Cement Sector - Q2FY10 Update - Centrum-061109

INDIA Cement
Cement Sector
Q2FY10 Update 6 November 2009
Centrum cement index: Performance vs Nifty
(%) 15 10 5 0 13-Oct-09 17-Mar-09 31-Mar-09 12-May-09 26-May-09 18-Aug-09 15-Sep-09 (5) (10) (15) (20) (25) (30) (35) (40) 29-Sep-09 27-Oct-09 14-Apr-09 28-Apr-09 9-Jun-09 4-Aug-09 21-Jul-09 23-Jun-09 1-Sep-09 7-Jul-09
Centrum Cement Index (Performance Vs Nifty) Status quo on excise duty and increase in infraspend led to outperformance of cement space post annual budget
Impact of price fall to be felt from Q3

We continue to remain Underweight on the cement sector, given the challenges of overcapacity, price drop and muted despatch growth ahead. Although companies under our coverage have reported betterthan-expected numbers, we expect their valuations to test further lows, as price fall begins to gather pace on the back of excess capacity. The impact of price fall would be felt in Q3, in our view. Results surprise marginally; cement price fall to impact from Q3FY10: Aggregate net sales at Rs102.8bn grew 12% YoY but was flat QoQ. While operating profit was 5.8% higher than our estimate at Rs34bn (up 54% YoY and 1% QoQ), adj PAT too surpassed estimates by 15% at Rs21.35bn (up 56% YoY and 2% QoQ). We expect companies to report a muted Q3, given the sharper-than-expected drop in cement prices, particularly in the southern and central regions. Sector underperforms Nifty despite strong results in last three quarters: Cement stocks under our coverage underperformed the Nifty by 26% since our initiation in March 2009 while the cement component of Nifty underperformed by 33%. We expect valuations to test further lows, on the back of negative newsflow of cement price correction coupled with muted despatch growth on a high base. Regional dynamics favor exposure to North: Price movements in cement have been following a divergent trend between the northern and southern regions, given the differences in capacity addition and consolidation levels in these zones. However, lower consumption growth has further aggravated industry dynamics in the southern region. Rising inventory to hamper prices: Cement and clinker inventories have risen from 11 days in March to 18.6 days in Sep 2009 (vs 14.3 days in Sep 2008). Actual inventory would still be higher, given that inventory of capacity under ramp up is yet to be reported. Rising inventory is a clear sign of price drop, going forward. Reiterate Underweight stance: We remain underweight on the sector as we expect newsflow on cement price correction to further impact valuations of companies in the sector. We reiterate Sell on ACC, Ambuja Cements and India Cements and Hold on Grasim Industries, Ultratech and Shree Cement.
CMP Rs 729 89 2,170 734 108 1,574 Target Price 707 83 2,622 884 91 1,728 % Upside /Downside (4) (7) 21 20 (16) 10 EPS (Rs) FY10E 87.4 8.1 308.8 94.3 17.3 280.0 FY11E 67.3 8.2 264.2 69.0 11.3 215.9 PE (x) FY10E 8.4 11.0 7.0 7.8 6.3 5.6 FY11E 10.9 10.8 8.2 10.6 9.6 7.3 EV/EBIDTA (x) FY10E 4.5 6.3 4.0 4.6 4.6 4.3 FY11E 5.5 5.6 4.3 5.5 5.9 4.9
Note : Centrum cement index is based on total Market cap of 6 frontline cement companies Source: Bloomberg, Centrum Research
Inventory levels on the rise

(Days) 20 18 16 14 12 10 8 6 4 2 0 May-08 Sep-08 Apr-08 Jun-08 Jul-08 Aug-08 Inventory Level On Rise
May-09
Oct-08
Nov-08
Cement Inventory (Days)
Cement and clinker inventory (Days)
Source: Bloomberg, Centrum Research
Rajan Kumar rajan.kumar@centrum.co.in

+91 22 4215 9640
Company Name
Rating
MCap (Rsbn)
EV/Ton ($) FY11E 93 116
P/BV (x) FY11E 2.0 1.8 1.4
ROE (%) FY10E 31.1 20.2 21.9 28.3 15.3 42.0 FY11E 21.8 18.1 15.9 16.9 9.0 24.2
ROCE (%) FY10E 26.8 18.4 16.2 18.1 10.7 25.0 FY11E 17.3 16.7 12.1 11.8 7.2 16.2
ACC * Ambuja Cements * Grasim Industries Ultratech Cement India Cements Shree Cement#
Sell Sell Hold Hold Sell Hold
137.6 136.0 198.8 91.4 30.6 54.8
87 81 84
1.6 0.8 1.6
Note: *ACC / Ambuja Dec ending; # Shree Cement numbers adjusted for depreciation policy differences; Prices as on 4 Nov 2009 Source: Company, Centrum Research Estimates Please refer to important disclosures/disclaimers inside
Aug-09
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Table of Contents
Results slightly better; Cement price fall to impact from Q3FY10 ...3 Regional dynamics favor northern exposure ..4 Inventory levels on the rise.5 Muted despatch growth over next 10 months ....5 Overview of quarterly results ...6 Companies ACC ......7 Ambuja Cements...11 Grasim Industries ..14 UltraTech Cement..19 India Cements....23 Shree Cements...27
Cement Sector
Results slightly better; Cement price fall to impact from Q3FY10

Q2FY10 results broadly met our expectations. Aggregate net sales at Rs102.8bn grew 12% YoY but remained flat QoQ. Operating profit, however, was 5.8% higher than our estimate at Rs34.3bn (up 54% YoY and 1% QoQ). Adj PAT at Rs21.4bn (up 56% YoY and 2% QoQ) was 15% higher-thanestimated. However, we expect companies to report a muted Q3, given the sharper-thanexpected drop in cement prices, particularly in the southern and central regions. Exhibit 1: Cement sector: Q2 performance
Rsmn Net Sales EBIDTA PAT Q2FY10 102,828 34,303 21,352 Q2FY09 91,598 22,323 13,667 YoY (%) 12.3 53.7 56.2 Q1FY10 102,697 33,812 20,907 QoQ (%) 0.1 1.5 2.1 Q2FY10E 102,011 32,424 18,559 Variance (%) 0.8 5.8 15.0
Source: Company, Centrum Research
Sector underperforms broad indices

