability,

(3) resource base, and (4) financial flexibility. Our target price of Rs3,900 for Ultratech is based

on 18x FY17E EPS (as the full benefit of reforms should be reflected by FY17 only), and the

Rs400/share value accretion from the consolidation of BK Birla assets.

Ultratech is working on eight

projects, out of which three

are most compelling. They

reduce freight costs and

address capacity constraints

The key projects are: (1) a

2.5 mt plant in MP (Dhar),

(2) a 3 mt plant in Rajasthan

(Nawalgarh), and (3) a 2.4

mt expansion in

Maharashtra (Awarpur)

Ultratech could improve the

profitability of BK Birla

assets by >50%

FY15 cement demand was

weak as the government

curtailed its spending in

2H15

We expect demand to

rebound to 8% in FY16, and

margins should expand as

supply growth is ~6%



14 April 2015

Ultratech Cement


Ultratech Cement Ltd ULTC.BO / UTCEM IN Price (13 Apr 15): Rs3,001.90, Rating: OUTPERFORM, Target Price: Rs3,900.00, Analyst: Anubhav Aggarwal

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside 4,630.00 54.24 22x EPS Central case 3,900.00 29.92 18x EPS Downside 2,200.00 (26.71) 1x replacement cost

Key earnings drivers 3/14A 3/15E 3/16E 3/17E

Volume (mn t) 41.2 46.2 50.9 55.9 Volume growth (%) 1.3 12.2 10.0 10.0 Price increase (%) (3.5) 5.0 7.9 9.0 Cost increase (%) 4.83 3.76 0.65 3.59 EBITDA/t (Rs) 878 880 1,187 1,452

Income statement (Rs mn) 3/14A 3/15E 3/16E 3/17E

Sales revenue 200,779 232,386 272,589 323,001 Cost of goods sold 138,130 159,461 176,117 201,339 SG&A — — — — Other operating exp./(inc.) 26,489 32,249 36,119 40,453 EBITDA 36,160 40,676 60,353 81,209 Depreciation and amortisation 10,523 11,302 13,000 13,800 EBIT 25,637 29,374 47,353 67,409 Net interest expense/(inc.) 3,192 5,515 6,160 6,160 Non-operating inc./(exp.) 5,310 6,219 6,600 7,600 Associates/JV — — — — Recurring PBT 27,755 30,078 47,793 68,849 Exceptionals/extraordinaries — — — — Taxes 6,310 9,248 11,948 17,212 Profit after tax 21,445 20,830 35,845 51,637 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit 21,445 20,830 35,845 51,637 Analyst adjustments — — — — Net profit (Credit Suisse) 21,445 20,830 35,845 51,637

Cash flow (Rs mn) 3/14A 3/15E 3/16E 3/17E

EBIT 25,637 29,374 47,353 67,409 Net interest 3,192 5,515 6,160 6,160 Tax paid (6,310) (9,248) (11,948) (17,212) Working capital (3,398) (2,883) (1,350) (2,468) Other cash & non-cash items 11,230 5,786 6,840 7,640 Operating cash flow 30,350 28,544 47,055 61,529 Capex (22,923) (61,500) (40,000) (40,000) Free cash flow to the firm 5,551 (18,425) 13,655 29,129 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 2,023 14,531 6,600 7,600 Investing cash flow (20,900) (46,969) (33,400) (32,400) Equity raised 70.6 — — — Dividends paid (2,888) (3,124) (5,377) (7,745) Net borrowings (2,092) 25,000 — — Other financing cash flow (3,192) (5,515) (6,160) (6,160) Financing cash flow (8,102) 16,360 (11,537) (13,905) Total cash flow 1,348 (2,065) 2,118 15,224 Adjustments — — — — Net change in cash 1,348 (2,065) 2,118 15,224

Balance sheet (Rs mn) 3/14A 3/15E 3/16E 3/17E

Cash and cash equivalents 2,775 710 2,828 18,052 Current receivables 12,810 14,827 17,392 20,608 Inventories 23,684 27,412 32,154 38,101 Other current assets 25,219 26,414 27,568 29,334 Current assets 64,488 69,363 79,943 106,095 Property, plant and equip. 178,194 228,392 255,392 281,592 Investments 53,917 45,605 45,605 45,605 Intangibles 941.7 941.7 941.7 941.7 Other non-current assets — — — — Total assets 297,540 344,302 381,881 434,234 Accounts payable 24,265 28,085 32,944 39,036 Short-term debt 7,220 7,220 7,220 7,220 Current provisions 9,730 9,966 12,219 14,587 Other current liabilities 17,619 17,619 17,619 17,619 Current liabilities 58,833 62,890 70,001 78,462 Long-term debt 44,774 69,774 69,774 69,774 Non-current provisions — — — — Other non-current liab. 22,958 22,958 22,958 22,958 Total liabilities 126,565 155,622 162,733 171,194 Shareholders' equity 170,975 188,680 219,149 263,040 Minority interests — — — — Total liabilities and equity 297,540 344,302 381,881 434,234

Per share data 3/14A 3/15E 3/16E 3/17E

Shares (wtd avg.) (mn) 274.2 274.2 274.2 274.2 EPS (Credit Suisse) (Rs) 78 76 131 188 DPS (Rs) 9.0 9.7 16.8 24.1 BVPS (Rs) 623 688 799 959 Operating CFPS (Rs) 111 104 172 224

Key ratios and valuation 3/14A 3/15E 3/16E 3/17E

Growth(%) Sales revenue (0.5) 15.7 17.3 18.5 EBIT (31.2) 14.6 61.2 42.4 Net profit (19.2) (2.9) 72.1 44.1 EPS (19.3) (2.9) 72.1 44.1 Margins (%) EBITDA 18.0 17.5 22.1 25.1 EBIT 12.8 12.6 17.4 20.9 Pre-tax profit 13.8 12.9 17.5 21.3 Net profit 10.7 9.0 13.1 16.0 Valuation metrics (x) P/E 38.4 39.5 23.0 15.9 P/B 4.81 4.36 3.76 3.13 Dividend yield (%) 0.30 0.32 0.56 0.80 P/CF 27.1 28.8 17.5 13.4 EV/sales 4.16 3.71 3.16 2.62 EV/EBITDA 23.1 21.2 14.3 10.4 EV/EBIT 32.6 29.4 18.2 12.5 ROE analysis (%) ROE 13.3 11.6 17.6 21.4 ROIC 11.1 9.9 14.7 18.7 Asset turnover (x) 0.67 0.67 0.71 0.74 Interest burden (x) 1.08 1.02 1.01 1.02 Tax burden (x) 0.77 0.69 0.75 0.75 Financial leverage (x) 1.74 1.82 1.74 1.65 Credit ratios Net debt/equity (%) 7.0 20.7 16.8 8.2 Net debt/EBITDA (x) 0.33 0.96 0.61 0.27 Interest cover (x) 8.0 5.3 7.7 10.9

Source: Company data, Thomson Reuters, Credit Suisse estimates

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015

12MF P/B multiple

Source: IBES

14 April 2015

Ultratech Cement


Ultratech is working on more than 30 mt cement projects In our recent note ("Galloping towards 100mt capacity" link), we highlighted that Ultratech

is on its way to reach 100 mt capacity and at this size, it would become 3x the size of its

nearest peer in India and have a market share of 24% on a pan-India basis. Investor

queries on our note mainly centred around the following: if consolidation of BK Birla group

assets with Ultratech is delayed, can Ultratech still reach 100 mt capacity organically?

