cement sector analysis report karvy

8/3/2019 Cement Sector Analysis Report Karvy

1/90

Prasun Kumar

+91-22-22895028

[email protected]

16 September 2011

CEMENT SECTOR

Rajesh Kumar Ravi

+91-22-22895030

[email protected]

INSTITUTIONAL EQUITIES

INDIA RESEARCH


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CEMENTSECTOR 16September2011

FalteringDemand,DecliningPricingPower

OutlookNegative

ProductionDisciplinetoWaneOff;ProfitabilitytoDeclineCement large caps have outperformed The cement majors with pan

IndiapresencehaveoutperformedtheSensexby~24%YTDduetotheir

strong comparative advantages. On the other hand, the midcap and

smallcap cement companies have declined by 1035%YTD. We believe

the large caps will remain relative outperformers in the sector despite

weakeningindustryfundamentals.

Expect largecap cement stocks to correct: Despite a stable EBIDTA

outlook for the largecap cement companies, we believe they are over

valued and hencewe expect theirstock pricesto correct from 12month

perspectiveamidweakeningdemand,decliningpricingpowerandrisingcostpressureresultinginlowerprofitabilitygoingforward.

Capacity utilisation at 20year lows until FY14E Sector in a Down

cycle:Whilecapacitygrowthisexpectedtoslowdown,lowerdemandoff

takewouldwidenthegapbetweendemandandsupplytherebyreducing

cementproducerspricingpower.Onaregionalbasis,utilisationlevelsin

thenorthernandcentralregionsshouldremainabove85%duringFY11

13Eandunder65%inthesouthernregion.

Productiondisciplinetomanagecostpressureunlikelytosustain:The

cement producers led by the larger players resorted to production

discipline led price hikes to stabilize their profitability amid weakening

demand growth, and rising operating costs. However, we expectindustryspricingpowermaynotsustainwithdecliningutilisationlevels.

Further, as industrys fragmentation continues and smaller producers

continueto gain incremental market share, we believe that the threat to

production discipline would intensify. Hence, we expect the industrys

marginsandprofitabilitytocomeunderfurtherpressuregoingforward.

GrossStateDomesticProduct(GSDP)trends: WehaveanalyzedGSDPs

of states in each region and the companies present in those regions to

drawregionaldemandinference.TheGSDPgrowthratesthathavebeen

stronginnorthern,southernandwesternstateshavebeenimprovingin

theeasternstates,whilecoolingdowninthecentralstates.

Initiate coverage on fiveCompanies: We initiate coverage onthe three

panIndiaproducersACC,AmbujaCements&UltraTechCementwith

SELLrecommendations,andontheregionalplayersIndiaCements&

ShreeCementwithHOLDrecommendations.

Exhibit1:ValuationSummary

StocksMCap

(RsBn)Rating

EBITDA/MT(Rs) RoCE(%) EV/EBITDA(x) EV/MT(US$)

FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

ACC* 200.1 SELL 859 811 742 15.9 14.5 12.4 9.1 9.1 9.1 123 130 124ACEM* 230.2 SELL 968 906 857 17.1 13.6 12.0 10.2 10.4 10.0 176 164 159

ICEM 22.3 HOLD 385 621 583 2.6 3.4 3.1 9.4 6.9 6.7 81 95 87SRCM 59.2 HOLD 718 713 707 15.9 8.9 16.0 6.1 6.4 5.5 89 95 90

UTCEM 314.9 SELL 686 748 734 13.7 11.2 10.1 11.5 8.7 8.6 134 133 132

Source:KarvyInstitutionalResearch*FY11,FY12E,FY13EreferstotheirCY10,CY11E,CY12Efinancials

[email protected]

[email protected]

ACC(ACCIN)SELL

CMP 1,065

TargetPrice 952

Upside (%) 11

52WeekHigh/Low(Rs) 1,143/917Avg.DailyVolume(000) 242

AmbujaCements(ACEMIN)SELL

CMP 151

TargetPrice 127

Upside (%) 1652WeekHigh/Low(Rs) 166/111Avg.DailyVolume(000) 1,841

IndiaCements(ICEMIN)HOLD

CMP 73

TargetPrice 76

Upside (%) 5

52WeekHigh/Low(Rs) 127/62Avg.DailyVolume(000) 814

ShreeCements(SRCMIN)HOLD

CMP 1,700

TargetPrice 1786

Upside (%) 552WeekHigh/Low(Rs) 2,350/1,500

Avg.DailyVolume(000) 27

UltraTechCement(UTCEMIN)SELL

CMP 1,149

TargetPrice 972

Upside (%) 1552WeekHigh/Low(Rs) 1,188/890

Avg.DailyVolume(000) 136

INSTITUTIONALEQUITIES

INDIA RESEARCH

Thematic


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CementSectorThematic

TableofContents Page

ExecutiveSummary..3 ValuationsExceedOurFairValueEstimatesOutlookNegative..3

CapacityUtilisationat20yearlowstillFY14EExpectaDowncycle.3 ProductionDisciplineUnlikelytoSustain..3

InitiateCoverageonFiveCompanies..4

ValuationSummaryofFiveStocks..4

CementMajorsHaveOutperformedtheMarket..5 Outperformanceattributedtocompaniesfundamentalstrengths.5 ExpectStockPricestoDeclineGoingForwardOutlookNegative...5

KeyTriggers.6

KeyUpsideRisks.6

SummaryofCompaniesCoveredintheReport.6

SensitivityAnalysisoftheFiveCompanies.9

DemandSupplyDynamics.10 LongtermCementDemandFundamentalsRemainIntact10

ProjectExecutionsSlumpintheNearterm..12

SupplyPressuretoRemainHigh....15

DemandSupplyMismatchtoContinuetillFY14E..16

CementSectorintheMidstofanotherDownCycle17

RegionwiseDemandSupplyDynamics....19

CostPricingDynamics.25 OperatingCostPressureMounting;UtilisationLevelExpectedtoDrop25

EnsuingProductionDisciplineNotALongtermSubstitutetoDemandGrowth..26

RoEAnalysisduringProductionDiscipline..27

InterRegionMovementofCementisLimited.28

RisktoPricingPowerIncreases.30

ComparativeAnalysisofMajorCementCompanies32 CaptivePowerSourcing..32

FuelLinkages....32

LogisticalInfrastructure..33

GeographicalDiversification...34

RevenueDiversification..34

AssetSweating..35

BalanceSheetStrength..35

ValuationMethodology36 WePreferEV/EBITDAoverAssetbasedValuation36

WeUseLastDowncycleValuationMultiple...36

CompaniesSection ACC.37

AmbujaCements...46

IndiaCements... 56

ShreeCement.68

UltraTechCement.78


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ExecutiveSummaryValuations Exceed Our Fair Value Estimates Outlook

Negative

ThecementstocksandespeciallythelargeproducersACC,AmbujaCements

&UltraTechhaveoutperformedthemarketsoverlastoneyear.Whilethisis

inline with their strong fundamental strengths, the recent runups in the

stocks do not seem to have factored in the increasing risk to the industrys

pricingpowerandhencesubsequentrisktotheirprofitability.Cementstocks

aretradingathighervaluationmultiplesdespiterisingrisktotheirearnings.

Lowercementrealizationandfurthercostpressureshouldsetinadeclining

trend incompaniesprofitsin the ensuing quarters. Weexpect the declining

profitability,andfurtherratehikeannouncementsbyRBIshouldtriggerasell

offinthecementstocks.

Capacity Utilisation at 20year lows till FY14E Sector in a

Downcyclephase

Whilethelongtermcementdemandgrowthmetricsareinplace,slowdownin

project executionsacross bothrealty and infrastructure sectors sinceQ2FY11

would dampen cement demand CAGR to 6% in FY1113E. Channel checks

withindustryparticipantsintheinfrastructureandrealtysectorssuggestnew

projectofftakeshavebeenonadeclineoverthelastoneyear.

Additionally,cementcapacityisexpectedtoincreaseata7%CAGRinFY11

13E, which implies demandsupply mismatch would remain until FY14E.

Lowercapacityutilisationduetowideninggapbetweensupplyanddemand

wouldinturnreducethepricingpowerofthecementproducers.

Withcapacityutilisationof~75%inFY1114E,theIndiancementindustryisin

themidstofanotherdowncyclephase.Industryscapacityutilisationduring

this phase would be at 20 year lows, in our view. On a regional basis,

utilisationlevelsinthenorthernandcentralregionsshouldremainabove85%,

whiletheSouthernregionsutilisationwouldremainunder65%inFY1113E.

ProductionDisciplineUnlikelytoSustain

Industrys operating costs have shot up by ~40% during the last four years

while its capacity utilisation has been on a decline. The cement producers

acrossIndia(ledbythelargeproducers)resortedtoproductiondisciplinesince

the start of Q2FY11 to firm up cement prices thereby stabilizing their

profitability against rising cost pressure. Weakening demand during the

precedingquarterhaddraggeddowncementpricesacrossallregions.While

theproductiondisciplinehassofarhelpedcementmanufacturerstopasson

their cost pressure fully, threat to the ensuing production discipline looms

large.

Whilecapacityutilisationisexpectedtofallto20yearlowlevelsduringFY11

14E,industrysfragmentationcontinues.Further,thelargemanufacturersmay

getwaryofcontinuouslylosingtheirmarketsharetotheirsmallerpeersover

the last one year during the ensuing production discipline. These factors

shouldreduceindustrypricingpowerandthemanufacturersabilitytofullypass on their cost pressure. Hence, we expect the industrys margins and

profitabilitytocomeunderfurtherpressuregoingforward.


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Ourestimatesofcompaniesoperatingprofitsandfairvaluecandeclineby15

25% if net realization growth in FY13E is lower by 5% that our current

estimates.

InitiateCoverageonFiveCompanies

WeinitiatecoverageonthethreelargeproducersACC,AmbujaCements&UltraTechCementwith SELLrecommendation,asthesestocksaretrading

above their last downcycle valuations. Amongst the regional players, we

initiate coverage onIndiaCements with a HOLD recommendation,as the

stockhasalreadycorrectedby~25%overthelastoneyearinlinewithitsweak

fundamentalstrengths.WeinitiatecoverageonShreeCementwith HOLD

recommendationduetoofftakeriskstoitsmerchantpowerbusinesswhilethe

cementbusinessoutlookremainsstable.

ValuationSummaryofFiveStocks

WehavevaluedACC&AmbujaCementsat8.2xtheirCY12EEBITDA,while

wehavevaluedUltraTechCementsat7.5xitsFY13EEV/EBITDA,(implying10% discount to ACC & Ambuja). We estimate this valuation differential

would exist over the next one or two years until the various logistical and

infrastructuralupgradationcapex enhances UltraTechs assetturnover inline

with ACC & Ambuja Cements. We have valued Shree Cements cement

business at 6.5x its FY13E EBITDA and its merchant power business at 5x

FY13E EBITDA. We value India Cements standalone cement business at 6x

FY13EEBITDA(~25%discounttoACC&Ambuja)andits100%ownershipof

theCSKatRs.20pershare.