Despite a satisfying Q2, our cement space (measured by Centrum Cement Index) underperformed Nifty by 26% since our initiation in March 2009. The cement component of Nifty underperformed by 33%. We expect valuations to test further lows on the back of negative newsflow on cement price correction, coupled with muted despatch growth on a high base. Exhibit 2: Centrum cement index: Performance vs Nifty
(%) 15 10 5 0 14-Apr-09 17-Mar-09 31-Mar-09 28-Apr-09 12-May-09 26-May-09 13-Oct-09 18-Aug-09 15-Sep-09 (5) (10) (15) (20) (25) (30) (35) (40) 29-Sep-09 27-Oct-09 23-Jun-09 9-Jun-09 4-Aug-09 21-Jul-09 1-Sep-09 7-Jul-09
Centrum Cement Index (Performance Vs Nifty) Status quo on excise duty and increase in infraspend led to outperformance of cement space post annual budget
Note : Centrum cement index is based on total Market cap of 6 frontline cement companies Source: Bloomberg, Centrum Research
Exhibit 3: Cement component of Nity: Performance vs Nifty

(%) 20 10 0 9-Jun-09 7-Jul-09 4-Aug-09 18-Aug-09 1-Sep-09 15-Sep-09 17-Mar-09 31-Mar-09 12-May-09 26-May-09 29-Sep-09 13-Oct-09 14-Apr-09 (10) (20) (30) (40) (50) 28-Apr-09 27-Oct-09 23-Jun-09 21-Jul-09
Cement Component of Nifty (Performance Vs Nifty) Status quo on excise duty and increase in infraspend led to outperformance of cement space post annual budget
Cement Sector
Exhibit 4: Stock performance to date corroborates positive dynamics in the northern region
Companies ACC Ambuja Cements Grasim Industries Ultratech Cement India Cements Shree Cement Orient Paper & Industries Nifty Centrum Cement Index Rating on Initiation (19 March 2009) Sell maintained Reduce later downgraded to sell Hold Maintained Accumulate later downgraded to hold Sell maintained Buy Later downgraded to hold Buy Later downgraded to hold Underweight maintained Absolute return 32.0 33.3 49.1 54.3 10.4 165.3 86.3 71.1 45.1 As of 4 November 2009 Outperformance Outperformance vs Nifty vs sector (39.1) (37.8) (22.0) (16.8) (60.7) 94.3 15.3 (25.9) (13.1) (11.9) 4.0 9.2 (34.7) 120.2 41.2
While our cement space as a whole underperformed Nifty by 26%, India Cements (south based player) underperformed sharply at 61% while Shree Cement (a north-based player) outperformed by 94%.The stock performance reflects the difference in operating environment between the two regions (refer to our initiation report), where we had argued that players with a presence in the northern region would enjoy superior pricing power, given lower threat of oversupply and higher consolidation there.
Regional dynamics favor northern exposure

Cement price movements have been following a divergent trend between the northern and southern regions, given the differences in capacity addition and consolidation levels in these zones (Refer to our initiation, Nadir Not Yet? dated 19 March 2009). While cement prices were hiked significantly (Rs15-25 a bag) in the northern, central and eastern regions during March-July 2009, the southern region saw modest price hikes of Rs 5-10 per bag during the period. Subsequently when cement prices fell by Rs10-20 per bag across other regions since July end, the fall in the southern region was substantial (especially in Hyderabad) at Rs40-50 per bag. This is reflected in the Q2FY10 cement realization numbers of companies under our coverage. Thus, QoQ fall in realization has been higher for companies like India Cements, OPIL and Ultratech Cements that have high exposure in the southern markets than peers, as the latter have exposure to other regions. Exhibit 5: Realization trend of cement majors
Rs/tonne ACC ACL Grasim Ultratech Shree India Cements Orient Paper & Ind Q2FY10 3,931 3,872 3,689 3,669 3,449 3,590 3,114 Q2FY09 3,688 3,493 3,446 3,491 3,055 3,633 2,993 YoY (%) 6.6 10.8 7.1 5.0 12.9 (1.2) 4.0 Q1FY10 3,811 3,798 3,664 3,702 3,477 3,720 3,246 QoQ (%) 3.1 2.0 0.7 (1.0) (0.8) (3.5) (4.1) Q2FY10E 3,841 3,809 3,700 3,600 3,560 3,533 3,027 Variance (%) 2.3 1.6 (0.3) 2.0 (3.1) 1.6 2.9
Moreover, lower consumption growth further aggravated the demand supply dynamics in the southern region. Exhibit 6: Region-wise cement consumption
(mn mt) North Central East West South All India *Excluding ACC numbers Source: CMA April-August 2009* 13 10 12 14 22 72 April-August 2008* 12 8 9 13 21 63 YoY (%) 16.1 29.3 23.1 8.6 5.8 13.9
Cement Sector
Inventory levels on the rise

Cement and clinker inventories have risen from 11 days in March to 18.6 days in September 2009 (against 14.3 days in September 2008). We believe actual inventory would be higher, as inventory from ramp up of new capacity is yet to be reported. Rising inventory clearly signals a fall in cement prices, going forward. Exhibit 7: Inventory levels on the rise
(Days) 20 18 16 14 12 10 8 6 4 2 0 May-08 Jul-08 Sep-08 Jun-08 Apr-08 Aug-08 Inventory Level On Rise
May-09
Dec-08
Mar-09
Jul-09
Nov-08
Feb-09
Cement Inventory (Days)