In this note, we have gathered details of the greenfield and brownfield projects that

Ultratech is working on and identify those that Ultratech is likely to pursue in the near term.

Ultratech has applied for several greenfield projects in Rajasthan, Madhya Pradesh,

Andhra Pradesh and Tamil Nadu. Additionally, Ultratech is working on a couple of

brownfield projects in Madhya Pradesh and Maharashtra. The total capacity of these

projects is about 30 mt and it could help Ultratech reach 100 mt organically by 2020 (with

already announced capacities, Ultratech will end FY16 at 75 mt).

Of the eight projects that we have identified, three make the most sense for Ultratech to

pursue in the near term: (1) a 2.5 mt integrated project in Madhya Pradesh (location

Dhar)—this can serve western MP, eastern Gujarat and northern Maharashtra more

efficiently with freight savings of more than 250 km, (2) a 3 mt integrated plant at

Nawalgarh in Rajasthan which can serve the northern India market more efficiently as it is

400 km closer than the existing Shambupura plant, (3) a brownfield expansion up to 2.4 mt

at Awarpur in Maharashtra which should address the high utilisation at Awapur plant.

Significant projects Ultratech planning/working on

We have gathered details of the greenfield and brownfield projects that Ultratech is

working on and identify those that Ultratech may pursue in the near term. The company

has applied for several greenfield projects in Rajasthan, Madhya Pradesh, Andhra

Pradesh and Tamil Nadu. Additionally, Ultratech is working on a couple of brownfield

projects in Madhya Pradesh and Maharashtra (Figure 5).

We have evaluated each of these projects in detail and conclude that in the near term the

following three projects make the most sense as either (1) these projects reduce the

freight costs for servicing the current markets, or (2) help alleviate the constraints at the

existing facilities.

■ The Dhar project in Madhya Pradesh: a 2.5 mt greenfield project in MP which can

serve western MP, eastern Gujarat and northern Maharashtra more efficiently than the

current plants of Ultratech. For instance, currently western MP is served by the Jawad

plant but the new plant at Dhar will be 250 km south of the Jawad plant and will help in

reducing the freight cost.

■ The Nawalgarh project in Rajasthan: Ultratech caters to northern India markets

through clinker produced in Rajasthan. The two integrated plants in Rajasthan are

Kotputli and Shambupura. A new plant at Nawalgarh should reduce the freight cost of

servicing the North market as Nawalgarh is 400 km nearer to North than Shambupura

plant. Ultratech has applied for clearances for up to 5.5 mt cement (4.1 mt clinker) and

in the first phase is likely to go for a 3 mt integrated plant.

■ The brownfield expansion at Awarpur in Maharashtra: The Awarpur (ACW) plant

sells almost all of its production to the Maharashtra market and is already operating at

high utilisation. Ultratech has applied for the expansion of the 3.6 mt plant to 6 mt. No

further land acquisition is needed and an environment clearance request was

submitted in October 2014 for the project and the approval is awaited.

Ultratech is working on eight

projects, of which three are

most compelling—they

reduce freight costs and

address capacity constraints

The key projects are (1) a

2.5 mt plant in MP (Dhar),

(2) a 3 mt plant in Rajasthan

(Nawalgarh), and (3) a 2.4

mt expansion in

Maharashtra (Awarpur)


14 April 2015

Ultratech Cement


Figure 5: Greenfield/brownfield projects Ultratech is working on

Plant State Unit Type Expansion type Capacity Remarks

Nawalgarh Rajasthan Integrated Greenfield 3.0 Clearance received

Pali Rajasthan Integrated Greenfield 3.3 Clearance received

Dhar Madhya Pradesh Integrated Greenfield 2.5 Awaited

Jawad Madhya Pradesh Integrated Brownfield 6.3 Clearance received

Satna Madhya Pradesh No data No data No data Yet to be filed

Awarpur Maharashtra Integrated Brownfield 2.4 Clearance received

Kurnool Andhra Pradesh Integrated Greenfield 6.0 Clearance received

Karur Tamil Nadu Integrated Greenfield 5.5 Clearance received

Source: Ministry of Mines, Credit Suisse research

Figure 6: Ultratech capacity map + new projects Ultratech is working on

Pipavav 5.8 MT (1 MT)

Bhatinda (G), 1.8 MT

Awarpur 3.6 MT


Jharsugda (G) 1 MT

Ginigera (G) 1.3 MT

Hirmi 1.9 MT

Raipur 4.2 MT

Jawad, 3 MT


Hotgi (G), 3.4 MT

Panipat (G) 1.3 MT

Aligarh (G) 1.3 MT

Kotpulli, 3.1 MT

Durgapur (G)

1.2MT

Dadri (G) 1.3 MT

Jafarbad 0.5 MT

Shambhupura, 5 MT

Magdalla (G) 0.7 MT

Reddipalayam

1.4 MT

Arakonam (G) 1.4 MT

Malkhed 6.4 MT

Tadpatri 5.6 MTRatnagiri (G) 0.4 MT

Gujarat

Maharashtra

Andhra Pradesh

West Bengal

Tamil Nadu

Uttar

Pradesh

Karnataka

HP

Madhya

Pradesh

Orissa

Integrated Unit

Grinding Unit

Greenfield expansion

Brownfield expansion

JPA Kutch, 2.4mt

JPA Wanakbori

(G) 2.4mt

JPA Bela

2.6MT

JPA Sidhi

2.3MT

Kurnool 5-6 MT

Nawalgarh, 3.0 MT

Satna, capacity

unknown

Dhar 2.5MT

Pali 3.3 MT

Karur 5.5 MT

Source: Company data, Ministry of Mines, Credit Suisse research

Rajasthan – Nawalgarh – 5.5 mt cement

■ Economics/rationale of expansion: A new plant at Nawalgarh should reduce the

freight cost of servicing the northern and central India markets, as Nawalgarh is 400

km closer than the Shambupura facility (which services these markets).

■ Specification: Media reports (e.g., The Times of India) suggest a 3.0 mt integrated

greenfield plant. Environment clearance documents suggest Ultratech has applied for

clearances for up to 5.5 mt cement (4.1 mt clinker) with a 75 MW power plant. The

plant area is expected to be 250 ha.