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CementMajorshaveOutperformedtheMarketThe cement sector and primarily the cement majors (UltraTech, ACC and

AmbujaCements)haveoutperformedtheBSESensexby~24%YTD.Thelarge

capstockshavedelivered~11%returnoverthelastoneyear.Incontrast,the

stocksofsmallercementcompaniesaredown1540%overlastoneyear.

Exhibit2:PriceperformanceofmajorcementcompaniesinIndia

CMP Mktcap Absolutereturn(%) 2yr 3yr RelativetoSensex(%)

CementStockPerformance(%) (Rs) (Rsbn) 3m 6m 1yr YTD CAGR CAGR 3 6m 1yr YTD

UltraTechCementLtd. 1,149 315 11 13 11 6 18 20 25 23 24 27

AmbujaCementsLtd. 151 232 15 21 10 6 21 28 23 23 23 24

ACCLimited 1,070 201 8 7 12 0 15 14 26 17 17 21

JaiprakashAssociatesLimited 70 149 (15) (13) (44) (34) (8) (7) (30) (17) (34) (11)

ShreeCementLimited 1,715 60 (1) (3) (16) (15) 6 4 (3) 2 7 46

CenturyTextiles&IndustriesLimited 288 27 (15) (7) (44) (33) (8) (0) (30) (15) (24) (12)

BirlaCorporationLimited 319 25 (12) 6 (16) (12) (5) 13 (2) 6 6 31

IndiaCementsLimited 74 23 (12) (18) (33) (32) (5) (11) (20) (15) (24) (19)

MadrasCementLimited 101 24 14 10 (11) (5) 21 17 2 13 (5) (7)

OrientPaper&IndustriesLimited 62 12 4 35 (3) 13 11 42 10 30 6 24

Source:Bloomberg,KarvyInstitutionalResearch

Outperformance attributed to companies fundamental

strengths:Thestrongoutperformanceofthecementmajorscanbeattributedtotheirstrongfundamentaldriversbothoperationalandfinancial.Asshown

inthetablebelow,wehaverankedthreecementmajors(UltraTech,ACCand

Ambuja Cements) and three regional companies (Shree Cement, India

Cements,MadrasCements)onthosefundamentaldriversonascoreofOneto

Five.Wehaveascribedahigherscoretothecompaniesforaparticulardriver

whichincreasesitsoperationalorfinancialstrength.

Exhibit3:ComparativeanalysisoffundamentalstrengthsofmajorcementcompaniesinIndia

FundamentalDrivers UltraTech ACCAmbuja

Cements

India

Cements

Shree

Cement

Madras

Cements

Captivepowersourcing 4 4 4 2 5 2

Fuellinkages 3 4 3 2 1 1

Logisticalinfrastructuresupport 4 4 4 2 1 1

Geographicaldiversification 4 4 4 2 2 2

Revenuediversification 2 2 2 2 4 2

AssetSweating 3 4 4 2 4 2

BalanceSheetstrength 4 3 4 1 3 1Overall(outof35) 24 25 25 13 20 11

Source:Companies,KarvyInstitutionalResearchScoreof5impliesstrongdriver,1impliesweakdriver

ExpectStockPrices toDecline GoingForward;Sector

OutlookNegativeWehaveaNegativestanceonthesectorasweexpectprofitabilitytodecline

during FY1113E. Lower capacity utilisation and increasing industrys

fragmentationwouldimpactproducerspricingpower.Hence,weexpectthey

should not be able tofullypass ontheir rising cost pressure. We expect the

industrysRoEtocontractfrom~12%inFY11to~9%byFY13E.However,as

suggested by their higher fundamental strengths, we expect the largemanufacturers to deliver higher operating margins of ~20% in FY13E vs.

industryaverageof17%.ThesemanufacturersshoulddeliverhigherRoEsof

~13%againstindustrys9%RoEinFY13E,inourview.


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Exhibit 4: Declining profitability to drag down stock performance going

forward

Source:CMA,KarvyInstitutionalResearch

Exhibit5:RelativeValuations&TargetMultiples

Companies Recommendation CMP Mcap EV/EBITDA(x)EV/MT

(US$)

Target

multiple

Target

Price

Implied

EV/MT

Rs Rsbn FY11 FY12E FY13E FY13E

EV/EBITDA

(x)Rs US$

ACC* SELL 1,065 200.1 9.1 9.1 9.1 124 8.2 952 112

AmbujaCements* SELL 151 230.2 10.2 10.4 10.0 159 8.2 127 130

IndiaCements HOLD 73 22.3 9.4 6.9 6.7 87 6.0 76 88

ShreeCement HOLD 1,700 59.2 6.1 6.4 5.5 90 6.5 1,786 96

UltraTechCement SELL 1,149 314.9 11.5 8.7 8.6 132 7.5 972 115

Source:Company,KarvyInstitutionalResearch*FY11,FY12E,FY13EreferstotheirCY10,CY11E,CY12Efinancials

KeyTriggersDecliningprofitabilityoverthenextthreequartersledbylowerrealizationand

highercostpressure

FurtherinterestratehikesbeingannouncedbytheRBI

KeyUpsideRisksIftheproductiondisciplinesustainsthroughinFY13E,netrealizationgrowth

could be 24% higher than our estimates and hence the producers can fully

passontheirincrementalcostpressure.Thesecouldleadtofairvalueestimates

of the companies under coverage being higher by 1020% than our current

estimates.However,evenifthisscenarioplaysout,therearelimitedupsidesin

thestocksattheircurrentmarketprices.

SummaryofCompaniesCoveredintheReport ACC:WeinitiatecoveragewithSELLrecommendationonthestockwithatargetpriceofRs.952pershare,valuingACCat8.2xitsCY12EEBITDA.

x PanIndia presence with strong fundamentals: ACC is Indias oldest

cementcompanyinIndiawith30mnMTofinstalledcementcapacityand

apanIndiapresence.Ithas~353MWofthermalCPPwhichmeets~80%of

its electricity requirements. ACC also has captive railway sidings and

railwaywagonswhichhelptocontrolitslogisticscost.ACCmeets~50%of

itscoalrequirementsthroughlowcostlinkagecoal.

x Decliningprofitability&returnratios:Whileoperatingcostsarelikelyto

growby~5.5%CAGRinCY1112E,weakpricingpowerwontallowACCtofullypassonthesecostpressuretotheendconsumers.Hence,operating

margins should contract by ~420 bps in CY1112E, which in turn would

leadtoitsEBITDAandPATtodeclineinCY1012Eat11%and15%CAGR

respectively.

60

70

80

90

100

0

8

16

24

32

40

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

CapacityUtilisation(%)RHS OPM(%) RoE(%)


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AmbujaCements:WeinitiatecoveragewithSELLrecommendationonthestockwithatargetpriceofRs.127persharevaluingAmbujaCementsat

8.2x its CY12E EBITDA. The target price implies a replacement cost of

US$130/MT.

x Third largest panIndia cement manufacturer: Ambuja Cements is the

third largest cement manufacturer in India having 27 mn MT ofcement

grinding capacity and 19.6 mn MTof clinker capacity. It is amongst the

Top4manufacturersinthewestern,easternregionsandnorthernregions.

Itdoesnothaveanypresenceinthesouthernregion.

x Operating profits to remain flat despite cost efficiencies: Ambuja

CementsisoneofmostcostefficientproducersinIndiawith~77%usageof

captive power. With the increasein fuel and freight expenses,we expect

operating costs to grow by ~5% YoY in CY1112E, while net realization

would rise by ~2% YoY. This should result in lower EBITDA/MT going

forward and hence we expect EBITDA to remain flat in CY1112E. We

expectbothRoEandRoCEtocontinuedownwardinCY1112E.However,

theCompanyshouldcontinuetodeliverindustryleadingreturnratios.

IndiaCements:Weinitiatecoveragewith HOLDrecommendationwithtargetpriceofRs.76,valuingIndiaCementsstandalonecementbusinessat6x

itsFY13EEBITDA,TrinetraCementatUS$60perMTandCSKsfranchiseright

atUS$140mn(Rs.20pershare).

x Strong realization growth in FY12E due to production discipline: The

productiondisciplinehasbeenmosteffectiveinthesouthernregion,where

India Cements has leading presence. This would help the Company to

register 12% YoY net realization growth in FY12E. However, lower

capacityutilisation(


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assetturnoverandnetmargins.WebelievethatRoCEof16%inFY13E

wouldbenefitfrom10%YoYEBITDAgrowthinFY13E.

UltraTech Cement: We initiate coverage on UltraTech with a SELLrecommendationasthestockhasrunupaheadofitsfairvalue,inourview.

WevalueUltraTechat7.5xitsFY13EEBITDA(implying10%discounttoACCandAmbuja).Weestimatethisvaluationdifferentialshouldexistoverthenext

oneortwoyearsuntilthevariouslogisticalandinfrastructuralupgradation

capex enhances UltraTechs asset turnover inline with ACC & Ambuja

Cements.

x Largest panIndia Company with strong comparative advantages

UltraTech Cement is Indias largest and Worlds ninth grey cement

manufacturer. In India, it is amongst the Top3 manufacturers in all the

regions.TheCompanyhas~540MWofthermalCPPwhichmeets~80%of

electricityrequirements.Ithasbeenamajoruserofseatransportationon

thewesterncoastofIndia.

x High exposure in southern & western regions to impact realization

growth: Over 50% ofUltraTechs capacityis located inthe southernand

western regions, where the price discipline is holding on the most.

However, the capacity utilisation in the southern region is expected to

declineto63%inFY1113Eperiod.Similarly,thecapacityutilisationinthe

adjacent western region would contract to 73% in FY1113E period. We

expect that declining utilisation levels in these regions would severely

affectthepricingpoweroftheproducerstherebyleadingtotheongoing

pricestabilityintheseregions.

x Earnings growth to moderate, return ratios on a decline: We expect

UltraTechCementssalesvolumegrowthwouldmoderateto~2%YoYinFY13Edespitefactoringin~83%utilisationforUltraTechinFY1213E.We

believe thatdeclining pricing power wouldreduce UltraTechsability to

fullypass onincremental cost pressurein FY13E. Weexpect UltraTechs

RoEtodeclineby690bpsinFY1113Eperiod.