Source: CMA, Centrum Research
Cement and clinker inventory (Days)
Muted despatch growth over next 10 months

Even if the industry grows at 9-10%, we believe the high base would keep despatch growth muted over next 10 months. Given the high base of cement despatch/consumption growth in H2FY09, we expect despatch/consumption growth in H2FY10 to be on the lower side (Exhibit 8). While monthly numbers would hover at 3.2%-7.1% YoY during Nov2009-March 2010 overall growth in H2FY10 would taper to 6.2% YoY vs 11.5 % in H1FY10 on our assumption of 8.7% growth for FY10. Even if we were to assume 9.5% growth for the full year, despatch growth for H2FY10 would still remain subdued at 7.7%. Newsflow of tapering despatch growth in H2FY10 would be a double whammy for the sector valuation, as it would coincide with news of capacity ramp up and falling cement prices. This would lead the market to assign a further discount to the sector. Exhibit 8: Despatch growth scenario for H2FY10/H1FY11E
Monthly Despatches Growth Scenario for H2FY10/H1FY11 Base Growth (%) --- FY09/FY10 Derived Growth assuming 8.7% for full Yr FY10/11 Derived Growth assuming 9.5% for full Yr FY10/11 Derived Growth assuming 10% for full Yr FY10/11 Source: Company, Centrum Research Oct 4.1 11.3 12.8 13.8 Nov 11.3 4.1 5.6 6.6 Dec 12.2 3.2 4.7 5.7 Jan 8.3 7.1 8.6 9.6 Feb 8.9 6.5 8.0 9.0 Mar 10.5 4.9 6.4 7.4 H2 9.2 6.2 7.7 8.7 Apr 13.1 4.3 5.9 6.9 May 10.8 6.6 8.2 9.2 Jun 12.8 4.6 6.2 7.2 Jul 9.9 7.5 9.1 10.1 Aug 16.9 0.5 2.1 3.1 Sep 5.7 11.7 13.3 14.3 H1 11.5 5.9 7.5 8.5
Exhibit 9: Base effect to lower monthly despatch growth (YoY) over next 12 months
(% ) 18 16 14 12 10 8 6 4 2 0 April09A May09A High base to lower despatch growth over 12 months
June09A
July09A
Aug09A
Sept09A
Nov-09
Mar-10
Oct-09
Dec-09
Jan-10
Feb-10
Apr-10
May-10
Jun-10
Jul-10
Aug-09
Aug-10
Sep-09
Oct-08
Jan-09
Jun-09
Apr-09
Growth Base Case (8.7%)/Actual Growth at 10% for full Yr FY10/FY11
Growth at 9.5% for full Yr FY10/FY11
Source: CMA, Centrum Research Estimates
Sep-10
Cement Sector
Overview of quarterly results
ACC (Sell; target price: Rs707): Q3CY09 PAT surged by a robust 54% YoY (10.3% lower QoQ) to Rs4,356mn, 15% higher than our estimate of Rs3,778mn. Net sales grew 10% to Rs19,694mn, in line with our estimate, while operating profit rose 50% YoY to Rs6,679mn on higher realization and lower costs. Going forward, we expect ACC to get impacted on account of sharp drop in cement prices in the southern region and Uttar Pradesh (UP). Ambuja Cements (Sell; target price: Rs83): Q3 adjusted PAT grew 14.1% YoY to Rs2,852mn, 1.9% lower than our estimate of Rs2,907mn. Net sales rose 16.2% to Rs16,284mn and EBITDA grew 11.3% to Rs4,553mn (5.4% below estimate). Higher energy costs, increase in clinker purchase and higher other expenses offset the rise in realization. The expected sharp drop in cement prices in the western region would impact Ambuja Cements, going forward. Price drop would be a result of expected supply from the south and diversion of exports to the domestic markets. However, lower energy cost and use of indigenous clinker would offset the impact to a great extent. India Cements (Sell; target price: Rs91): Net sales increased 7% YoY and 4.3% QoQ to Rs9,949mn, 2% higher than our estimate. Operating profit at Rs3,032mn (up 1% YoY and 5.9% QoQ) and net profit at Rs1,377mn (down 11% YoY and 6.5% QoQ) were 24% and 20%, respectively, higher than our estimates. Going ahead, India Cements would be impacted on account of sharp drop in cement prices in the south. Grasim Industries (Hold; target price: Rs2,622): Q2 exceeded expectations, mainly on account of superior performance in the VSF segment and higher other income. PAT (standalone) grew 60.8% YoY to Rs6.7bn vs our estimate of Rs5.5bn. Net sales rose 12% YoY to Rs30.3bn and EBITDA grew 78% to Rs10.6bn. Post restructuring only the VSF business would remain under direct control of Grasim, which would become a holding company of Ultratech. Shree Cement (Hold; target price: Rs1,728): Q2 PAT surged by a robust 153% YoY (1% lower QoQ) to Rs2, 915mn vs our estimate of Rs2,421mn. Net sales grew 43% YoY to Rs8,996mn but fell about 4.7% short of our estimate on account of lower volumes and realization. Operating profit rose 123% YoY to Rs4,082mn (3% higher than estimate) on account of lower energy cost. We expect higher sale of merchant power from Q4FY10 to partially offset the impact of cement price fall. Ultratech Cement (Hold; target price: Rs884): Q2 net sales grew 10% YoY (but down 21% QoQ) to Rs15,408mn (our estimate: Rs15,600mn). EBIDTA surged 58% YoY (down 34% QoQ) to Rs4,700mn (Rs4,641mn). However, higher other income and lower interest cost resulted in PAT growing 53% YoY (down 39.9% QoQ decline) to Rs2,509mn, 9.2% above our estimate of Rs2,297mn. We expect Ultratechs operating performance to improve, once Grasim transfers its cement business to Ultratech.
Cement Sector
INDIA Cement
ACC
Q3CY09 Update 6 November 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs47.1 ACC IN ACC.BO 187.7 187.7 136.8/2.9 929/381 556,461 10
Sell Target Price: Rs707 CMP: Rs729* Downside: 3 %