■ Mine details: Two nearby limestone mines in the same tehsil of size 3,461 ha and

1,153 ha having a peak capacity of 7.0 MTPA. The two mines have reserves of ~130

mt and ~33 mt, and at peak requirement (5.5 MT) can sustain Ultratech's operations

for almost 30 years.

14 April 2015

Ultratech Cement


■ Land details: In 2007, the state government approved a project spanning ~4,600 ha

for Ultratech, and land acquisition has been in progress since then.

■ Clearances: The environment clearance for the plant (5.5 mt cement / 4.1 mt clinker

as per documents) was received in November 2010.

Rajasthan – Pali – 3.3 mt cement capacity

■ Economics/rationale of expansion: Less appealing than the Nawalgarh project but

the Pali plant can service western Rajasthan and northern East Gujarat markets more

economically.

■ Specification: A 3.3 mt integrated greenfield plant with 2.2 mt clinker and a 30 MW

captive power plant (and 5 MW waste-heat recovery unit). The plant is to be spread

over a 245 ha area. The stated capital cost is Rs21 bn (~US$105/t), and this reflects

plant set-up costs at the time of filing the TOR application (FY12).

■ Mine details: The limestone mines (755 ha area) are 7 km away from the plant site

and are to be transported using a covered conveyor belt. Peak limestone mining

capacity is 3.3 mt.

■ Land details: Public hearing documents suggest that land acquisition for both the

mines was in progress as of Feb-13; we do not have further information post this date.

■ Clearances: Ultratech applied for environment clearance (EC) for the mines in July

2013 and the overall facility in July 2014. The government gave EC for both in January

2014 and February 2015, respectively.

■ Other remarks: Ultratech expects to source 2.5 mt of fly ash from the Kota and

Suratgarh power plants owned by the government, which are 150-250 km away. Most

other raw materials (laterite/iron ore/red ocher/gypsum of total ~1.2 mt) are expected

to be sourced within a 150-200 km radius within the state of Rajasthan itself.

Madhya Pradesh – Dhar – 2.5 mt integrated plant

■ Economics/rationale of expansion: Located almost 250 km south of the Jawad plant

(near the MP-Gujarat-Maharashtra border), we think this plant can help service the

eastern Gujarat, western/central MP and northern Maharashtra markets better than

any of Ultratech's other plants.

■ Specification: The company intends to build a 2.5 mt integrated cement plant at Dhar

(including clinker capacity 2 mt, 40 MW CPP, 10 MW waste-heat recovery plant). The

plant is expected to take up a 222 ha area. The capital cost envisaged was Rs16 bn

(US$105/t).

■ Mine details: Limestone is planned to be obtained from two sources—a large 2.2-2.4

mtpa captive mine (Sitapuri) and a smaller 0.5-0.8 mtpa mine (Mohanpura)—both of

which are <10 km from the site of the plant.

■ Land details: The Lawani forest, an ecologically sensitive area, lies ~10kms away

from the plant site. We do not have any details on land acquisition at the site.

■ Clearances: The company applied for mining clearances in October 2013, and

received the go-ahead in February 2015. The clearance request for the plant was

submitted in July 2013, and clearances are still awaited from the central government.

■ Other remarks: Fly ash is to be sourced from the Malwa/Jhabua CPP which is 200

km away.

14 April 2015

Ultratech Cement


Madhya Pradesh – Jawad – brownfield expansion

■ Economics/rationale of expansion: We estimate the Jawad plant sells almost 60%

of its volumes into Madhya Pradesh and 15% into Uttar Pradesh, and operates at high

utilisation. This plant is 550/800 km away from the recently acquired assets from

Jaiprakash Associates (Bela, Sidhi) and expanding capacity would be a viable option,

as the catchment area overlap is likely small.

■ Specification: 3 mt plant already existing; brownfield expansion to 10.3 mt possible—

2.7 mt will be via optimisation and the remainder via installation of an additional line.

Current captive power plant approvals are for 46 MW, and documents suggest

clearances up to 112 MW and an additional 10 MW of waste-heat recovery units.

■ Mine details: Ultratech already had approval (since October 2005) for a 5.5 mt

limestone mine in the area and received environment clearance for an additional 2 mt

mine in January 2014.

■ Land details: We do not have details on whether incremental land acquisition would

be required for the brownfield expansion.

■ Clearances: In August 2012, the plant also received government clearances to

expand to 10.3 mt cement and 6.2 mt clinker (from 3 mt cement and 3.6 mt clinker).

Madhya Pradesh – Satna – should be back ended

■ Economics/rationale of expansion: After acquiring the JPA Madhya Pradesh

assets, Ultratech applied (March 2015) for mining leases in Satna. While the 2.6 mt

Bela plant is nearby, the 2.3 mt Sidhi plant is almost 600 km away, and an additional

plant located in Satna (where Ultratech has low market share) would be in the

company's interests.

■ Specification: Currently not known.

■ Mine details: Currently not known.

■ Land details: Currently not known.

■ Clearances: The company is yet to work on the process of clearances and we think

this expansion is only likely to happen 4+ years from now.

Maharashtra – Awarpur – brownfield expansion

■ Economics/rationale of expansion: We believe the Awarpur (ACW) plant sells

almost all of its production to the Maharashtra market and is already operating over

90% utilisation. The Malkhed expansion can alleviate some of the pressure of the

Hotgi and Ratnagiri grinding units (earlier operating at 100% utilisation) selling into

Maharashtra, but may not help ease constraints at ACW.

■ Specification: Currently has a 3.6 mt plant in Awarpur– brownfield expansion planned

up to 6.0 mt cement (4.5 mt clinker). Ultratech already has clearances for 71 MW of

power capacity, which is sufficient for the expanded capacity.

■ Mine details: The company received TOR approval for an expansion of its limestone

mine (Naokari spread over 1,030 ha; 1 km away) from 5.0 mt to 7.6 mt, which should

be sufficient for the fully expanded capacity.

■ Land details: Expansion would be carried out in the existing plant area of 307 ha, and

requires no further land acquisition.

■ Clearances: Environment clearance request for the project was submitted in October

2014 which is still awaited.

14 April 2015

Ultratech Cement


Andhra Pradesh – Kurnool

■ Economics/rationale of expansion: While Ultratech received TOR clearances for

limestone mines and an integrated plant in 2011, the company had likely put the

project on the back burner due to the excess capacity in the region. With the cement

demand outlook now turning and the government spending on infrastructure

increasing, Ultratech may have taken a re-look at the project. This can service the

Andhra Pradesh, Telangana and Odisha markets, and is located ~140 km to the north

of the current plant at Tadipatri.

■ Specification: The company applied for clearances for a 6.0 mt greenfield expansion,

including 4 mt clinker, 60 MW captive power plant and 15 MW of waste-heat recovery.

■ Land details: No details yet.