Exhibit6:Keyperformancemetricsofthefivecompaniescoveredinthereport

CompaniesYearSalesVol

Growth(%)

Realization

Growth(%)

EBITDA/MT

(Rs)

OPM

(%)

EBITDA

growth(%)

FCF/EBITDA

(X)

RoE

(%)

RoCE

(%)

ACC CY10 (1.7) (2.5) 859 22.7 (31.5) 0.5 17.9 15.9

CY11E 12.9 3.9 811 20.7 6.6 0.5 15.8 14.5

CY12E 4.0 2.0 742 18.6 (4.8) 0.1 13.4 12.4

ACEM CY10 8.2 (1.8) 968 26.0 (0.9) 0.7 18.1 17.1CY11E 4.1 2.5 906 23.6 (1.6) (0.0) 14.4 13.6

CY12E 6.0 2.1 857 21.8 0.3 0.1 12.7 12.0

ICEM FY11 (9.1) 2.0 385 11.1 (50.5) (0.7) 1.6 2.6

FY12E (2.8) 11.6 621 16.1 56.5 0.5 2.5 3.4

FY13E 7.0 1.9 583 14.8 0.4 0.4 2.1 3.1

SRCM FY11 0.2 (7.6) 718 25.2 (41.4) 0.1 13.5 15.9

FY12E 5.8 3.4 713 22.5 1.0 0.5 9.9 8.9

FY13E 5.6 3.6 707 20.6 10.1 0.2 22.9 16.0

UTCEM FY11 4.2 4.6 686 20.1 32.1 (0.9) 19.9 13.7

FY12E 4.4 4.9 748 20.9 30.8 0.2 15.3 11.2

FY13E 1.5 4.3 734 19.7 0.2 0.0 13.1 10.1

Source:Companies,KarvyInstitutionalresearch


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SensitivityAnalysisoftheFiveCompaniesThefollowingtablesenumeratetheimpactonprofitabilityandvaluationsof

the five stocks covered in the report due to variations in key parameters in

FY13E.

Exhibit 7: Impact of 1% increase in the followingparametersonEBITDA(%)

Exhibit 8: Impact of 1% increase in the followingparametersonEPS(%)

SalesVol Realization Fuelcost Freightcost

ACC 1.2 5.1 (1.2) (0.9)

ACEM 0.9 4.3 (1.2) (1.0)

UTCEM 0.7 4.1 (1.3) (1.1)

SRCM 0.9 3.2 (1.8) (0.7)

ICEM 0.6 7.0 (2.0) (1.5)


ACC 1.5 6.5 (1.5) (1.2)

ACEM 1.1 5.3 (1.4) (1.3)

UTCEM 1.0 6.0 (1.9) (1.6)

SRCM 1.5 5.0 (2.8) (1.1)

ICEM 4.0 45.3 (12.7) (9.6)

Source:KarvyInstitutionalResearch Source:KarvyInstitutionalResearch

Exhibit 9: Impact of 1% increase in the following

parametersonRoE(bps) Exhibit 10: Impact of 1% increase in the following

parametersonTargetPrice(%)


ACC 19 81 (19) (15)

ACEM 13 63 (17) (15)

UTCEM 12 73 (23) (20)

SRCM 30 101 (57) (22)

ICEM 6 64 (18) (14)

SalesVol Realization Fuelcost FreightCost

ACC 1.1 4.8 (1.1) (0.9)

ACEM 0.8 3.8 (1.0) (0.9)

UTCEM 0.7 4.4 (1.4) (1.2)

SRCM 1.1 3.8 (2.2) (0.8)

ICEM 1.0 12.5 (3.6) (2.7)


TwoKeyObservationsI. Whilethevariationsinsalesvolume,fuelcostandfreightexpensesaffect

earningsandvaluationby~0.51.5x,thevariationsinnetrealizationhave

almost 46x impact on these parameters. This implies that if producers

pricing power continues to reduce, their profitability and subsequent

valuationsshoulddeclinesignificantly.

II. Low debt levels in case of the ACC, Ambuja Cements, UltraTech and

Shree Cement reduces their EPS and RoE volatility. We expect India

CementsRoEtoremainunder3%duringFY1113E.Itshighdebtlevels

increasesitsfinancialleveragemultifold.


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DemandSupplyDynamics

Longterm Cement Demand Fundamentals Remain

Intact

Overthe lasttwenty years, the cement demandinIndia has grownat ~1.22xGDP growth. Housing / Realty sector has sofar accounted for ~75% oftotal

cement consumption in India, while the infrastructure sector and industrial

constructionaccountedfor25%theremainingdemand.

Exhibit 11: Cement demand grew at 1.22x GDP growth during the last 20

years

Source:CMA,RBI,KarvyInstitutionalResearch

Exhibit12:GDPandcementconsumption(percapita)arestronglycorrelated

Source:CMA,RBI,KarvyInstitutionalResearch

Exhibit13:Expandingshareofinfrastructuresectorscementconsumption

Source:CRISILResearch,KarvyInstitutionalResearch

4%

1%

6%

11%

16%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

2014E

GDPgrowth(%) CementConsumptionGrowth(%)

80

100

120

140

160

180

25,000 30,000 35,000 40,000 45,000 50,000CementDemand(K

g/capita)

IndiasGDP(Rs/capita)

64%54%

17% 30%13% 11%

6% 5%

500

700

900

1100

0%

20%

40%

60%

80%

100%

FY0509 FY1014E

Housing Infrastructure CommercialConstruction Industrial Totaldemand(mnmt)RHS


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However, the infrastructure sector is expected to gain a larger share of the

cement demandpie onbackof largeinvestmentspegged toimproveIndias

infrastructure facilities. The Government of India has been doubling its

investment outlay in each of the 10th, 11th & 1 2th Five Year Plan (FYPs) to

supporttheGDPgrowthmomentum.

AsperCRISILResearchthecementconsumptionshareof infrastructureand

industrial sectors is expectedtoexpand to35% during FY1014E asagainst

23%duringFY0509

Exhibit14:CementDemandfromInfrastructureSectortodoubleto~480mn

MTinFY1317Easperplannedcapexoutlayin12thFiveYearPlan

Source:PlanningCommissionofIndia,KarvyInstitutionalResearch

Exhibit15:PowerCapacityExpansionScheduleforFY1015EperiodStrong

orderbookinpipelinetoaidlongtermcementconsumptiongrowth

Source:CEA,KarvyInstitutionalResearch

Exhibit 16: Out of50,405kms underNHAI, 70% still to becompleted over

nextfourtofiveyears

Source:NHAI,KarvyInstitutionalResearch

0

40

80

120

160

200

Power Roads Telecom Railways Irrigation Water&

Sanitation

Ports&

Airports

Others

XIthPlan XIIthPlan

10

20

30

4

8

12

16

FY10 FY11E FY12E FY13E FY14E FY15E

Central State Private TotalCapex(RHS)

000MW 000MW

4,000

8,000

12,000

16,000

4,000

8,000

12,000

16,000

P1&2 P3 P4 P5 P6 P7 GQ

Done UnderImplementation Remaining Total(RHS)


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16September,2011


ProjectExecutionsSlumpintheNeartermDenting

DemandGrowthtobelow10%inFY1113E

WhileweexpectthelongtermcementdemandtofollowtheCementDemand

Factor(CDF=CementDemandGrowth/GDPGrowth)of1.22x,thereareno

measurestomeaningfullyassesstheneartermcementdemandgrowth.Hence,we have tried to analyze trends in CDF to identify the nearterm demand

trends.Overthelast20years,theCDFhasremainedaboveoneexceptforfour

instances when it was below one. In fact, in FY01, the factor was negative

owning toa decline inthe cement demandgrowth. Inall the four instances

when the CDF was below one, it rebounded to more than one in the

subsequentyear.Additionally,theCDFhasstabilizedoverthelastsixtoseven

years,asagainstthehighvolatilityitwitnessedduringtheprecedingtenyears.

Basedonthetwotrendsasdiscussedabove,weexpectthecementdemandin

FY1213Ewouldbehigherthan4.7%inFY11.

Exhibit17:CementDemandFactor(CDF)trendoverthelast17years

Source:RBI,CMA,KarvyInstitutionalResearch

ThecementconsumptioninFY11shrunkto~4.7%,asactivitiesslumpedacross

bothrealtyand infrastructuresectors.Risinginterestcostshasimpactedsales

offtakefortherealtysector.Thebureaucraticinactivityafterunearthingofa

slew of scams and scandals has slowed down both Governmentled

infrastructureactivitiesaswellasprivatesectorledprojects.

Exhibit18:RisingcostofcapitaltoimpactdemandofftaketillFY12E

Source:RBI,KarvyInstitutionalResearch

0.20

0.20

0.60

1.00

1.40

1.80

2.20

2.60

FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10

Cementdemandfactor

4.0

5.0

6.0

7.0

8.0

9.0

Oct05 Mar06 Aug06 Jan07 Jun07 Nov07 Apr08 Sep08 Feb09 Jul09 Dec09 May10 Oct10 Mar11 Aug11

RepoRateTrend


14/90

13

16September,2011


Exhibit19:HousingCreditGrowthRecoverymuted

inFY11asinterestratestartedtosurge

Exhibit 20: Revenue (Rs bn) trends of nine realty

companiesinIndia

Source:RBI,KarvyInstitutionalResearch Source:Bloomberg,KarvyInstitutionalResearch

Exhibit21:BanksCreditO/SYoYtoInfraSector(%)

Trendingdownwards

Exhibit 22: Revenues (Rs bn) of 28 Infrastructure &

Powersectorcompanies;Growthslowingdown

Source:RBI,KarvyInstitutionalResearch Source:Bloomberg,KarvyInstitutionalResearch

Channel checks with industry participants in the infrastructure and realty

sectors suggest that the new project offtakesin realty sector have been ona

decline over the last one year. As per realty research firm PropEquity, the

housing projects launches across top eightcities inIndiahave dropped 31%

since Q3FY11. Slow demand has been attributed to rising construction cost,

higher interest rate. Moreover, delayed deliveries have further added to

reduction in new project announcements. Infrastructure projects have also

sufferedasinvestmentsinnewprojectshavebeenonadeclinein2011vs.2010.

The execution delay has resulted in 22% increase in project costs. Land

acquisitiondelays,changeinscopeofprojects,escalatingmaterialcost,service

outlay,etc.aretheotherreasons,whichcanbeattributedtothecostoverruns.

Factoringintheexecutiondelays,weexpecttheCDFmayremainunder1xat

leastduringFY1213EeventhoughitmayincreasesubsequentlyfromitsFY11

levels. Hence, we expect cement demand CAGR of 6% during FY1113E as

against10%demandCAGRduringFY1113Eperiod.