*as on 4 November 2009
Greater challenges ahead

ACC reported better-than-estimated Q3 on the back of higher cement realization and lower other expense. However, the sharp fall in cement prices in the southern and central markets will likely impact its earnings, going forward. We maintain Sell with a target price of Rs707, as capacity overhang would keep valuations in the sector under check. Higher realization, lower expenses boost PAT: Q3CY09 PAT surged by a robust 54% YoY (10.3% lower QoQ) to Rs4,356mn vs our estimate of Rs3,778mn. Net sales grew 10% to Rs19,694mn, in line with our estimate, while operating profit rose 50% YoY to Rs6,679mn on higher realization and lower costs. Sharp correction in prices in the southern and central regions to impact earnings: A sharp correction in cement prices in Andhra Pradesh and retracing of cement prices from abnormal levels in Uttar Pradesh (UP) would impact the companys earnings, going forward. We maintain our estimates for CY10. Valuation Rich; Sell on challenging outlook: The stock currently trades at CY10E P/E of 10.9x, EV/EBITDA of 5.5x and P/BV of 2.0x. Its assets are valued at US$93/tonne on CY10E capacity of 30.5mt. The valuations appear rich and we reiterate Sell with a target price of Rs707 (valuing 10.5x CY10E earnings), in view of the challenging industry dynamics and likely earnings downgrades.
Y/E Dec (Rsmn) Net sales Power and Fuel % of sales Logistics % of sales Other Expenses % of sales EBITDA EBITDA Margin (%) EBITDA /ton Dep and amortisation Interest EBT Other income PBT Provision for tax Effective Tax Rate % PAT (adjusted) NPM (%) EPS (adjusted) Q3CY09 19,694 3,595 18 2,548 13 3,791 19.3 6,679 33.9 1,336 796 135.1 5,748 509 6,257 1,900 30.4 4,356 22.1 23.02 Q3CY08 17,909 4,370 24 2,366 13 4,326 24.2 4,461 24.9 821 736 115.9 3,609 581 4,190 1,356 32.4 2,834 15.8 15.17 YoY (%) 10.0
One year Indexed Stock Performance

200 180 160 140 120 100 80 60 40 20 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
ACC LIMITED
NSE S&P CNX NIFTY INDEX
Price Performance (%)

1M ACC NIFTY (11.8) (5.8) 6M 11.3 28.6 1Yr 43.7 57.3

+91 22 4215 9640
Source: Bloomberg, Centrum Research *as on 4 November 2009
Q2CY09 20,813 3,738 18 2,547 12 3,741 18 7,337 35.3 1,356 784 159.5 6,394 570 6,963 2,107 30.3 4,856 23.3 25.8
QoQ (%) (5.4)
Q3CY09E 19,410 3,481 18 2,352 12 4,237 21.8 6,149 31.7 1,229 820 140 5,189 450 5,639 1,861 33 3,778 19.5 19.96
Variance (%) 1.5 3.0 8.0 (11.0) 9.0 224.0 9.0 (3.0) (4.0) 11.0 13.0 11.0 2.0 15.0 266.0 15.0
50.0 900.0
(9.0) (134.0)
59.0 49.0 40.0 54.0 629.0
(10.1) (10.1) (9.8) (10.3) (121.0)
Source: Company, Centrum Research Y/E Dec (Rsbn) Rev YoY (%) EBITDA EBITDA (%) 16.6 19.3 16.6 26.7 22.4 28.3 27.3 21.5 31.0 26.0 Adj PAT 11.3 12.7 10.7 16.4 12.6 YoY (%) Fully DEPS 229.3 12.6 (15.6) 53.3 (23.0) 60.0 67.5 58.5 87.4 67.3 RoE (%) RoCE (%) 42.7 34.8 23.6 31.1 21.8 29.0 29.1 20.9 26.8 17.3 P/E (x) 12.2 10.8 12.5 8.4 10.9 EV/EBITDA (x) 7.6 6.1 6.7 4.5 5.5 P/BV(x) 4.3 3.3 2.9 2.3 2.0
CY06 58.5 73.1 CY07 70.7 20.8 CY08 77.2 9.2 CY09E 86.4 12.0 CY10E 86.9 0.5 Source: Company, Centrum Research Estimates
Please refer to important disclosures/disclaimers inside
Higher realizations, lower costs propel profit growth

ACC reported better-than-expected Q3. On a standalone basis, net sales at Rs19,694mn was in line with estimates, while operating profit was 9% higher than our estimate on account of lower other expenses (11% lower than estimate). Sales grew 10% YoY on 3.2% YoY volume growth to 5.01mn mt and 6.6 % YoY growth in realization to Rs3,931/tonne (2.3% higher than estimate) Operating profit rose 50% YoY (9% QoQ decline) to Rs6,679mn. EBITDA margin expanded 900bp YoY (contracted 134bp QoQ) to 33.9%. Higher other income (13% higher than estimate) and lower tax (30.4% of PBT) against our assumption of 33% and 32% in Q3CY08 led PAT to grow by 54% YoY (15% above estimate), to Rs4,356mn. Consolidated net sales grew 9% YoY (5.1% QoQ decline) to Rs20,774mn, on the back of 10% growth in revenue of Rs19,694mn from the cement business and 12.7% YoY decline in ready mix concrete (RMC) sales at Rs1,177mn. This division reported a loss of Rs1,72.5mn vs Rs2,04.5mn in Q3CY08. Consolidated EBITDA was up 52% YoY to Rs6, 541mn while adjusted PAT grew 61% YoY to Rs4,154mn. Exhibit 1: Consolidated segmental performance
(Rsmn) Segmental Sales Cement RMC Total Segmental EBIT Cement RMC Total Source: Company, Centrum Research 19,694 11,773 20,774 6,255 (173) 6,081 17909 13491 19,001 4,176 9204) 3,972 10.0 (12.7) 9.3 49.8 (15.6) 53.1 Q3CY09 Q3CY08 YoY (%)
Muted profit from Q4CY09 onwards