■ Clearances: The Andhra Pradesh state government accorded clearances to the

project in September 2014. We believe environment clearances are still awaited.

Tamil Nadu – Karur

■ Economics/rationale of expansion: The Karur plant is ~140 km to the west of the

Reddipalayam plant and 350-400 km to the southwest of the Arakonam grinding unit.

This plant can help service Kerala and western Tamil Nadu better than any of

Ultratech's other plants.

■ Specification: Ultratech plans a 5.5 mt greenfield expansion over a 263 ha area (4.5

mt clinker, 75 MW captive power plant, 15 MW waste heat recovery boiler). The

envisaged capital cost is Rs25 bn (US$83/t; TOR dated 2010); we think actual costs

for constructing this plant now could be closer to US$125/t.

■ Mine details: The company expects to source limestone from five nearby captive

mines with a combined capacity of 6.7mtpa (within a 25 km radius).

■ Land details: Around 120 ha of land had already been acquired by Ultratech by 2012.

We do not have details post this date.

■ Clearances: Ultratech has been considering the plant since 2010 (sent TOR proposal

to the government) and finally applied for environment clearances in July 2013. Final

EC is still awaited for the project.

■ Other remarks: Ultratech applied for coal linkage to the Ministry of Coal in September

2012. Fly Ash could be sourced from the Mettur and Tuticorin thermal power plants

(120-220kms away).

14 April 2015

Ultratech Cement


Consolidation of BK Birla assets should be value-accretive Further to our detailed report on BK Birla group assets (link), media articles (Business

Standard) suggested that Ultratech is looking at a share swap proposal to merge the

cement division of Century Textile. In our view, the consolidation is value-accretive as it

should improve the profitability of these assets by >50% and thus our TP includes Rs400

from the consolidation of cement assets of Century, Kesoram, Mangalam: 23 mt capacity.

We have evaluated the combined entity from the perspective of Competition Commission

of India as well, and in our view, the combined entity may need reorganisation of output in

Maharashtra, Karnataka, and MP. On the consolidation of BK Birla assets, the news flow

has started turning positive with Kesoram planning business restructuring (source: ET),

the issuance of Century Textiles warrants to Mr Kumar Birla (expiry in Nov-15), and now

Ultratech looking for a share swap proposal with Century (source: Business Standard).

BK Birla group: Century, Kesoram, Mangalam

Mr Basant Kumar Birla is grandfather of Mr Kumar Mangalam Birla. The BK Birla/Aditya

Birla group has cement assets spread across four key companies: (a) 72 mt capacity at

Ultratech (in India), (b) 12.8 mt at Century Textiles (largely West and Central, with some

East exposure), (c) 7.25 mt at Kesoram (South and West) and (d) 3.25 mt at Mangalam

Cement (North). Mr BK Birla is the key promoter of Century, Kesoram and Mangalam.

Figure 7: Geographical spread of BK Birla cement assets

Gujarat

Maharashtra

Andhra Pradesh

West Bengal

Tamil Nadu

Rajasthan

Uttar

Pradesh

Karnataka

HP

Madhya

Pradesh

Orissa

Mangalam Cement

Kesoram Inds.

Century Textiles

1.5 MT Sagardighi

(Century Textiles)3.25 MT Morak

(Mangalam Cement)

5.0 MT Manikgarh

(Century Textiles)

4.2 MT Maihar

(Century Textiles)

2.1 MT Tida

(Century Textiles)

1.5 MT Ramagundam

(Kesoran Industries)

5.75 MT Sedam


Source: Company data, Credit Suisse research

Ultratech can improve

profitability of BK Birla

assets by >50%


1

4 A

pril 2

01

5

Ultra

tec

h C

em

en

t

(UL

TC

.BO

/ UT

CE

M IN

) 1

1

Birla family tree with key holdings Figure 8: Cement assets within the Birla family—we expect cement assets of Century Textile, Kesoram and Mangalam to be consolidated with Ultratech

Upper

Ganges

Sugar &

Inds.

Gobind Sugar

Mills, Zuari

Global Limited

Hindustan

Times Group

Chambal

Fertilisers(Saroj

Kumar Poddar

& Shyam

Sundar Bhartia)

Manjushree

Plantations

Jayshree Tea,

North Tukvar Tea

Aditya Vikram

Birla

Kumar Mangalam

Birla

Ultratech,

Hindalco, Grasim,

Idea Cellular etc

Basant Kumar

Birla

Jayshree Mohta

Manjushree

Khaitan

Ghanshyamdas

Birla (GD Birla)

Krishna Kumar

Birla

Shobhana BhartiyaJyotsana

Poddar, SK

Poddar

Nandini

Nopany

Chandra

Shekhar

Nopany

Lakshmi Niwaas

Birla

SK Birla

Siddharth Birla

Digjam Ltd,

Xpro India Lrd,

Mysore

Cements

(defunct)

Braj Mohan

Birla

Rameshwardas

Birla

Jugal Kishore

Birla

Ganga Prasad Birla

Gajanan Birla

Partner with GD

Birla

CK Birla

Ashok Vardhan

Raja Baldeodas

Seth Shivnarain

Birla

Orient Cement, Orient

Paper, Orient Electicals, ,

Avtec Ltd, Birlasoft Ltd,

Gmmco Ltd, NEI Ltd,

Neosym Limited, HIL Ltd

Zenith Birla, Birla

Costyn, Birla

Pacific Medspa

Birla Corp, Universal

Cables, Vindhya

Telelinks, Optic Fibre

Goa, Hindustan Gum &

Chemicals

Yashovardhan Birla

MP Birla

Wife Priyamvada

Birla left all assets

with accountant RS

Lodha

Cement -

Mangalam,

Kesoram,

Century

Textiles


14 April 2015

Ultratech Cement


Mr BK Birla has stated his intention of bequeathing cement assets to descendants

In several interviews (e.g., The Economic Times), Mr. BK Birla has spoken of his intention

to bequeath his stake in Kesoram Industries and Century Textiles to Kumar Mangalam

Birla, while Jayshree Tea and North Tukvar Tea would be bequeathed to his elder

daughter Mrs Jayshree Mohta. Mangalam Cement, Manjushree Plantations and some

smaller companies would go to his younger daughter, Ms. Manjushree.

Regardless of the actual inheritance of the assets, we think it makes very strong

commercial sense for all the group cement assets to be consolidated into Ultratech. This

would be a win-win situation, allowing the smaller companies from benefiting from

Ultratech's scale, established brand and management quality. Ultratech will benefit from

getting operating assets which can add immediately to volumes (and EBITDA), while

providing sufficient scope to generate higher profits at the plant level via synergies.

Century Textiles: Textile, cement, paper & real estate

The company has three key business segments: textiles, cement and paper and pulp. In

FY14, cement accounted for over 50% of group sales and over 55% of operating profits.