0%

10%

20%

30%

40%

50%

60%

FY05 FY06 FY07 FY08 FY09 FY10 FY11

10%

0%

10%

20%

30%

40%

50%

30

60

90

120

150

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Realty 3yrCAGR

0%

20%

40%

60%

Apr08

Sep08

Feb09

Jul09

Dec09

May10

Oct10

Mar11

BankscreditO/StoInfraSectorYoYchange(%)

0%

10%

20%

30%

800

1,600

2,400

3,200

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Constructionandpowersectors 3yrCAGR


15/90

14

16September,2011


Exhibit23:CostOverrunsinCentralSectorMegaProjects(RsBn)

Sectors

No.of

Projects

Anticipated

Cost

Cost

Overrun

Rise

(%)

Atomicenergy 3 226 48 27.2

Civilaviation 2 32 0 0

Coal 7 159 29 21.9Fertilizer 3 41 0 0

Mines 1 44 3.1 7.6

Steel 5 621 244 64.5

Petroleum 36 1,490 102 7.4

Power 44 1,655 45 2.8

Railways 28 705 340 93.3

RoadTransport&

Highways10 156 12 8.2

Shipping&Ports 5 70 4.1 6.2

Telecom 3 42 5.52 15.2

Urban

Development2 305 154 102.4

WaterResources 1 12 6.44 118.6

GrandTotal 150 5,558 993 21.8

Source:MOSPI,ProjectMonitor,KarvyInstitutionalResearch

Exhibit24:Mostofthe150centralsectormegaprojects

arebehindschedulesasonApril2011

Exhibit25:Costoverrunratiohasstartedtosurgeagain

ledbyprojectexecutiondelays

Source:MOSPI,ProjectMonitor,KarvyInstitutionalResearch Source:MOSPI,ProjectMonitor,KarvyInstitutionalResearch

On

Schedule,55

Facedtime

overruns,69

Commission

ingdatenot

fixed,26

0%

20%

40%

60%

80%

1991 2000 Feb/08 Apr/11

Costoverrunratio


16/90

15

16September,2011


SupplyPressuretoRemainHigh

High return ratios during the last 56 years prompted capacity expansion

drive, as the incumbent ploughed their internal accruals and new players

grabbedtheopportunityprovidedby10%cementdemandCAGRprojections.

Hence, many newprojects were announced and commissioned over the lastthreetofouryears.Theindustryadded~80mnMTduringFY10andFY11,and

another42mnMTcapacityislikelytogetcommissionedinFY1213Eperiod.

We believe that the supply pressure would remain high even though the

expansionrateexpectedtoslowdown to 7%CAGR inFY1113Evs. 16% in

FY0810.

Exhibit26:CapacityExpansionplansfornexttwoyearsinIndia(mnMT)

Companies District State Region FY12E FY13E

AndhraCements Dachapalli AP S 2.1

KJSCement Satna MP C 2.2

JKLakshmi Haryana N 0.5

JaypeeGroup Nalgonda AP S 3.5

BirlaCorporation Durgapur, WB E 0.6

MadrasCements Ariyalur, TamilNadu S 2.0

JaypeeGroup(SAILJV) Bokaro Jharkhand E 2.1

BirlaCorporation Chanderia Rajasthan N 1.2

JSWSteel Kurnool AP S 1.5

ABGCement Kutch, Gujarat W 3.3

JaypeeGroup Churk UP C 1.5

JaypeeGroup Bina UP C 2.0

Heidelberg Imlai,Jhansi UP C 2.9

SagarCements Gulbarga, Karnataka S 2.8

CenturyPlywood Guwahati Assam E 1.6

CenturyPlywood Kahlegaon, Bihar E 1.6

CenturyTextiles Murshidabad WB E 1.5

JaypeeGroup Roorkee Uttrakhand N 1.0

JaypeeGroup Sidhi UP C 2.0

SAIL Kulti WB E 2.0

BirlaCorporation Chanderia Raj N 1.5

JKLakshmi Durg Chhattisgarh N 2.7

Total TotalAdditions 19.0 23.1

Source:KarvyInstitutionalResearch

RegionwiseCapacityExpansion:Whilethesouthernregionleadsincapacity

expansioninFY1113E,thecentralandtheeasternregionswouldgaintraction

in FY13E. Out of the total additions of 72 mn MT in FY1113E period, the

southernregionaccountsfor23mnMT(~33%share).Webelievethiswouldkeeptheutilizationlevelssuppressedinsouthernregionsatleastforthenext

twoyears.Theeasternandthecentralregionswouldaccountfor65%ofnew

additions during FY13E. While we expect these two regions to continue to

grow at >8% during FY12E and FY13E, we expect the imports from nearby

regionstoreduceintheseregionsasthesenewcapacitiesgetcommissioned.


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16September,2011


Exhibit27:CapacityAdditionsregionwiseoverthenexttwoyears

(mnMT) CapacityAdditions YearEndInstalledCapacity Shareofnewadditions

Regions FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Northern 3.2 1.7 5.2 62 64 69 11% 9% 23%

Eastern 2.7 6.7 37 40 46 0% 14% 29%

Western 10.5 3.3 52 55 55 35% 17% 0%Central 4.3 2.2 8.4 35 38 46 14% 12% 36%

Southern 11.8 9.1 2.8 110 119 122 40% 48% 12%

29.8 19.0 23.1 296 315 338 100% 100% 100%


Exhibit28:Southernregiontoaccountfor~33%oftotal

newcapacityadditions(mnMT)inFY1113E

Exhibit29:EasternandCentralregionstoaccountfor

higherincrementaladditionsinFY13E

Source:CMA,KarvyInstitutionalResearch Source:CMA,KarvyInstitutionalResearch

DemandSupplyMismatchtoContinueuntilFY14E

Based on the demand supply projections as discussed below, we expect

industrys capacity utilization to remain under 80% until FY14E. Lowercapacityutilisationshouldinturnnegativelyimpactthepricingpowerofthe

cementmanufacturers.

Exhibit30:DemandSupplymatrixfortheIndianCementIndustry

DemandSupplyMatrix(mnMT) FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Installedcementcapacity(mnMT) 166 190 212 266 296 315 338 353

Additionduringtheyear 6 24 22 54 30 19 23 15

EffectiveCementCapacity(mnMT) 166 179 205 235 278 303 324 339

EffectiveCapacityGrowth(%) 5.0 8.1 14.3 14.6 18.3 9.2 6.8 4.5

CementProduction(mnMT) 155.7 168.3 181.0 200.3 209.2 221.7 239.4 263.4

EffectiveCapacityUtilization(%) 93.9 93.9 88.3 85.2 75.3 73.1 73.9 77.8

Cementconsumption(mnMT) 155 168 181 200 209 222 239 263Consumptiongrowth(%) 9.7 8.0 7.9 10.4 4.7 6.0 8.0 10.0


5.0

10.0

15.0

20.0

25.0

Northern Eastern Western Central Southern

FY11 FY12 FY13

0%

20%

40%

60%

80%

100%

Northern Eastern Western Central Southern

FY11 FY12 FY13


18/90

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16September,2011


CementSectorintheMidstofADownCycle

Longterm capacity utlisation trend during FY1120E to be lower

comparedtoprevioustwodecades

Overthelastfortyyears,theIndiancementindustryhasseenmultipledown

cycle periods when the utilization levels declined prominent among them

being19711974period(~3years),1980s(thewholedecade)andthe20012004

period (~4 years). Even though the pace of capacity addition would slow

downinthecomingyears,weestimateaveragecapacityutilisationof~82%in

FY1120Ewouldbe370bpslowercomparedtothatinFY0110periodand130

bps lower compared to that in the preceding decade (FY9100). This is

primarilyonaccountsurgeincapacityadditionrateduringthefirstfewyears

ofthecurrentdecade.

Exhibit31:CementCapacityUtilizationTrendoverthelastFortyYears

Source:CMA,KarvyInstitutionalResearch Note:TheDottedLinesrepresentTenYearAveragetrend

CementCyclesinIndiainLastTenYears

x DowncyclePeriod(FY01FY04): Duringthisperiod,thedemandgrowth

slumped, while the capacities grew ata faster pace, which resulted in a

slump in capacity utilisation. Moreover, higher dependence on external

powersourcesandlogisticssupportkepttheoperatingcostshigh.

x UpcyclePeriod (FY05FY10): During thisperiod, thecapacity utilisation

startedtofirmupandroseabove90%levels,ascementdemandgrewat

~10% CAGR. In additions, the manufacturers invested in captive power

and logistic infrastructure support, which improved the industrys cost

efficiency.Thoughtheprofitabilityandreturnratiosimprovedduringthe

period, increased returns and cashflow attracted higherinvestment into

newcapacitiesinFY1011periods.

Exhibit32:Variousfundamentalandprofitabilityparametersduringthecementcycleoverthelasttenyears

Cycle PeriodCapacity

(mnMT)

Capacity

CAGR

(%)

Utilisation

(%)

Avg

Prices

(Rs/bag)

GDP

growth

(%)

EBIDTA

(Rs/MT)

RoE

(%)

PE

(x)

EV/EBITDA

(x)

EV

(US$/MT)

Downcycle FY01FY04 132 7.6 81 142 6.4 467 13.1 16.3 7.9 70

Upcycle FY05FY10 182 9.2 89 207 8.6 905 25.2 13.0 7.0 128

Downcycle FY11FY14E 311 6.7 75 248 8.0 830 14.1 17.4 8.6 130

Source:CMA,KarvyInstitutionalResearch,Notes1)ValuationsaretheaveragesofACCandAmbujaCements2)Valuationsforcurrentdowncycleperiodistill31stAug2011

60

65

7075

8085

9095

100

FY68

FY71

FY74

FY77

FY80

FY83

FY86

FY89

FY92

FY95

FY98

FY01

FY04

FY07

FY10

FY13


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16September,2011


Exhibit33:Cementindustryscapacityutilisationtoremainunder80%until

FY14E


Exhibit34:Cementindustrysprofitability&returnratiostrendingtowards

lastdowncyclelevels


x CurrentDowncycle PeriodFY1114:Duringthecurrentdowncycle,the

industrys capacity utilisation is expected to decline to ~75%, one of the

lowestlevelsduringthelasttwentyyears.Therehasbeenthedualimpact

of a surge in capacity growth as well asof a slowdown in the demand

growthledbythegovernmentalinactionsandrisingcostofcapital.

During the current downcycle period, the valuationswould contract from

theircurrentlevelsinlinewithdeclineinprofitabilityofthecementindustry.

60

70

80

90

100

(5)

5

15

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

EffectiveCap.Utilisation(RHS) Capacitygrowth Demandgrowth

Upcycle Downcycle

60

70

80

90

100

0

8

16

24

32

40

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E


Downcycle


20/90

19

16September,2011


RegionwiseDemandSupplyDynamics

Northern Region: Low demand growth but firm capacity

utilisation

Demand drivers in the region: Inline with higher Gross State Domestic

Product(GSDP)growth,thecementdemandhasbeenrobustduringFY0710

periodandcompanieshavebeenabletogethigherrealizationonthecement

sales.TheCommonwealthGameswasamajordemanddriverinFY0910.With

projectscomingtoanendbymidFY11,cementdemandgotimpactedinFY11.