Robust performance of ACC during Q2CY09 and Q3CY09 was primarily driven by the significant price hikes effected in the northern and eastern regions and abnormal price hike in UP. We expect ACC to report muted profits from Q4CY09 onwards, with cement price in UP beginning to reverse since Q3CY09 end and prices in other regions too softening.
Zonal exposure to worsen post expansion in south and west

ACC is a pan-India player with a near uniform presence across all regions. However, it currently derives approximately 30% of sales from the relatively challenging southern and western markets. Post its 7mn tonne expansions at Bargarh (Orissa), Wadi (Karnataka) and Chanda (Maharashtra), its exposure to these regions is expected to rise from 30% to 45% of total sales. This poses higher challenges ahead as these markets are expected to witness oversupply and cement prices here are expected to see a sharper drop (started since Q3CY09 end). The management indicated that expansion at Bargarh, Orissa has been commissioned during Q3CY09 and is under trial run. Moreover, for the expansion of its New Wadi project in Karnataka, the satellite grinding unit at Thondebhavi near Bangalore is already undergoing trial runs, the second grinding plant at Bellary is likely to get commissioned in Q4CY09 and the clinkerization plant at Wadi would be ready in Q1CY10. The other major project at Chanda in Maharashtra is expected to see completion in Q42010 (earlier guidance mid 2010). Exhibit 2: Rising exposure in southern and western markets
ACC' Zonal Exposure Central West South East North 0 (Percent of total Sale) 5 10 FY09 15 14.2 15.7 17.4 18.6 18.7 20 25 25.5 30 19.1 21.9 23.0 26.1
Post Expansion
ACC
Rich valuations; Sell on challenging outlook

ACC has underperformed Nifty by 39% and our cement universe by 13% since our initiation with a Sell in March 2009. Currently, the stock trades at CY10E P/E of 10.9x, EV/EBITDA of 5.5x and P/BV of 2.0x. Its assets are valued at US$93/tonne on CY10E capacity of 30.5mt. The valuations appear rich and we reiterate Sell with target price of Rs707 (valuing it 10.5x CY10E) in view of the challenging dynamics and possible earnings downgrades in future. Exhibit 3: Valuations rich; reiterate Sell on challenging outlook
(%) 200 180 160 140 120 100 80 May-09 May-09 Apr-09 Mar-09 Mar-09 Apr-09 Jun-09 Jun-09 Jul-09 Jul-09 Aug-09 Aug-09 Oct-09 Acc Sep-09 Sep-09 Sep-09 Oct-09 ACC Performance Vs Nifty & Cement Space
Nifty
Centrum Cement Index
ACC
Financials
Exhibit 4: Income Statement
Y/E Mar (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBIT from operations Other non operating income PBT before extra-ordinary items Extra-ordinary income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest Share of profit in associates PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin CY06 58,512 73.1 9,791 16.7 8,119 13.9 12,206 20.9 16,554 28.3 882 2,610 13,944 792 13,152 1,573 14,725 1,609 16,334 3,939 24.1 12,395 41.3 9.0 12,363 11,270 229.3 19.3 CY07 70,674 20.8 11,986 17.0 9,379 13.3 15,709 22.2 19,311 27.3 964 3,130 16,181 744 15,437 1,718 17,156 2,099 19,254 4,981 25.9 14,273 (8.3) 1.8 14,283 12,688 12.6 18.0 CY08 77,197 9.2 16,118 20.9 9,975 12.9 18,469 23.9 16,624 21.5 779 3,205 13,419 400 13,019 2,780 15,799 425 16,224 5,252 32.4 10,972 (1.9) 23.9 10,998 10,708 (15.6) 13.9 CY09E 86,458 12.0 15,961 18.5 11,005 12.7 14,881 17.2 26,744 30.9 1,187 3,559 23,185 550 22,635 1,840 24,474 24,474 8,084 33.0 16,390 (0.2) 23.9 16,414 16,414 53.3 19.0 CY10E 86,907 0.5 17,207 19.8 11,995 13.8 16,210 18.7 22,387 25.8 914 4,552 17,835 990 16,844 2,003 18,847 18,847 6,227 33.0 12,620 (0.2) 23.9 12,644 12,643 (23.0) 14.5
Exhibit 6: Cash flow

Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op and EI CF from investing Dec (Inc) in FA Pur (Sale) of Investment Cash from investment CF from financing Proceeds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) CY06 14,726 2,610 660 17,995 (47) 18,042 3,930 14,112 2,047 16,158 CY07 17,156 3,130 578 20,864 (1,299) 22,163 1,921 20,242 2,073 22,315 CY08 15,822 3,205 (66) 18,961 (1,311) 20,272 3,193 17,079 178 17,257 CY09E 24,498 3,559 550 28,607 1,449 27,158 8,084 19,074 19,074 CY10E 18,871 4,552 990 24,413 (80) 24,493 6,227 18,266 18,266
(5,333) (1,392) (6,724)
(8,319) (2,185) (10,504)
(15,772) 3,999 (11,773)
(13,200) 169 (13,031)
(16,800) 3,000 (13,800)
216 (1,917) (890) (1,681) (4,273) 5,162
40 (4,393) (862) (5,356) (10,571) 1,240
14 1,766 (413) (4,351) (2,985) 2,499
(550) (4,396) (4,947) 1,096
8,000 (990) (4,396) 2,613 7,079
Source: Company, Centrum Research Estimates
Exhibit 7: Key Ratios

Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value DPS Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) CY06 28.3 26.5 25.2 19.3 73.1 180.1 229.3 29.0 34.4 42.7 1.4 (50.1) 13.3 104.3 40.8 60.0 79.9 169.2 15.0 0.3 0.0 21.6 12.2 4.3 7.6 2.3 2.3 144.8 CY07 27.3 25.3 24.3 18.0 20.8 16.7 12.6 29.1 35.2 34.8 1.5 (61.7) 15.8 115.8 38.3 67.5 92.7 222.0 20.0 0.2 (0.2) 26.0 10.8 3.3 6.1 1.8 1.9 122.2 CY08 21.5 21.0 20.5 13.9 9.2 (13.9) (15.6) 20.9 27.4 23.6 1.3 (79.6) 16.9 134.4 37.8 58.5 75.6 257.0 20.0 0.2 (0.1) 43.4 12.5 2.9 6.7 1.7 1.8 111.9 CY09E 30.9 28.9 28.3 19.0 12.0 60.9 53.3 26.8 35.3 31.1 1.4 (65.0) 17.0 120.0 38.0 87.4 106.3 320.9 20.0 0.1 (0.1) 48.6 8.4 2.3 4.5 1.5 1.6 97.3 CY10E 25.8 22.8 21.7 14.5 0.5 (16.3) (23.0) 17.3 21.9 21.8 1.2 (65.0) 17.0 120.0 38.0 67.3 91.5 364.9 20.0 0.2 (0.1) 22.6 10.9 2.0 5.5 1.5 1.6 93.3
Exhibit 5: Balance Sheet

Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets CY06 1,875 29,770 31,645 79 7,832 3,264 42,820 49,447 19,618 29,829 5,515 35,345 4,757 6,539 2,290 6,225 4,486 19,540 16,832 2,708 10 42,820 CY07 1,878 39,744 41,623 81 3,147 3,380 48,230 55,923 21,993 33,931 6,453 40,384 7,906 7,417 3,058 7,464 4,400 22,340 22,413 (74) 14 48,230 CY08 1,878 46,364 48,242 25 4,820 3,421 56,508 61,139 24,536 36,603 16,114 52,717 5,169 7,993 3,579 9,915 5,541 27,028 28,418 (1,390) 11 56,507 CY09E 1,878 58,381 60,259 25 4,820 3,421 68,525 84,339 28,095 56,244 6,114 62,358 5,000 9,001 4,027 11,008 5,541 29,577 28,425 1,152 14 68,524 CY10E 1,878 66,628 68,506 25 12,820 3,421 84,772 105,139 32,647 72,492 2,114 74,606 2,000 9,048 4,048 18,087 5,541 36,724 28,572 8,152 14 84,772
10
ACC
INDIA Cement
Ambuja Cements
Q3CY09 /Earnings change 6 November 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs47.1 ACEM IN ABUJ.BO 1,523.2 1,523.2 135.7/2.9 112/50 3,453,347 2
Sell Target Price: Rs83 CMP: Rs89* Downside: 6.7%

Exceptionals inflate profits

Ambuja Cements (ACL) Q3 was in line, except for exceptionals of Rs461mn. Going forward, ACL would benefit from lower fuel cost and use of indigenous clinker after expansion. However, valuations appear rich; maintain Sell. Result in line: Q3 adjusted PAT grew 14.1% YoY to Rs2,852mn, 1.9% lower than our estimate of Rs2,907mn. Net sales rose 16.2% to Rs16,284mn and EBITDA grew 11.3% to Rs4,553mn (5.4% below estimate). Higher energy costs, increase in clinker purchase and other expenses offset the rise in realization. Exceptionals inflate profits: Reported profit was 9.5% higher than our estimate on account Rs461mn received as discount on prepayment of outstanding deferred sales tax loan. Cost pressures continue: Energy costs remained high due to the high cost coal inventory. Going forward, we expect fuel costs to fall, with the company already having exhausted the high cost coal inventory and use of clinker from its clinkerization unit. Valuations rich; Sell: At CMP, the stock trades at 10.8x CY10E EPS, 5.6x EV/EBIDTA and 1.8x P/BV. We estimate the value of the companys assets at US$116 on a capacity of 22.2mt. Maintain Sell on rich valuations with a target price of Rs83, valuing it at 10.1x CY10E EPS.
Y/E Dec (Rsmn) Net sales Power and Fuel % of sales Logistics % of sales Other Expenses % of sales EBITDA EBITDA Margin (%) Dep and amortisation Interest EBT Other income PBT Except. item (reported) Provision for tax Effective Tax Rate % PAT (reported) PAT (adjusted) NPM (%) EPS (adjusted) Q3CY09 16,284 3,217 20 2,978 18 2,801 17.2 4,553 28.0 719 52.10 3,782 180 3,962 461.60 1,238 28.0 3,185 2,852 17.5 1.88 Q3CY08 14,019 3,140 22 2,936 21 2,466 17.6 4,091 29.2 654 58.60 3,378 333 3,711 1,210 32.6 2,501 2,501 17.8 1.65 YoY% 16.2 Q2CY09 18885 3752 20 3294 17 2719 14.4 5208 27.6 704 52.1 4,451 281 4,732 1486 31.4 3,247 3,247 17.2 2.14

180 160 140 120 100 80 60 40 20 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
AMBUJA CEMENTS L

1M 6M 1Yr
Ambuja (13.0) 8.9 41.4 NIFTY (5.3) 28.6 57.3 Source: Bloomberg, Centrum Research *as on 4 November 2009
QoQ% (13.8)
Q3CY09E 16,187 3,080 19 2,983 18 2,532 15.6 4,810 29.7 730 64.8 4,015 260 4,275 1.00 1,368 32.0 2,907 2,907 18.0 1.91
Variance % 0.6 4.4 72.3 (0.2) (13.8) 10.6 155.9 (5.4) (175.7)bps (1.5) (19.6) (5.8) (30.8) (7.3) (9.5) 9.5 (1.9) (44.4) bps (1.89)
11.3 (122) bps
(12.6) 38bps
12 (46) 6.8 2.34 27.3 14.1 (32.3)bps 14.05
(15.0) (36.0) (16.3) (16.7) (1.9) (12.1) 32.6 bps