The cement business generated RoCE of c.9% and EBITDA of Rs 391/t. This is materially

below large-caps, but largely in line with small-cap cement players. Margins are low for

Century as (1) power cost is high as Century buys 30% of power requirement from the

Grid (2) lead distance for a cement bag is high.

Century's cement sales are diversified across three regions—West, Central and East.

Century has expanded its capacity by 33% over the last two years with the commissioning

of grinding unit in West Bengal and a 2.8 mt expansion at the Manikgarh Unit-II

(completed in Oct-14). Total cement capacity now stands at 12.8 mt. Until FY12, Century

was operating at high utilisation of more than 85% and utilisation dropped to 70% in FY14

mainly due to commissioning of the new capacities.

In May-14, Mr Kumar Birla subscribed to a warrant issue giving him a potential 16% stake

in the company and increasing total promoter holding from 40.2% to 50.2%. The issue

price implied a total capital infusion of Rs. 6.6bn (c.37% of Mar-14 book value) into the

company—with 25% already paid and the remainder on conversion. The warrants expire

18 months from issue (approximately Nov-15).

Media reports (e.g., The Times of India) in 2011 also indicated that Century was looking to

sell its paper business and that ITC had done due diligence on its assets. The segment

made EBIT losses in four of the past five years (FY10, FY12-14) although losses narrowed

in the past year.

Century also has 40 acres of land bank in Worli (Mumbai) out of which 10 acres is in

dispute with Wadia group and a further 10 acres has been used for development of

residential colony for employees. Of the remaining 20 acres of land, development of 0.6

mn sq ft of commercial projects is possible which the company intends to lease out.

Century cement margins are

low as (1) power cost is

high—30% of power

sourced from the grid, and

(2) lead distance is high

Before capacity expansion,

Century has operated at

>80% utilisation

Mr Kumar Birla could get a

16% stake in Century with

the warrants issued in May-

14

Century in the past

expressed intention to sell

its paper business

Century also has 20 acres

of land in Worli where

commercial development is

on

14 April 2015

Ultratech Cement


Figure 9: Century Textiles financials

FY14 financials

(Rs mn)

Textile Cement Paper Others/unalloc

ated

Total

Sales 16,040 31,017 16,401 1,305 64,764

EBITDA 2,482 3,194 1,644 305 7,626

Depreciation 1,040 813 1,679 38 3,569

EBIT 1,442 2,382 (35) 268 4,057

Finance cost 3,628 3,628

Tax/other cost 402 402

PAT 27

Assets 16,451 32,686 31,229 12,550 92,916

Liabilities 2,445 7,331 2,581 63,085 75,442

Capital Employed 14,006 25,355 28,648 (50,535) 17,474

RoCE (%) 10.3% 9.4% -0.1% -0.5% 23.2%


Kesoram: Tyres, cement and rayon

Kesoram has three key segments: tyres (marketed under the "Birla Tyre" brand) and

cement (sold under the 'Birla Shakti' and 'Vasavadatta' brands) account for almost 95% of

sales. The third segment is rayon, T.P. and other chemicals. The cement segment was a

key driver of profitability in FY14, generating returns on capital employed of c.10% and

accounting for over 95% of company-level EBIT. Cement profitability in FY14 was Rs550/t,

which is in line with mid-caps and below the large-cap average.

Kesoram has two cement plants in the Southern India—the larger 5.8 mt Sedam plant in

North-East part of Karnataka and the 1.5 mt Ramagundam facility in North-East part of

Andhra Pradesh. Most of the sales are in South, West and East regions. On the tyre

business, Kesoram has assets in North and East India.

Kesoram has been making a PAT loss for the past ten quarters and this has resulted in its

equity base becoming close to negative. The loss has been driven by (1) weak profitability

at the tyre business although the profitability has improved over the past two years with

declining rubber prices; (2) high financial leverage resulting in high interest costs; (3) weak

demand from the commercial vehicle industry. A part of the capex is stuck as well with

capital work in process of Rs7.3 bn (tyre expansion in Odisha has been stayed). Kesoram

has been working on expansion in both tyre and cement businesses (planned to expand

capacity by 3 mt in two phases by setting up a new grinding unit in Maharashtra

(Solapur)).

Kesoram has already gone through one round of capital infusion; in Jun-13, Kesoram

proposed a Rs4.16 bn shares issue, which increased the promoter holding in the company

from 27.1% to 49.3% (currently stands at 48.2%).

At the end of Sep-14 results, Equity stood at Rs182 mn and close to becoming negative. It

may necessitate a fresh capital infusion. Media articles recently indicated (source: The

Economic Times) that Kesoram is looking to sell its tyre business and even in Kesoram's

Sep-14 results release, management mentioned that a committee comprising three

directors has been set up (two of them are independent) to consider reorganising and

realigning of the existing businesses. MRF tyres was quoted as the one in The Economic

Times involved in bilateral talks with Kesoram.

In Feb-13, Manjushree Khaitan was elevated to the post of executive vice-chairman (she

had been a non-executive member of the board for the past decade). BK Birla has spoken

of his wish for Kumarmangalam Birla to run Kesoram as chairman with Manjushree as the

vice-chairman.

Cement has been

accounting for >90% of

Kesoram's profits

Two cement plants: (1) AP

(1.5 mt) and (2) Karnataka

(5.8 mt)

Kesoram has made PAT

loss for the past ten quarters

and has undergone one

round of capital infusion in

FY14 through right issue

Media reports (ET) suggest

Kesoram is looking to sell its

tyre business

Kesoram has limestone

reserves of >500 mt

14 April 2015

Ultratech Cement


Figure 10: EBITDA loss at the tyre business and high interest cost have resulted in

equity being close to becoming negative

(Rs mn) FY11 FY12 FY13 FY14 1Q15 2Q15

Tyre (149) (4,281) 733 2,120 (95) (836)

Cement 3,758 5,430 4,337 2,776 765 914

Rayon 139 (83) 45 (65) 12 (62)

Others (15) (14) (33) (37) 13 (9)

Interest cost 2,636 4,102 5,144 5,728 1,797 1,635

Net debt 31,497 40,358 43,215 39,667 43,016

EBITDA 3,838 (27) 4,431 4,106 578 -45

PAT (2,102) (3,797) (3,292) (5,156) (2,019) (2,506)

Equity 13,003 9,150 5,802 4,708 182


Mangalam – pureplay cement – north-based player

Mangalam Cement (MGLC.NS) expanded its Morak (Rajasthan) cement plant capacity

from 2.0 mt to 3.25 mt in FY14 (clinker from 1.71 mt to 2.21 mt). The company added 0.5

mt of clinker and 1.25 mt grinding capacity. MGLC sells cement under the "Birla Uttam"

brand. Its main markets are northern (Rajasthan, Haryana, Delhi) and central India

(Madhya Pradesh and Uttar Pradesh). Mangalam has a network of ~1180 dealers.