Other demanddrivers in the region have been hydel projects tothe tune of

1800MWtobecommissionedoverthenextthreeyears,independenthousing

projectsinthesemiurbanandruralareas,especiallyinPunjabandurbaninfra

projectsintheNCRandChandigarh.

Exhibit35:NorthernRegionLowerDemandCAGRof5.6%inFY1113Evs.8.6%inFY0810

DemandSupplyMatrix(mnMT) FY07 FY08 FY09 FY10 FY11 FY12E FY13E

EffectiveCementCapacity(mnMT) 33 38 48 51 60 63 66

EffectiveCapacityGrowth(%) 11 18 26 6 17 5 5

CementProduction(mnMT) 32 36 41 47 52 55 59

EffectiveCapacityUtilization(%) 99 95 85 92 86 88 89

Cementconsumption(mnMT) 30 34 35 38 40 42 45

Consumptiongrowth(%) 10.3 12.0 4.8 9.4 3.9 5.5 7.6

Source:CMA,KarvyInstitutionalResearchExhibit36:GSDPgrowthrateshavebeenstronginthenorthernstates(%)

NorthernRegion FY06 FY07 FY08 FY09 FY10 GSDPCAGR(%) MajorCementPlayersintheregion

Haryana 8.8 11.6 9.8 8.6 10.0 9.7

Shree Cement, UltraTech, Ambuja

Cement,BinaniCement,ACC

Punjab 5.4 10.2 9.3 6.6 7.8 7.8

Rajasthan 6.7 11.7 5.1 7.0 4.0 6.9

HimachalPradesh 8.4 9.1 8.6 7.4 8.1 8.3

Uttarakhand 13.5 14.6 18.2 8.0 10.7 12.9

Source:NationalPlanningCommission,KarvyInstitutionalResearchExhibit37:CementConsumption(percapita)hasbeen

thanallIndiaaveragelevels Exhibit 38: Price Trend High Capacity Utilisation

shouldkeeppricesstableoverthenexttwoyears

Source:NationalPlanningCommission,CMA,KarvyInstitutionalResearch Source:CMA,KarvyInstitutionalResearch

ThecementdemandCAGRof5.6%inthenorthernregioninFY1113Ewould

be slightly lower than the industry demand CAGR of 6.2%. Lower demand

projectionsareonaccountofaslowdowninrealtyofftakeacrossIndiaaswell

as duetoslump in infrastructure projectexecutions.However,with capacityexpansionsremainingundercheck,thecapacityutilisationintheregionwould

remain strong (~89%) in FY1213E, which in turn would keep cement prices

stableintheregion.ThecementconsumptionintensityisabovetheallIndia

averageof~180kg/capita.

0

100

200

300

400

0.0

5.0

10.0

15.0

Haryana Punjab Rajasthan Himachal

Pradesh

Uttarakhand

PerCapCementConsumption Kg(RHS) GSDPCAGR(%)

150

200

250

300

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

North IndiaAvg

Rs/bag


21/90

20

16September,2011


EasternRegion:Industryleadingdemandgrowth;utilisationto

getimpactedinFY13Easnewcapacitiesgetcommissioned

Demanddriversintheregion:Thoughtheconsumptionintensityhasbeenthe

lowest in the region, with stable and growthfocused governments in most

statesofthisregions,cementdemandintheregionhasbeenupwardsof10%sincestartofFY09therebyboostingthedemandCAGRto11.4%inFY0410.

The region is a net importer of cement, as the capacity addition has lagged

demand growth. The demand drivers have been various industrial projects

implementedbystatessuchasOrissa,Jharkhand&Chhattisgarh(alltheseare

rich in mineral resources), alongwith IT/ITeSrelated demand from West

Bengal&Bihar.

Exhibit39:EasternRegion:DemandCAGRof9%inFY1113Evs.11.5%intheprecedingthreeyears


EffectiveCementCapacity(mnMT) 25 28 30 34 37 39 43EffectiveCapacityGrowth(%) 7 10 8 15 9 5 11

CementProduction(mnMT) 22.1 23.9 26.0 28.9 30.0 32.1 33.5


Cementconsumption(mnMT) 24.0 25.3 28.2 33.4 36.5 39.3 43.2



Exhibit40:GSDPgrowthrateshaveimprovedintheeasternstatesoverthelastfewyears(%)

EasternRegion FY06 FY07 FY08 FY09 FY10 GSDPCAGR(%) MajorCementPlayersintheregion

Bihar 0.9 18.1 8.5 13.1 8.6 9.7

ACC, UltraTech, Lafarge India, OCL

India,AmbujaCement

Orissa 5.5 13.0 10.9 7.2 10.6 9.4

WestBengal 6.3 7.4 8.0 5.2 9.0 7.2

Chhattisgarh 3.2 18.6 8.6 6.8 11.9 9.7

Jharkhand (3.2) 2.4 20.5 4.7 6.6 5.9

Source:NationalPlanningCommission,KarvyInstitutionalResearchExhibit 41: Low cement consumption intensity

providesgrowthopportunity

Exhibit 42: Cement prices in the region may come

underpressureinFY13asutilisationlevelsdeclineto


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16September,2011


CentralRegion:Whilethedemandgrowthisexpectedtoslow

down,theutilisationisalsolikelytobeaffectedinFY13E,as

newcapacitiesgettingcommissioned.

Demand drivers in the region: Though Madhya Pradesh (MP) and Uttar

Pradesh (UP) are two ofthe most populated states inthe region, the cementconsumptionintensityhasbeenanotherlowintheregion.Thecementdemand

witnessed CAGR of8.4%in FY0410. Housing projectsbothrural and urban

andhydelprojectsimplementedinUPhavebeenkeydemanddriverssofar.

The housing demand in the central region would be led by various

government schemes. Other demand triggers should be key central projects

like Pradhan Mantri Gram Sadak Yojna, Bharat Nirman and Indira Awas

Yojna. Cement prices have remained volatile in this region despite its stable

capacity utilisation as there has been continuous influx of cement from

adjoining northern region. We expect the price volatility to remain in the

regiongoingforwardledbylowerdemandgrowth.

Exhibit43:CentralRegion:DemandCAGRtocooldownto7%inFY1113Evs.11%inFY0810period



EffectiveCapacityGrowth(%) 2 4 8 (0) 18 13





Source:CMA,KarvyInstitutionalResearchExhibit44:GSDPgrowthratetrendsoftwostatesintheregion(%)

CentralRegion FY06 FY07 FY08 FY09 FY10 GSDPCAGR(%) MajorCementPlayersintheregion

MadhyaPradesh 5.3 9.2 4.7 7.8 8.5 7.1 J P Associates, ACC, UltraTech, Century Textiles, Birla

CorporationUttarPradesh 6.3 8.2 7.5 6.1 7.2 7.0

Source:NationalPlanningCommission,KarvyInstitutionalResearchExhibit45:Lowcementconsumptionintensityinboth

thestates

Exhibit46:Weexpectthepricevolatilitytocontinueas

demandgrowthexpectedtoslowdown


Thecementdemandintheregionislikelytoslowdownduetorecentdelaysin

policyimplementationbytheGovernment.Hence,weexpectdemandCAGR

toslowdownto7%inFY1113Eperiod.

0

50

100

150

7.0

7.0

7.1

7.1

7.1

MadhyaPradesh UttarPradesh


150

200

250

300

Jan/09

Apr/09

Jul/09

Oct/09

Jan/10

Apr/10

Jul/10

Oct/10

Jan/11

Apr/11

Jul/11

Central IndiaAvg

Rs/bag


23/90

22

16September,2011


Western Region: Despite higher growth rate, the capacity

utilisation is expected to remain low, while the adjacent

southernstatesposefurtherrisktopricingpower.

Demanddriversintheregion: Thewesternregionhasoneofhighestcement

consumptionintensitiesinIndia.ThecementdemandhasgrownataCAGRof8.9%inFY0410drivenbyrealestateboominthemajorcitiesMumbai,Pune,

AhmedabadandSuratandstrongdemandfrominfrastructureandcommercial

segmentsinthesecities.However,thecementdemandinFY1213Eperiodis

expectedtodeclineledbyaslumpintherealtysectoraswellasduetonon

availabilityoflabourersinthetwostates.Thewesternregionconsumesmore

cementthanthatisproducedintheregion.Thedeficitismostlymetbythe

neighboringsouthernstates.

Thecementpricesintheregionhasbenefittedfromtheproductiondiscipline

invogueacrossIndia.However,continuedlowercapacityutilisationin FY12

13E period wouldaffect the abilities ofthecement manufacturers topasson

theincrementalcostpressuregoingforward.

Exhibit47:WesternRegionDemandCAGRof8.6%inFY1113Evs.9.8%inFY0810



EffectiveCapacityGrowth(%) 1 14 4 24 9 4





Source:CMA,KarvyInstitutionalResearchExhibit48:BoththestateshavepostedstrongGSDPgrowthrate(%)

WesternRegion FY06 FY07 FY08 FY09 FY10 GSDPCAGR(%) MajorCementPlayersintheregion

Gujarat 15.0 8.4 11.0 7.0 10.2 10.3 UltraTech, Ambuja Cement, Mehta Group, J P

Associates,SanghiIndustriesMaharashtra 14.5 14.1 10.8 7.8 8.7 11.1

Source:NationalPlanningCommission,KarvyInstitutionalResearch

Exhibit 49: Cement consumption intensity has been

higherthanallIndiaaverage

Exhibit 50: Cement prices to remain volatile due to

lower utilisation levels in the western and southern

regions


Thechancesofincreaseinsupplyinfluxfromthesouthernstatesasdemand

firmsupinthewesternregionishightherebyexertingdownwardpressureon

cementprices.

180

190

200

210

220

230

9.5

10.0

10.5

11.0

11.5

Gujarat Maharashtra


150

200

250

300

Jan/09

Apr/09

Jul/09

Oct/09

Jan/10

Apr/10

Jul/10

Oct/10

Jan/11

Apr/11

Jul/11

West IndiaAvg

Rs/bag


24/90

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16September,2011


SouthernRegion:Whiletheutilisationlevelsintheregionare

oncontinuousdecline,threattoensuingpricedisciplinelooms

large.

Demand drivers in the region: The southern region has been the leading

cementproducerandconsumerregioninIndia.Cementconsumptionintensityin the southern regionis the highest inIndia. The IT/ITeS sector has been a

majorcontributortodemandCAGRof10%inFY0510period.Whiletheboom

in the IT/ITeS sector led to strong demand for commercial and residential

constructions, infrastructure investments in roads, irrigation, airports and

variousgovernmentprojectshaveprovidedfurtherboosttocementdemandin

theregion.