+91 22 4215 9640
Source: Company, Centrum Research Y/E dec(Rsbn) CY06 CY07 CY08 CY09E CY10E Rev 63 56 62 69 70 YoY (%) 140.6 (10.2) 10.7 10.4 1.7 EBITDA 21 20 18 19 21 EBITDA (%) 34.0 36.3 28.5 27.9 29.4 Adj PAT 15 13 11 12 13 YoY % 212.1 (10.2) (16.6) 12.7 1.8 Fully DEPS 9.6 8.6 7.2 8.1 8.2 RoE (%) 34.4 32.2 21.2 20.2 18.1 RoCE (%) 24.0 28.8 19.0 18.4 16.7 P/E (x) 9.3 10.4 12.4 11.0 10.8 EV/EBITDA (x) 5.8 5.4 6.7 6.3 5.6 P/BV(x) 3.9 2.9 2.4 2.1 1.8
Source: Company, Centrum Research Estimates Please refer to important disclosures/disclaimers inside
Q3 inline; Exceptionals inflate profits

Q3CY09 net sales grew 16.2% YoY (13.8% QoQ decline) to Rs16,284mn, driven by 4.8% volume growth to 4.16mt and 10.8% increase in realization to Rs3,872/tonne. The increase in the companys purchase of clinker by 3.7x YoY to Rs1.6bn, 2% YoY rise in energy cost coupled with 14% YoY growth in other expenses curtailed operating profit growth at 11.3% YoY (12.6% QoQ decline) to Rs4,553mn. EBITDA margin contracted 122bp YoY (4bp QoQ) to 28%. Higher depreciation (up 10% YoY), lower interest cost (down 11% YoY) and lower other income (down 46% YoY and down 36% QoQ) restricted PBT growth to 6.8% YoY at Rs3,962mn. Exceptional income of Rs461mn due to discount on prepayment of interest free sales tax loan and lower tax (28% of PBT vs32% in Q3CY08) inflated reported PAT by 27.3% YoY to Rs3,185. Adjusted PAT grew 14.1% YoY to Rs2,852mn.
Increase in clinker purchase and energy cost offset higher realization

ACL increased its purchase of clinker by 3.7x YoY to Rs1.6bn to support the higher volumes during the quarter. Besides, energy cost pressure continued unabated with the companys per tonne energy cost during the quarter having increased to Rs795 vs Rs789 in Q3CY08 (Rs814 in Q1CY09). Other expenses too rose 7% YoY (19% QoQ) to Rs664/tonne.These costs virtually neutralized the increase in realization and led to margin contracting 122bp YoY to 28%. However, going forward, we expect cost pressures to ease, with the company commissioning its own clinkerization units at Bhatapara in Chattisgarh and Himachal Pradesh. It would also benefit from low international coal prices after exhausting its high-cost international coal inventory. However, ACL has already lost the cost leadership advantage to competition, which translates into a lower premium.
Project expansion status

During the quarter, the company commissioned 15MW power plant at Maratha plant in Maharashtra Its 4.4mn clinker expansion at Bhatapara in Chattisgarh and Rauri (HP) are expected to be commissioned during Q409 and end CY09, respectively Two grinding units of 1.5mt each are expected to be commissioned in Q4CY09 and Q1CY10, respectively, at Dadri and Nalagarh in North India Other projects like the commissioning of its 25MW captive power plant at its Maharashtra unit and purchase of 3 ships for coastal transportation are expected to be completed by mid 2010 Exhibit 1: Valuations rich; reiterate Sell on challenging outlook
(%) 200 180 160 140 120 100 80 May-09 May-09 Oct-09 Mar-09 Mar-09 Apr-09 Apr-09 Jun-09 Jun-09 Aug-09 Aug-09 Sep-09 Sep-09 Sep-09 Oct-09 Jul-09 Jul-09 ACL Performance Vs Nifty & Cement Space
Nifty
Ambuja
ACL has underperformed Nifty by 38% and the Centrum cement space by 12% since our initiation with a Sell in March 2009. At CMP of Rs89, the stock trades at 10.8x CY10E earnings, 5.6x EV/EBITDA and 1.8x P/BV. Its assets are valued at US$116/ton on CY10E capacity of 22.2mt. The valuations appear rich and we reiterate Sell with a target price of Rs83 (valuing it at 10.1x CY10E), in view of the challenging dynamics and possible earnings downgrades in future.
12
Ambuja Cements
Financials
Y/E Dec (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBIT from operations Other non operating income PBT before extra-ordinary items Extra-ordinary income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin CY06 62,683 140.6 12,399 19.8 11,719 18.7 10,972 17.5 21,331 34 945 3,261 18,070 1,132 16,937 1,003 17,941 475 18,416 3,384 18 15,033 14,617 212 23.3 CY07 56,314 -10.2 10,042 17.8 11,175 19.8 8,580 15.2 20,451 36 1,221 2,363 18,088 759 17,329 1,935 19,265 7,859 27,124 9,433 35 17,691 13,122 (10) 23.3 CY08 62,347 10.7 13,257 21.3 12,205 19.6 10,949 17.6 17,779 29 1,003 2,598 15,182 321 14,861 1,754 16,615 3,083 19,698 5,676 29 14,023 10,939 (17) 17.5 CY09E 68,829 10.4 14,088 20.5 14,070 20.4 10,961 15.9 19,183 28 1,033 2,926 16,257 202 16,055 1,553 17,609 17,609 5,283 30 12,326 12,326 13 17.9 CY10E 69,975 1.7 13,769 19.7 15,299 21.9 12,043 17.2 20,566 29 1,008 4,183 16,383 202 16,181 1,746 17,927 17,927 5,378 30 12,549 12,549 2 17.9