The newly expanded capacity allows Mangalam Cement to (1) reduce specific power

consumption (2) improve coal efficiency (3) VAT exemption is available for seven years for

sales in Rajasthan. Management is laying emphasis on increasing the proportion of PPC

cement which should help increase margins.

On expanded capacity, Managalam has limestone reserves of 20-25 years. For future

expansions, Mangalam is considering a 0.5 mt clinker expansion at Morak plant and a 1 mt

grinding unit at Aligarh (Uttar Pradesh). Mangalam has net debt of Rs3.1 bn and D/E of 0.6x.

Figure 11: Net debt at Mangalam is due to capacity expansion by 60% recently

(Rs mn) FY12 FY13 FY14 1H FY15

Sales 6,374 7,131 7,019 4,698

EBITDA 1,102 1,378 605 608

Interest cost 31 48 87 170

PAT 560 774 296 176

Capacity (mt) 2 2 2 3.25

Volumes (mt) 1.64 1.84 1.80 0.93


Net Debt (196) 1,187 3,104 3,162

Equity 4,323 4923 5070 5237

EBITDA (Rs/t) 673 749 337 652


Mangalam has capacity of

3.25 mt and services

northern and central India

markets

14 April 2015

Ultratech Cement


Synergies of consolidation of Century, Kesoram and

Mangalam with Ultratech

In our view, overall synergies of consolidation of Century, Kesoram and Mangalam with

Ultratech could be in the order of about Rs300-350/t. A large part of this synergy is driven

by higher realisation as brand transitions to Ultratech, lower freight costs, and savings in

fixed costs.

Figure 12: Profitability trend of cement assets of BK Birla group companies

FY12 FY13 FY14 1HFY15

Century

Cement Capacity (mt) 8.5 8.5 10.0 12.8*


EBITDA/t 492 568 391 533

Kesoram



EBITDA/t 1,095 841 553 652

Mangalam



EBITDA/t 673 749 337 652

* Exit capacity for 1HFY15.


■ Higher realisation: Typically, mid-cap players sell at a price gap of about Rs15/bag

(50 kg cement bag) or a 3-4% discount to the large caps. The same is true for pricing

difference on average between Ultratech and each of Century, Kesoram and

Mangalam. Post consolidation, we expect Ultratech to transition individual brands to

the Ultratech brand, which should help increase EBITDA/t of the acquired assets by

~Rs200-215/t.

■ Volumes: The stronger brand of Ultratech should help increase utilisations, although

we do not build any incremental benefits of the same in our numbers.

■ Cost synergies:

a. Lower freight cost—overall savings of about Rs75-100/t.

o Mangalam's plant is based in Rajasthan but only 40% of the output is sold in

Rajasthan and 40% is sold in Delhi and NCR region and 20% in Madhya

Pradesh. Given that Ultratech has a much stronger presence in Delhi and

NCR, freight costs can be rationalised for the combined entity.

o Both the plants of Kesoram are servicing Maharashtra (Sedam servicing

West and Central and 1.5 mt Ramagundam plant servicing East

Maharashtra) and in our view, it can be more economically serviced through

Ultratech's plants. Likewise, the eastern part of Andhra Pradesh (or

Seemandhra) can be more efficiently serviced through Kesoram's plants.

o Similarly freight cost for Century can be reduced, mainly for West and North

shipments where output of Maihar unit of Century in MP focuses more on

MP+UP and the rest of the areas can be more efficiently serviced by

Ultratech. Similarly a large part of Manikgarh units is aimed towards

Mumbai/Pune market and the same can be more economically serviced by

Ultratech.

We estimate overall

synergies of Rs300-350/t

Higher ASP contributes

Rs200-215/t

Lower freight adds Rs75-

100/t

14 April 2015

Ultratech Cement


Figure 13: Plenty of lead distance reduction synergies exist in the consolidation

Gujarat

HP

ULTC Integrated Unit

ULTC Grinding Unit

C Century units

K Kesoram units

M Mangalam unit

1.5 MT Sagardighi

(Century Textiles)

3.25 MT Morak

(Mangalam Cement)

5.0 MT Manikgarh

(Century Textiles)

4.2 MT Maihar

(Century Textiles)

2.1 MT Tida

(Century Textiles)

1.5 MT Ramagundam


5.75 MT Sedam


K

MC

C

C

C

K


b. Lower promotion spend: With the brand change, promotion spend at each of

the three companies can be saved as most of the plants of these three companies

are close to that of Ultratech's plants (Figure 13). Ultratech spends about Rs1.5

bn on advertisements, while the combined expenditure of all three companies is

more than Rs0.3 bn. This should potentially save about Rs15-20/t.

c. Operational efficiencies can be improved as cement was one of the divisions for

both Century and Kesoram and higher focus under Ultratech should benefit.

Consolidation should get CCI approval with some

reorganisation required

Given the consolidation of Ultratech with Century, Kesoram and Mangalam could go

through the scanner of Competition Commission of India (CCI), we apply the same filter

which CCI recently used to evaluate the competitive scenario for the Sun Pharma and

Ranbaxy deal. In that deal, CCI evaluated the market share of the combined entity in each

product and also the market share of other players. Where there was enough competition

from other players such that more than two large players existed as competition to the

leader (Sun+ Ranbaxy) and the combined market share of subsequent players is more

than that of the combined entity, CCI was agreeable that the combined entity cannot use

its dominance to influence the market. We use the same approach to evaluate each of the

three companies from a CCI approval perspective.

Lower advertisement cost

should save Rs15-20/t

We take cues from recent

CCI criteria on which CCI

evaluated the Sun Pharma

and Ranbaxy deal

14 April 2015

Ultratech Cement


■ Ultratech + Mangalam: Mangalam sells 40% of the output to Rajasthan, another 40%

to Delhi and NCR regions and the rest primarily to Madhya Pradesh. Our analysis

does not suggest any issue in the states of MP and Delhi, and NCR regions. In our

calculations, the combined entity will have about a 22-25% market share of the

production in Rajasthan with the No. #2 player being Shree cement with a 18-20%

market share, followed by Ambuja (9-10%), Binani (8%), JK Cement (8%), and JK

Lakshmi (6%). Given that sufficient competition exists in the state of Rajasthan even

after the consolidation, we expect consolidation to get CCI clearance in Rajasthan.