However, the region witnessed a contraction in cement consumption as

AndhraPradesh(AP)& Karnatakafacedpoliticalinstability.Thesetwostates

constitute ~1718% of total cement consumption in India. Hence, lack of

decision making led to a contraction in cement consumption. The situation

doesnotseemtoimproveinthenearterm.However,thecementconsumption

growthinTamilNadu&KeralaisexpectedtoremainbettercomparedtoAP&

Karnatakaledbystableandgrowthfocusedgovernmentsinthosestates.

Exhibit51:SouthernRegion;DemandCAGRof2.7%inFY1113Evs.8.4%inFY0810



EffectiveCapacityGrowth(%) 6 7 17 28 18 9 8



Cementconsumption(mnMT) 44.8 49.2 54.3 57.2 55.6 57.4 62.0Consumptiongrowth(%) 13.8 9.7 10.4 5.3 (2.7) 3.2 8.0

Source:CMA,KarvyInstitutionalResearchExhibit52:GSDPgrowthratetrendsofthemajorstatesintheregion(%)

SouthernRegion FY06 FY07 FY08 FY09 FY10 GSDPCAGR(%) MajorCementPlayersintheregion

AndhraPradesh 9.6 11.2 12.0 5.0 5.8 8.7

IndiaCements,UltraTech,MadrasCements,ACC,

DalmiaCement

Karnataka 11.0 9.9 12.6 3.8 5.0 8.4

Kerala 10.1 7.9 8.8 7.2 9.7 8.7

TamilNadu 13.3 14.9 5.9 5.8 9.0 9.7

Goa 7.8 9.7 5.6 9.5 13.0 9.1

Source:NationalPlanningCommission,KarvyInstitutionalResearchWhilethedemandgrowthhassloweddown,thesouthernregionremainsan

oversurpluszone,asthecapacityexpansionrateisexpectedtoremainhighin

FY1113E period. Thishas resulted in capacity utilisation declining to below

65%inFY1113E.Thecementmanufacturershavebeenabletoincreasecement

prices in Oct10Jan11 period and to hold on to those price levels over the

subsequent eight months led by production cut to match the incremental

demand. This discipline has held on despite the southern region being the

mostfragmentedregionsofall.

Thisdisciplinewouldnothelpthemanufacturersintheregiontopassontheir

incremental cost pressure until demand growth firms up beyond 10% tostabilizeutilizationlevelsatover75%.Assuchhighdemandgrowthmaynot

beachievedinFY1213E,weexpectthecementpricestocorrectintheregion.


25/90

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16September,2011


Exhibit53:Cementconsumptionintensityishighestin

India

Exhibit 54: Prices surged led by production cuts, we

expectthisstabilitytocomeunderthreat


190

200

210220

230

240

7.5

8.0

8.59.0

9.5

10.0

Andhra

Pradesh

Karnataka Kerala TamilNadu Goa


150

200

250

300

Jan/09

Apr/09

Jul/09

Oct/09

Jan/10

Apr/10

Jul/10

Oct/10

Jan/11

Apr/11

Jul/11

South IndiaAvg

Rs/bag


26/90

25

16September,2011


CostPricingDynamics

Operating Cost PressureMountingwhile Utilisation

LevelExpectedtoDecline

Exhibit55:OperatingCostStructureofaCementManufacturerVariableCost(6575%) FixedCosts(2530%)

Rawmaterials(limestone,gypsum,andotherblendingadditivesflyash,slag,etc)1520% Employeecost510%

Fuelcost(coal,petcokeusedforclinkerisation,andifCPPthenpowergeneration)1520%SG&A (Maintenance, packaging,

advertising)2025%

Powercost(forgrinding,assistingotherprocesses)1015%

Transportcost(Clinkertransferbetweenplants,finishedcementtomarkets)20%25%

Source:Company,KarvyInstitutionalResearch

Exhibit 56: Operating Costs (Rs/MT) has shot up by

~40%overthelastfouryearswhileindustryscapacity

utilisation(%,RHS)hastrendeddownwards

Exhibit 57: Raw materials /MT (including fuel

expenses)haveshotupby~40%duringthesametime;

Freight/MT>20%


Alargechunkoftheoperatingcost~7075%isvariable.Asshownintheabove

graphs,variablecostelementshave increasedovertheyearstherebypushing

theoperatingcostsupwardsby~40%overthelastfouryears.Fuelpricesboth

domestic and international have increased and are expected to remain firm

goingforward.Additionally,highercrudepriceshaveresultedinincreasein

domestic fuel price thereby increasing freight cost for the manufacturers.

Variouscriticalrawmaterialsgypsum(5%ofcement)andflyash(~2530%of

cement)havebeenontheriseandcementmanufacturershavetoabsorbthese

costpressure.

Exhibit58:DomesticCoalSupplyDeficittocontinueto

NonPowerSectorExhibit 59: Surge inInternational Prices has further

raisedManufacturingCost

Source:Industry,KarvyInstitutionalResearch Source:Bloomberg,KarvyInstitutionalResearch

20

40

60

80

100

120

1,800

2,000

2,200

2,400

2,600

2,800

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

80

90

100

110

120

130

140

150

Jun07

Dec07

Jun08

Dec08

Jun09

Dec09

Jun10

Dec10

Rawmaterials

Freight

50

80

110

140

170

200

FY10

FY11E

FY12E

FY13E

FY14E

FY15E

CoalDemand Cement&others Domesticcoalsupply

50

150

Jan08

M

ar08

Jun08

Sep08

Dec08

M

ar09

Jun09

Sep09

Dec09

M

ar10

Jun10

Sep10

Dec10

M

ar11

Jun11

Newcastlecoalspot/AustrIndex

RichardsBay6000kcfobsteam/S.africa

AsiaCoalspotMarkerIndex


27/90

26

16September,2011


EnsuingProductionDiscipline

Production Discipline not a longterm substitute to demand

growthasameasuretopassoncostpressure

Inascenariowherelowerdemandalongwithincreasedcapacityadditionled

to a sharp decline in utilisation levels, the surge in operating cost pressure

resulted in the cement manufacturers resorting to production discipline. We

haveanalyzedthemeritsonaproductiondisciplineasatooltoarrestdecline

in profitability when cost pressure surges while demand growth remains

muted. As shown above, a large chunk of the operating costs of cement

manufacturerarevariableinnature.Wehaveworkedoutthecoststructureof

a new 2.5 mn MT cement plant (at operating level and including capital

charges) at various capacity utilisation levels. We have detailed below the

variableandfixedcostsincurredbythemanufacturerwhenoperatingat100%

capacityutilisation.

Exhibit60:CostStructureof2.5mnMTNewCementPlantFixedCosts(FCs) Rs.mn VariableCosts(VCs) Rs/MT

OperatingCost 1500 CostofProduction 1,500

Depreciation 450 Freight&Handling 700

InterestCost 101 Excise,SalesTax&Commissions 1,200

TotalFixedCosts(Rs.perMT) 1,051 TotalVariableCost 3,400


Exhibit61:TrendinCost(RsperMT)atVariousUtilizationLevel

Capacity

Utilisation

(%)

Operating

Variable

Costs(A)

Operating

Fixed

Costs(B)

Total

Operating

Cost(A+B)

%Risein

operating

cost

Capital

Charges

Total

Cost

%Rise

intotal

cost

Excise,sales

tax&

Commissions

Breakeven

realization

/bag

%Sales

pricerise

required

100 2,200 600 2,800 220 3,020 1,200 211

90 2,200 667 2,867 2.4 245 3,112 3.0 1,200 216 2.2

80 2,200 750 2,950 2.9 276 3,226 3.7 1,200 221 2.6

70 2,200 857 3,057 3.6 315 3,372 4.5 1,200 229 3.3

60 2,200 1,000 3,200 4.7 367 3,567 5.8 1,200 238 4.3

50 2,200 1,200 3,400 6.3 441 3,841 7.7 1,200 252 5.7


As shown in the above exhibit, a 10% reduction in plant utilization level

(throughsupplycut)wouldincreasetheplantsoperatingcostperMTby250

600 bps and increase the breakeven realization growth by 220570 bps. Thecementmanufacturershavemanagedtoincreaserealizationsatahigherrate

than the cost increase by controlling production during the weak demand

growth period as witnessed over the last one year. Average cement price

surgedto~Rs.280perbaginMar11.

Iftheproductiondisciplineholdson,therebyresultingincementpricesatRs.

280perbag,theplantwouldmakeaPBTofRs.28perbag(PriceofRs.280

minusbreakevenrealizationofRs.252)andanetmarginof8%evenbycutting

down its utilisation leveldown to50%.While the cement prices insouthern

regionareholdingonto~Rs.275levels,theaveragecapacityutilisationlevelis

likely to remain under 65% in FY1113E period, which implies the smaller

players would be operating at 3050% utilisation levels, while further costpressurewoulddragtheirprofits.


28/90

27

16September,2011


RoE Analysis during Production Discipline Low

UtilisationLevelstoDragProfitability

Asshownin the exhibitsbelow,a newcement plantcanmanagetomakean

RoEof15%at70%capacityutilisationifthecementpricescanremainstableat

~Rs.262perbagthroughtheproductiondiscipline.

Exhibit62:AnalysisofrequiredEBITDA/MTandretailcementpricesfora15%RoEofthesameplant(2.5mnMT)

Capacity

Utilisation

(%)

Cement

Sales

(mnMT)

Required

PAT

(Rsmn)

Required

PAT

(Rs/MT)

Required

PBT

(Rs/MT)

Interest+

Depreciation

(Rs/MT)

Required

EBITDA

(Rs/MT)

Required

Realisation

(Rs/MT)

Required

Cement

price

(Rs/bag)

90% 2.25 810 360 514 245 759 3,626 241

80% 2.00 810 405 579 276 854 3,804 250

70% 1.75 810 463 661 315 976 4,033 262

60% 1.50 810 540 771 367 1,138 4,338 277

Source:KarvyInstitutionalResearch (ProjectcostassumedatUS$120/MT,60%Debt)

Exhibit63:RequiredEBITDA/MTandretailcementpricesfora20%RoEofthesameplant(2.5mnMT)

Capacity

Utilisation

(%)

Cement

Sales

(mnMT)

Required

PAT

(Rsmn)

Required

PAT

(Rs/MT)

Required

PBT

(Rs/MT)

Interest+

Depreciation

(Rs/MT)

Required

EBITDA

(Rs/MT)

Required

Realisation

(Rs/MT)

Required

Cement

price

(Rs/bag)

90% 2.25 1,080 480 686 245 931 3,797 250

80% 2.00 1,080 540 771 276 1,047 3,997 260

70% 1.75 1,080 617 882 315 1,196 4,254 273

60% 1.50 1,080 720 1,029 367 1,396 4,596 290

Source:KarvyInstitutionalResearch(ProjectcostassumedatUS$120/mt,60%Debt)

Theplantcanachieve20%RoEwhileoperatingat70%capacityutilisationif

cementpricesholdontoRs273/baglevel.However,demandgrowthrecovery

to~10%levelsisnecessarytoimproveRoEonasustainablebasis.Wedonot

expectdemandgrowthtofirmupto10%ormoreuntilFY14E.Asillustratedin

the tables above, if capacity utilisation improves to 8090% levels led by

demandrecovery,a20%RoEcanbeachievedatretailcementpricesofRs250

260/bag.