■ Ultratech + Kesoram + Century

a. Maharashtra: Almost 60% of Kesoram's overall output is sold in Maharashtra and

Century's Manikgarh unit also supplies to Maharashtra market. In our analysis,

the combined entity's market share in Maharashtra will increase to ~40% with the

No. #2 player being Ambuja at a 12% market share, followed by ACC (10%),

Orient (9%) and then several players with less than 5% share. Here CCI could

raise an issue and in our view it is possible that Century's Manikgarh could be

divested among the group assets. The reason we think Manikgarh could be

divested is that limestone reserves of mines supporting Manikgarh is ~100 mt

whereas Kesoram plants have reserves of >500 mt and Ultratech's Awarpur plant

in Maharashtra has reserves of ~200 mt.

b. Karnataka: The combined entity will have a market share of about 30% in

Karnataka with the No. #2 player being ACC at 16%, followed by India Cement

(7%), Dalmia (5%), Chhetinad (4-5%), and Zuari (5%). In our view, CCI concerns

can be addressed here by the reorganisation of Cement output from the Tadpatri

plant of Ultratech which is located in Andhra Pradesh but supplies almost a third

of the output to Karnataka.

c. Madhya Pradesh: The combined entity will have more than a 30% market share

in Madhya Pradesh with the No. #2 and No. #3 players at 9% each (ACC and

Prism), followed by Heidelberg at 8% and Reliance at 5-6%. We have also

included here JPA's two assets in Madhya Pradesh. In our view, this will require a

reorganisation of the markets for some of the assets. Currently, Shambupura from

Rajasthan supplies to Madhya Pradesh and Century's Manikgarh plant in

Maharashtra also supplies to Madhya Pradesh. If the output of these two plants

does not flow into Madhya Pradesh, then the combined market share will drop to

25%. We want to highlight that presence of Ultratech in Madhya Pradesh is in

quite remote parts such as (1) the Jawad unit is in western MP (2) JPA units are

in eastern MP, (3) the Century Maihar unit is in northern MP, and therefore with

the modification, we mentioned above, CCI approval is possible.

d. Uttar Pradesh: The combined entity will have about 18% market share in the state

with JPA being the state leader with a market share of about 20%. Other significant

players are Shree cement (~10%), Heidelberg (7%), Birla Corp (7%), etc. In our

view, Uttar Pradesh still has sufficient competition and should satisfy CCI criteria.

Amalgamation is value-accretive: Rs350-400/sh

We think these assets bring (a) higher market share for Ultratech in existing markets and

(b) significant potential exists for synergies (EBITDA/t to increase by >50% or Rs300-

350/t). A large part of this synergy is driven by higher ASPs (Rs200-215/t) as the brand

transitions to Ultratech, and with lower freight costs (Rs75-100/t), lower promotion spend

(Rs20/t) and savings in other fixed costs. We estimate that if all the assets were acquired

at US$120/t, it would add Rs400/sh to Ultratech's valuations.

A Business Standard article suggested that potential valuation of Century's assets could

be Rs105 bn, implying an enterprise value of US$130-135/t for the assets. Therefore, if

the potential transactions are done at US$130-135/t, value accretion to Ultratech could be

Rs350/share.

In Rajasthan, enough

competition still exists even

after consolidation

For Maharashtra, it is

possible that Century's

Manikgarh unit may not be

consolidated with Ultratech

CCI requirements in

Karnataka could be met by

reorganising output from the

Tadpatri plant of Ultratech

(located in AP)

Dispatches from

Shambupura (Rajasthan) to

MP may need to altered and

also for Manikgarh unit

14 April 2015

Ultratech Cement


Figure 14: Sensitivity of value accretion from BK Birla assets vs the acquisition price

EV/t paid ($/t) Value (Rs/share)

100 500

110 450

120 400

130 350

140 300

150 250

Source: Credit Suisse estimates

14 April 2015

Ultratech Cement


Expect demand acceleration over the next two years Cement demand declined in the Mar-15 quarter and weak demand was also reported

across several other sectors. This was largely driven by the government curtailing

expenditure to meet the FY15 fiscal deficit target. Over the past three years, there has

been continued postponement of expenditure into the next year with the declining proportion

of the government's annual expenditure in the March quarter and the rising share of the

June quarter. On the cement front, this has led to a strong 1H on a high base for the past

two years, and a weak 2H on a weak base.

Therefore, FY15 was another weak year with cement demand growth of 4%. We expect

demand to accelerate in FY16 to ~8% with recovery driven by (1) pick-up in rural housing

and (2) pick-up in highway projects with the possibility of higher use of concrete roads

(higher cement intensity). With cement supply CAGR expected at 6% (FY14-17), margins

for the industry should expand if demand growth is >6% for the next two years. Ultratech is

the best proxy to participate in a cement upcycle, given its edge over peers on (1) scale,

(2) profitability, (3) resource base, and (4) financial flexibility. Our target price of Rs3,900

for Ultratech is based on 18x FY17E EPS (as the full benefit of reforms should be reflected

by FY17 only) and a Rs400/share value accretion from consolidation of BK Birla assets.

Weak 4Q15 cement demand driven by low government

spending

Cement demand declined in the Mar-15 quarter with volumes declining by high single

digits in the month of Mar-15. Weak demand has been reported across several other

sectors as well, such as two-wheelers and consumer discretionary. In our view, this was

largely driven by the government curtailing expenditure to meet the FY15 fiscal deficit of

4.1%. Over the past three years there has been continued postponement of expenditure

into the next year. This is clear from the sharply dropping share of expenditure of the

March quarter (Figure 16), and the rising share of expenditure in the June quarter. On the

cement front, this phenomenon has led to a strong 1H on a high base for the past two

years, and a weak 2H on a weak base.

Figure 15: Negative cement demand growth in 4Q FY15… Figure 16:..government spend in Mar-15 quarter very low

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Demand growth YoY

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

15%

17%

19%

21%

23%

25%

27%

23%

25%

27%

29%

31%

33%

35%

2009 2010 2011 2012 2013 2014 2015

March Quarter June Quarter (RHS) As per CS Est

Govt. Expenditure as % of corresponding full year

Govt's est. for Mar. qtr.

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Expect cement demand to accelerate in FY16

As we discussed above, FY15 was another weak year of cement demand with growth low

at ~4%. This was the second consecutive year of weak cement demand. We expect

demand to accelerate in FY16 to about 8% with recovery mainly driven by (1) pick-up in

FY15 cement demand was

weak as the government

curtailed spending in 2H15

We expect demand to

rebound to 8% in FY16 and

margins should expand as

supply growth is ~6%

14 April 2015

Ultratech Cement


rural housing demand and (2) pick-up in highway projects and possibility of some of the

incremental projects to use concrete roads (higher cement intensity). CS infrastructure

team recently met NHAI and the following is the key feedback from the meeting:

The NHAI targets to order 13,062 km of projects by end FY16; these projects are

expected to be under construction by end of FY16. The typical historical run rate of

ordering of 3,000-4,000 km p.a. In addition, the Roads Ministry will order another

7,000 km outside the NHAI structure as this falls under border/hilly projects

Aims to have incremental projects on concrete basis (lower lifecycle cost). Concrete

road is 15-20% more expensive but has lower maintenance costs.

Rs4 of additional cess has only been earmarked but no allocation has been made

from this money this year. Each rupee of cess is about Rs110 bn and thus additional

money would be about Rs440 bn p.a.

Stuck projects where 50% of construction is complete: the government is moving a

proposal to provide partial equity support which would be reimbursed first as the

project starts generating cash flows. This may work in 18 such contracts.

Figure 17: Cement demand growth has been low single

digit for two years and we expect a rebound in FY16

Figure 18: CS infra team expects a revival in highway

award activity post severe lull for the past three years

7%

8%

11%

8%

10%

6%

15%

-1%

9%9%

6%

9%

12%

9%8%

7%

11%

5%

7%8%

3%4%

8%

10%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

Forecast

4.7

1.7

1.2

0.6

3.4

5.1

6.4

1.1 0.9

2.1

5.5 5.5

6.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2006

2007

2008

2009

2010

2011

2012

2013

2014

10M

FY

15

2015

E

2016

E

2017

E

NHAI awarding activity ('000 km)


Figure 19: NHAI has to award another 14,630 kms of highways (as of Oct-2014)

Phase Description Length (km)

Total Completed Under

Impl.

To be

awarded

Phase Golden Quadilateral (GQ): 4-laning of roads

connecting Mumbai-Delhi-Kolkata-Chennai

5,846 5,846 - -

Phase I NSEW Corridor: 4-Laning of roads connecting

Silchar-Porbandar and Kashmir-Kanyakumari

7,142 6,325 400 417

Phase II Stretches connecting important tourist and

religious places with urban centres

12,109 6,300 4,464 1,345

Phase III 2-laning of less important national highways 14,799 776 5,509 8,514

Phase IV 6-laning of high density corridors in GQ,NSEW 6,500 1,919 2,162 2,419

Phase V New expressway construction 1,000 - - 1,000

Phase VI Urban areas - ring roads etc. 700 22 19 659

Phase VII SARDP -NE 388 95 16 277

Total 48,484 21,283 12,570 14,631

Source: Company data, Credit Suisse estimates

14 April 2015

Ultratech Cement


Upcycle requires demand growth at least >6%

With cement supply CAGR expected at 6% (FY14-17), margins for industry should expand

if demand growth is at least >6% over next two years. With our positive view on the

demand growth, we expect industry utilisations to improve materially by FY17 (Figure 21).

On the supply side, a significant chunk of capacity additions is concentrated in the east

over next two years and other regions may not see capacity addition nearly as strong. In

our view, high supply addition in the east should be offset by significant upfront inflows

from recent coal block auctions and higher tax sharing from central government to the

state governments.

Figure 20: Supply additions strong only in the east Figure 21: FY15-17 industry utilisation could improve 600 bp

0%

5%

10%

15%

20%

25%

North South East West

YoY FY15 supply growth YoY FY16 supply growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

10.0

20.0

30.0

40.0

50.0

60.0

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

Capacity Adds (mt) Utilisation

Forecast


Pricing trend remains strong despite weak demand

While cement demand has been weak, the prices have been strong especially in south.

Therefore, we still expect margins for cement companies to expand in the Mar-15 quarter

sequentially despite a volume decline YoY. North prices have been the weakest in FY15

due to high supply addition in FY15 and we expect a recovery in north prices in FY16.

Figure 22: Cement prices have been strong across regions

120

170

220

270

320

370

420

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Mumbai Kolkata Delhi Chennai Hyderabad Bangalore

Rs/bag


14 April 2015

Ultratech Cement


Ultratech: TP based on 18x FY17E EPS

In our view, Ultratech is the best proxy to participate in a cement upcycle, given its edge

over peers on (1) scale, (2) profitability, (3) resource base, and (4) financial flexibility.

Ultratech's profitability gap vs the industry should further expand as auctioning of new

mines increases cost for the industry, but Ultratech appears well placed with its limestone

mine life being >35 years.

Our target price of Rs3,900 for Ultratech is based on 18x FY17E EPS (as the full benefit of

the government's reforms should be reflected by FY17 only) and Rs400/share value-

accretion from the consolidation of BK Birla assets. On the band charts, Ultratech is

trading at the high end of historical multiples as the market is evaluating the stock on

FY17E rather than FY16E as the key benefits of government reforms should start

reflecting from then.

Figure 23: Ultratech one-year forward P/E band Figure 24: Ultratech one-year forward EV to EBITDA band

0x

5x

10x

15x

20x

25x

30x

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14

Price to 12M fwd EPS Mean 1 + SD 1 - SD

0x

2x

4x

6x

8x

10x

12x

14x

16x

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

EV to 12M fwd EBITDA Mean 1 + SD 1 - SD


14 April 2015

Ultratech Cement


Companies Mentioned (Price as of 13-Apr-2015)

ACC Limited (ACC.BO, Rs1594.6) Birla (BRLC.NS, Rs454.65) Century Textiles (CNTY.NS, Rs785.65) Kesoram Inds (KSRM.BO, Rs141.7) Mangalam Cement (MGLC.BO, Rs290.5) Orient Cement (ORCE.NS, Rs182.95) Sun Pharmaceuticals Industries Limited (SUN.BO, Rs1148.55) Ultratech Cement Ltd (ULTC.BO, Rs3001.9, OUTPERFORM, TP Rs3900.0)

Disclosure Appendix

Important Global Disclosures

I, Anubhav Aggarwal, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Ultratech Cement Ltd (ULTC.BO)

ULTC.BO Closing Price Target Price

Date (Rs) (Rs) Rating

02-May-12 1414.45 1212.00 U *

26-Sep-12 1882.85 1559.00

11-Mar-13 1893.35 1900.00 N *

05-May-13 1885.55 1950.00

20-Jan-14 1719.95 1700.00

20-Feb-14 1700.20 1430.00 U

24-Apr-14 2170.50 1535.00

29-Jul-14 2406.45 2200.00 N

20-Oct-14 2450.55 2300.00

27-Jan-15 3120.30 3900.00 O

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N EU T RA L

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

14 April 2015

Ultratech Cement


Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. A n analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (53% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 16% (44% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative bas is. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Price Target: (12 months) for Ultratech Cement Ltd (ULTC.BO)

Method: Our target price of Rs3,900 for Ultratech Cement is based on 18x FY17E EPS (earnings per share), in addition to benefits from the acquisitions of JPA Madhya Pradesh and BK Birla group assets (Rs. 70/400/sh each).

Risk: Risks to our Rs3,900 target price for Ultratech Cement include: (1) demand growth weaker than expected at 8% for the industry; (2) cement prices weaker than expected at less than 8% annual increase ; (3) input prices could surprise; and (4) further delays in commissioning/ramping up new capacities in a bad environment.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (ULTC.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ULTC.BO) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ULTC.BO) within the past 12 months

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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research

14 April 2015

Ultratech Cement


analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (India) Private Limited .................................................................................... Anubhav Aggarwal ; Badrinath Srinivasan

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14 April 2015

Ultratech Cement


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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