Exhibit64:Decliningcapacityutilisationtosuppressprofitabilityfurther


Weexpectcementindustrysutilisationtoremainunder75%duringFY1213E.

Utilisationinsouthernregionisexpectedtoremainunder65%whileweexpectthesametoremainunder75%inthewesternregionduringFY1213E.Hence,

industrysabilitytopassontheincrementalcostpressurewoulddecreaseand

we expect operating margins and RoE to remain under pressure going

forward.

60

70

80

90

100

0

8

16

2432

40

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E



29/90

28

16September,2011


InterRegionMovementofCementisLimited

While prices vary across regions, interregion movement of cement is

restricted as large distance transportation is unviable: Cement is generally

consumedwithin300500kmsfromtheplantlocationasdistanceslargerthan

that makes it uncompetitive. Hence, price differences would exist amongstvariousregionswithoutprovidinganarbitrageopportunityfortheproducers.

Exhibit65:Cementprices(Rs/bag)varywidelyacrossregions


Exhibit66:Regionalmovementofcementisgenerallyrestrictedtoadjoiningregionswithin300500kms

Supplyfrom

|DemandinFromN FromE FromS FromW FromC

Total

demandin

Demand

Share

NetImports/

(Exports)*

Captive

demand#

InNorth 25.8 0.0 0.0 0.1 1.6 27.6 17% 36% 94%

InEast 0.3 22.3 1.3 0.3 4.3 28.6 17% 21% 78%

InSouth 0.0 49.4 0.5 0.0 49.9 30% 18% 99%

InWest 3.8 0.0 7.8 19.3 0.4 31.3 19% 34% 62%

InCentral 7.7 0.3 0.2 0.4 19.1 27.6 17% 8% 69%

TotalSupply

from>37.5 22.7 58.7 20.7 25.4 165.1 100%

SupplyShare 23% 14% 36% 13% 15% 100%

Source: CMA,KarvyInstitutionalResearch

NotesThedatadoesnotincludeACCandAmbujaCementsnumbersastheydonotreportsalesbreakuptoCMA *Import/(Exports) refer to interregion

netmovementofcementJunMay2011#CaptiveDemand=Regionalproductionconsumedwithintheregionasapercentageoftotaldemandinthatregion.

Intheexhibitabove,wenotethatcementisprimarilyconsumedintheregionit

isproducedorisexportedtothetowns/citiesintheadjoiningregion.Foreg,

out of 58.7 mn mt of cement produced in the southern region, 13% was

exported to the adjoining western region. There were only marginal exports

(~3%)tofar off easternand centralregions.Anotherpointto note isthatthe

northern and the southern regions (60% of total production) are net surplus

producers while the other three regions witness net inflow of cement from

adjoiningregions.

Cement price dynamics since the start of the production

discipline

In Q3FY11 when the cement demand slumped across India, the southern

manufacturerscutdownproductionsby~1520%QoQtoreducethedemand

supplymismatch.Thishelpedthemanufacturerstohikethecementpricesby

>20% QoQ from the low levels witnessed inthe southern region inQ2FY11.

ThecementpricesinAndhraPradeshandothersouthernregionsinQ2FY11

had dipped to Rs. 130140 per bag, as the manufacturers pushed volumes

despitesluggishdemandgrowth.TheproductiondisciplineinQ3FY11helped

thesouthernplayerstorecovertheirprofitabilityinH2FY11.

180

200

220

240

260

280

300

Apr2010 Jun2010 Aug2010 Oct2010 Dec2010 Feb2011 Apr2011 Jun2011 Aug2011

North East Central West South


30/90

29

16September,2011


Exhibit 67: Southern Players could firm up their

Prices & Profitability by Cutting Volumes in

H2FY11

Exhibit68:WeakDemand&Pricingcontinuedtodrag

ProfitabilityinQ3FY11ofPlayersinNorthernIndia

Source:CMA,KarvyInstitutionalResearch Source:CMA,KarvyInstitutionalResearch

Subsequently, the manufacturers in the northern half of India increased thecement prices since Jan2011. As the cement demand is highest in JanJune

period,themanufacturerswereabletoincreasecementpriceswellabovethe

incremental operating cost pressures. While the EBITDA of the southern

players expanded by Rs. 400600 per MT in Q3FY11, the northern players

EBITDA declined byRs.100300 per MTQoQ. During Q4FY11 and Q1FY12,

the profitability of all cement manufacturers improved QoQ largely led by

production discipline, which helped them to increasing the cement prices

abovetheirincrementalcosts.

The larger manufacturers have been able to generate higher profitability

throughoutcomparedtotheirsmallerpeers,ascanbeseenfromthequarterly

performancetrendsoverthesixquarters.Wehaveplottedtherealisationand

EBITDA/mt trends of a large capacity producer (ACC, 30mn MT), mid

capacity,(JKLakshmi,6mnMT),andasmallcapacity(Mangalam,2mnMT)

producersoverthelastsixquarters.

Exhibit69:NetrealizationtrendsThelargecapacity

producerhasoutperformeditssmallerpeers

Exhibit70:EBITDAtrendsThelargecapproducer

hasoutperformeditssmallerpeers


Cement Prices have declined over the last five months albeit at a

slowerpace

The cement prices have been declining from the peak levels witnessed in

Mar11. Inour view, the decline can beattributed toseasonal adjustment aswellastheinterruptionsinproductiondiscipline.Thepricesdeclinedby~17%

inthenorthernandcentralregionsfromtheirpeaklevelsinMar11,whilethe

prices declined by ~12% and 7%, respectively in the western and eastern

regions,andinthesouthernregionthepricescorrectedby2%.Despitethese

(15)

(10)

(5)

5

10

1520

25

2,400

2,800

3,200

3,600

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Realisation (Rs/mt)LHS DemandYoY

DemandQoQ(%)

(15)

(10)

(5)

5

1015

20

2,600

3,000

3,400

3,800

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Realisation (Rs/mt)LHS DemandYoY

(%)DemandQoQ

(%)

2,500

3,000

3,500

4,000

4,500

Mar10 Jun10 Sep10 Dec10 Mar11 Jun11

MangalamCement ACC JKLakshmi

0

500

1,000

1,500

Mar10 Jun10 Sep10 Dec10 Mar11 Jun11

MangalamCement ACC JKLakshmi


31/90

30

16September,2011


corrections, the average cement prices so far in FY12 are higher than the

corresponding levels in FY11. The cement demand and prices decline

sequentiallyinJunDecperiodastheconstructionactivityslowsdownduring

these monsoon months across India and due to cold weather conditions in

northernIndia.

Exhibit 71: Industrys realization trend we expect

realizationhaspeakedoutinJuneQuarter

Exhibit 72: Subsequently, industrys EBITDA (Rs/mt)

shouldtrenddownwardsfromJuneQuarterlevels


We expect net realization & EBITDA trends (Rs/MT) to decline from June

quarterlevelsgoingforward,asthecementpriceshavedeclinedsequentially,

whilethecostpressurehasbeenontherise.

RisktoPricingPowerIncreases

Increasingshareof smallermanufacturerssalesat theexpense

oftheerodingshareoflargemanufacturers

Theindustrysrealizationgrowth(despitelowersalesgrowth)sofarhasbeen

ledbythelargeplayerswhohavecompromisedtheirmarketsharetostabilize

the industrys profitability. This has benefitted a large number of smaller

manufacturers,whichsawtheirmarketsharesurgeastheygrewaheadofthe

marketandthelargemanufacturers.Hence,thedisruptionsintheproduction

disciplineareboundtohappenasthelargerplayerstrytocheckcontinuous

declineintheirmarketshares.AllIndiapriceshavedeclinedfromthepeakof

Rs.280perbaginMar11toRs.245perbaginAug11.

Exhibit 73: Smaller players (10 mn MT

capacity)


20%

10%

0%

10%

20%

2,000

2,500

3,000

3,500

4,000

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

NetRealisation GrYoY(%)RHS

100%

50%

0%

50%

0

300

600

900

1,200

1,500

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

EBITDA GrYoY(%)RHS

60%

70%

80%

90%

100%

110%

Jan10

Feb10

Mar10

Apr10

May10

Jun10

Jul10

Aug10

Sep10

Oct10

Nov10

Dec10

Jan11

Feb11

Mar11

Apr11

May11

>10mnmt 510mnmt


32/90

31

16September,2011


Industrysfragmentationcontinuesledby theincreasingshare

ofsmallermanufacturers

Increasingly,newcementcapacitiesexpectedtocomeupinFY1213Eperiod

arefromthesmallerplayers,whichwouldleadtofurtherreductioninmarket

shareofthelargeplayers.During FY1113E, the Top5 manufacturers (UltraTech, ACC, Ambuja, and

Jaiprakash Associates & India Cements) are expected to add 18.6mn MT

capacity, which constitutes ~26% of incremental new capacities. Even on a

regional basis, the dominance of the Top5 manufacturers is expected to

declineacrossallthefiveregionsgoingforward.

Exhibit 74: Top5 producers in each region (and pan

India)areaddinglessercapacitiesinFY1113E

Exhibit 75: Market share of Top5 producers should

declinefurtherto~48%byFY13E

Source:KarvyInstitutionalResearch Source:CMA,KarvyInstitutionalResearch

Exhibit76:MarketshareofTop5producerstodeclineinallfiveregions


Thesefactorsshouldseverelyimpactthecementmanufacturerspricingpower

led by the ensuing production discipline. This implies that cement

manufacturerswouldnotbeabletofullypassontheincrementalcostpressurethereby leading to a decline in operating margins as well profitability in

FY13E.

Asshownintheexhibitbelow,variationincementrealizationgrowthposes

higher risks to earnings & fair value estimates of cement companies under

coveragecomparedtovariationinsalesvolumegrowth.Thisimpliesthatrisk

rewardratiobecomesunfavourablewhenthreattopricingpowerincreases.

Exhibit77:Sensitivityanalysisofsalesvolume&netrealizationonkeyparameters(FY13E):

Companies Impactof1%changeinsalesvolumeontheir Impactof1%changeinnetrealizationontheir

EBITDA RoE TargetPrice EBITDA RoE TargetPrice

(%) (bps) (%) (%) (bps) (%)ACC 1.2 19 2.3 5.1 81 4.8

ACEM 0.9 13 1.9 4.3 63 3.8

UTCEM 0.7 12 0.9 4.1 73 4.4

SRCM 0.9 30 1.1 3.2 101 3.8

ICEM 0.6 6 1.0 7.0 64 12.5


26%

14%

0%

42%

54%

0%0%

20%

40%

60%

AllIndia N orth East Central West South

ShareofTop5players

30 33

5650 48

0

20

40

60

FY82 FY88 FY03 FY10 FY13E

MarketshareofTop5Players(%)

69%

77%82% 78%

55%61%61% 69%

72%

45%

0%

50%

100%


FY10 FY13E


33/90

32

16September,2011


Comparative Analysis of Major Cement

Companies

Inthecontextoftheindustrysscenariothatwediscussedabove,weanalyze

below the key cement manufacturers in India based on their competitive

positioning onvarious fundamental parameters. We have ranked them ona

scaleofonetofivewhereoneimpliesaweakfundamentaldriver,whilefive

implies a strong fundamental driver. We believe that higher score on these

parameterswouldhelpthecompaniestoeithersustainand/orincreasetheir

market share along with their profit margins going forward. These in turn

would help the companies in attracting higher relative valuation multiples

comparedtotheirpeergroup.

Exhibit78:ComparativeAnalysisofFundamentalStrengthsofMajorCementCompaniesinIndia

FundamentalDrivers UltraTech ACC AmbujaCements IndiaCements ShreeCement MadrasCements

Captivepowersourcing 4 4 4 2 5 2

Fuellinkages 3 4 3 2 1 1Logisticalinfrastructuresupport 4 4 4 2 1 1

Geographicaldiversification 4 4 4 2 2 2

Revenuediversification 2 2 2 2 4 2

AssetSweating 3 4 4 2 4 2

BalanceSheetstrength 4 3 4 1 3 1

Overall(outof35) 24 25 25 13 20 11

Source:Companies,KarvyInstitutionalResearchScoreof5impliesstrongdriver,1impliesweakdriver

I.CaptivePowerSourcing:ShreeCementisBestplaced

Theproductionofcementrequirescontinuoussourcingofpowersupplyfor

grinding clinker into cements and various auxiliary operations. The Indiancementindustryhasgenerallyreliedonstatepowersupplyfortheirelectricity

requirements. However, any disruption in power supply can affect the

productionandprofitability.Hence,thecementmanufacturersprimarilythe

largeonesinvestedintoCaptivePowerPlants(CPPs)overthelastsixyears

inordertoreducetheirdependenceonexternalgridpower.Thishasnotonly

helped them in streamlining the cement production, but also helped the

manufacturersinreducingtheirelectricitybills.

Exhibit79:CPPCapabilityofMajorCementManufacturersShreeCement

leads,whileIndiaCementsscorestheleast

Source:Companies,KarvyInstitutionalResearch

II.FuelLinkages:ACCbenefitsfromHigherProportionofLow

CostDomesticCoalCoal is required for both clinkerisation process and power generation

(grinding operation). Thus access to cheap and steady supply becomes a

competitive advantage for the cement manufacturers. Though most of the

350 400540

265

5894

0

100

200

300

400

500600

0%

20%

40%

60%

80%

100%

ACCLtd Ambuja

Cements

UltraTech Shree

Cement

India

Cements

Madras

Cements

Captivepowersourcing(%) CPPInstalledCapacity(MW)RHS


34/90

33

16September,2011


cement manufacturers have been assigned linkage coal, none of them have

beenabletoprocure100%oftheirrequirementsthroughtheselinkages.ACC

has been getting ~50% of its requirements from the linkages, while Ambuja

Cements&UltraTechgetaboutonethirds.ShreeCementshasbeenapetcoke

user for its cement operation, while India Cements is largely dependent on

importedcoal.

Exhibit80:Accesstolowcostdomesticlinkagecoalforthevarious

companies

Source:Companies,KarvyInstitutionalresearch

III.LogisticalInfrastructureSupport:Top3Manufacturershave

StrengthenedtheirInfrastructureContinuouslyTransportationisoneofmajorcostelementsforcementfirms.Havingaccessto

cheaper means of transportation such as rail and sea modes helps contain

freight cost.Thelargerplayers have overthe lastsix toseven yearsinvested

into railway sidings, railway wagons, port terminals and ships. These

infrastructuresupportalsoincreasetheoverallefficiencyofthesupplychain

theirbyboostingtheassetsweatingforthecompany.Exhibit81:ShareofCostefficientRailTransporthasrecoveredbutwagons

supplytothecementsectorhasremainedasorepoint


Exhibit82:AccesstoEfficientMeansofTransportation(Rail&Sea)Top3

ProducersEnjoyBetterPositioning


0%

20%

40%

60%

80%

100%

ACCLtd Ambuja

Cements

UltraTech Shree

Cement

India

Cements

Madras

Cements

DomesticLinkage DomesticEauction Imports Petcoke

0%

50%

100%

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Road Rail Sea

0%

20%

40%

60%

80%

100%

ACCLtd AmbujaCements UltraTech ShreeCement IndiaCements MadrasCements

Road Rail Sea


35/90

34

16September,2011


IV.GeographicalDiversification:Weprefer AmbujaCements

foritsabsenceinthesouthernregion

Cementbeingaregionalcommodity,manufacturersprofitabilityis impacted

by regional concentration of sales. Companies with presence in the weak

southernmarket shouldwitness increasedmargin pressure.Higher capacityutilisationof>85%inthenorthernandcentralregionsduringFY1113Eshould

resultinbetterpricingpowerforproducersinthoseregions.

Exhibit83:GeographicalDiversification


We prefer players with lesser exposure to the southern markets where the

demandsupply situation is expected to remain fragile duringover the next

twoyears.WepreferAmbujaCementstoACC&UltraTechamongstthepan

Indiaplayersduetoitsminimalexposuretothesouthernregion.Amongstthe

regional players, we like Shree Cement to India Cements as the capacity

utilisationinthenorthernregionisexpectedtoremainhigh.

V.RevenueDiversification: ShreeCement &UltraTech Score

High

Cementbeingacommodityisexposedtovagariesofbusinesscyclicality,and

thuswepreferthecemententitieswithdiversifiedrevenuestreamasagainst

pure play cement firms. ShreeCement has expanded into captive/merchant

power sales, which would constitute ~17% of total revenues in FY1213E.

UltraTech generates ~14% of its topline from other business comprising

mainly ofRMC andwhitecement.WhiteCement/ Puttyare nicheproducts

andhencelessvolatile.RMCprovidesdiversificationbenefitasitusescement

asarawmaterial.

Exhibit84:RevenueDiversification


0%

20%

40%

60%

80%

100%

ACCLtd AmbujaCements

UltraTech ShreeCement

IndiaCements

MadrasCements


0%

20%

40%

60%

80%

100%

ACCLtd Ambuja

Cements

UltraTech Shree

Cement

India

Cements

Madras

Cements

GreyCement&Clinker Others


36/90

35

16September,2011


VI.AssetSweating:ACCLeadsthePack

TheIndiancementindustryhasincreaseditsassetsweatingbyimprovingits

operational parameters. It improved from 0.6x in FY04 to 1.0x in FY11. The

improvement has primarily been led by the large manufacturers benefitting

fromtheeconomiesofscaleon theirinvestmentininfrastructuresupportand

panIndiadistributionreach.

Exhibit85:IndustrysAssetTOTrend


Exhibit86:AssetSweating


VII. Balance Sheet Strength: Large Players have been able to

FinancetheirExpansionsthroughInternalAccruals

Strongcashflowduringthelastupcyclehelpedthecementmanufacturersto

generatestrongcashflows,whichinturnledtoareductioninnetdebtforthe

industryaswellastofundtheircapex.Thelargemanufacturershavebeenable

to become net cash flow companies as against their smaller counterparts.

Among the regional players, Shree Cement has been able togenerate strong

cash flow as the Company could capitalize on its timely cement capacityexpansionsandalsofromsalesofitssurpluscaptivepower.

Exhibit87:LargePlayershavegeneratedhighercashflowstherebyfunding

theircapexaswellasreducingtheirdebtlevels


0.3

0.6

0.9

1.2

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Sales/GrossBlock(x) Industry

0.5

1.0

1.5

ACCLtd Ambuja

Cements

UltraTech Shree

Cement

India

Cements

Madras

Cements

AssetSweating Industry5yrAverage

(0.5)

0.5

1.0

1.5

2.0

ACCLtd Ambuja

Cements

UltraTech Shree

Cement

India

Cements

Madras

Cements

CFO/Capex(x) Netdebt/equity


37/90

36

16September,2011


ValuationMethodologyUsed

WePreferEV/EBITDAoverAssetbasedValuation

We have used the EV/EBITDA metric to value the cement stocks under

coverage. As a commodity, the cement prices and the profitability of thecement manufacturers are expected to remain volatile. We believe this is a

comprehensive approach as this multiple captures the impact of a declining

profitability(EBITDA/MT,RoEandRoCE)ontheassetbasedvaluationmetric

EV/MT.

WeUseLastDowncycleValuationMultiple

Our analysis of the valuation trends for the last ten years suggests that the

largecementcompaniesi.e.ACC&AmbujaCementshavetradedat~8.2xfwd

EV/EBITDA during the last down cycle period (FY01FY04). Since FY05, the

cementsectorwitnessedanupcycleperiodforthenextsixyearsuntilFY10.Thiswaswhenmanufacturersgeneratedstrongcashflowsledbytherobust

demandgrowth,increasingcostefficiencyandhighcapacityutilisation.

WehaveusedthelastdowncycleaverageEV/EBITDAmultipleasourbaseto

value the cement stocks under our coverageas profitability and return ratio

trendsduringthecurrentdowncycle(FY1114E)aresimilartothatduringthe

lastdowncycle.

ACC & Ambuja Cements have traded at >8x (1 year forward EV/EBITDA)

duringlastDowncyclePeriod.Historically,AmbujaCementshastradedata

premiumtoACConReplacementCostBasis(EV/MT).

Exhibit88:ACCsEV/EBITDATrend(1yrfwd) Exhibit89:AmbujaCementsEV/MTTrend(1yrfwd)

Source:Company,KarvyInstitutionalResearch Source:Company,KarvyInstitutionalResearch

Exhibit90:ACCsEV/MTTrend(1yrfwd)

Exhibit91:AmbujaCementsEV/MTTrend(1yrfwd)

Source:Company,KarvyInstitutionalResearch Source:Company,KarvyInstitutionalResearch

5.0

7.0

9.0

11.0

13.0

Apr00

Jul00

Oct00

Jan01

Apr01

cement sector analysis report karvy

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