Y/E Dec (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op Ex OI CF from investing Capex Investment Cash from investment CF from financing Proceeds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 481 (3,402) (1,202) (4,766) (8,889) 2,826 323 (5,253) (483) (5,831) (11,244) 2,652 12 (434) (497) (3,902) (4,821) 2,093 (202) (3,919) (4,121) (287) (202) (3,919) (4,121) 6,794 (7,564) 1,238 (6,327) (5,215) 3,586 (1,629) (16,415) 13,666 (2,749) (11,544) (11,544) (6,273) (6,273) 18,416 3,261 825 22,503 463 22,965 (4,449) 18,517 (475) 18,042 27,124 2,363 (435) 29,052 (1,179) 27,873 (4,489) 23,384 (7,859) 15,525 19,698 2,598 (1,015) 21,281 (2,612) 18,670 (5,924) 12,746 (3,083) 9,662 17,609 2,926 202 20,737 (76) 20,661 (5,283) 15,378 15,378 17,927 4,183 202 22,312 254 22,566 (5,378) 17,188 17,188 CY06 CY07 CY08 CY09E CY10E

Y/E Dec Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value DPS Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) CY06 34.0 28.8 28.6 23.3 140.6 194.6 212.1 24.0 37.3 34.4 2.5 0.5 5.2 40.9 36.1 9.6 11.8 23.0 3.4 0.2 (0.2) 18.8 9.3 3.9 5.8 2.1 2.2 CY07 36.3 32.1 34.2 23.3 (10.2) 15.7 (10.2) 28.8 54.7 32.2 1.9 (7.1) 9.4 75.8 59.2 8.6 10.2 30.6 2.2 0.1 (0.3) 27.0 10.4 2.9 5.4 2.1 2.4 CY08 28.5 24.4 26.6 17.5 10.7 (13.1) (16.6) 19.0 33.1 21.2 2.0 3.8 13.1 86.3 77.0 7.2 8.9 37.3 2.2 0.1 (0.2) 55.5 12.4 2.4 6.7 2.1 2.2 CY09E 27.9 23.6 25.6 17.9 10.4 7.9 12.7 18.4 22.3 20.2 1.2 3.5 13.5 80.0 70.0 8.1 10.0 42.8 2.2 0.0 (0.1) 94.9 11.0 2.1 6.3 1.9 2.0 122.8 CY10E 29.4 23.4 25.6 17.9 1.7 7.2 1.8 16.7 18.7 18.1 1.2 3.5 13.5 80.0 70.0 8.2 11.0 48.4 2.2 0.0 (0.2) 101.8 10.8 1.8 5.6 1.8 1.9 116.4

Y/E Dec (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets 8,654 3,839 47,410 45,425 20,533 24,892 5,419 30,311 11,331 4,088 950 3,781 3,887 12,706 7,016 5,690 77 47,410 3,304 3,784 53,701 52,311 22,712 29,599 5,100 34,699 12,889 5,816 1,578 6,426 3,921 17,741 11,691 6,050 62 53,701 2,887 3,808 63,423 57,069 25,142 31,928 15,608 47,535 3,324 9,398 2,480 8,518 6,863 27,259 14,738 12,521 43 63,423 2,887 3,808 71,830 84,086 28,068 56,018 2,500 58,518 3,324 9,521 2,780 8,231 4,499 25,152 15,086 10,067 43 71,830 2,887 3,808 80,459 91,359 32,251 59,107 2,500 61,607 3,324 9,476 2,822 15,026 3,499 30,918 15,337 15,581 43 80,459 CY06 3,034 31,872 34,917 CY07 3,045 43,564 46,613 CY08 3,045 53,680 56,729 CY09E 3,045 62,087 65,135 CY10E 3,045 70,716 73,765
13
Ambuja Cements
INDIA Cement
Grasim Industries
Q2FY10/Estimate change 6 November 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs47.1 GRASIM IN GRAS.BO 91.7 91.7 199/4.2 2,940/872 204,046 10
Hold Target Price: Rs2,622 CMP: Rs2,170* Upside: 21%

Robust performance
A robust performance in the cement and VSF divisions coupled with higher other income drove Grasims Q2 PAT 23% above our estimate to Rs6.7bn. We see 20% upside on our revised target price of Rs2,622 from current levels. The stocks valuation is contingent on the Ultratech-Samruddhi merger ratio and we have considered three merger ratio scenarios to value Grasim. Reiterate Hold. Result surprises: The Q2 result exceeded expectations, mainly on account of the VSF segments superior performance and higher other income. PAT (standalone) grew 60.8% YoY to Rs6.7bn vs our estimate of Rs5.5bn. Net sales rose 12% YoY to Rs30.3bn and EBITDA grew 78% to Rs10.6bn. Earnings raised: We raise FY10E EPS by 7.3% to Rs309 and FY11E EPS by 7.8% to Rs264 to factor in the superior performance in its VSF business. Robust performance in cement and VSF, higher other income drive profit: The VSF divisions EBIDTA grew 140% YoY to Rs3.55bn (up 79% QoQ and 36% higher than our estimate) on the back of 18% volume growth and 3.4% YoY (8% QoQ) growth in realization. The cement segments EBITDA surged 80% YoY to Rs6.8bn on robust volume growth (23% YoY), higher realization (7.1% YoY) and cost savings. Other income rose 20% YoY to Rs1bn (190% higher than estimate).

300 250 200 150 100 50 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
GRASIM INDS LTD

1M Grasim Inds. (13.3) 6M 21.2 1Yr 106.6
Rajan Kumar rajan.kumar@centrum.co.in 91 22 4215 9640
Merger ratio key to valuation: The stock currently trades at 7.0x FY10E EPS and 8.2x FY11E EPS, 4x and 4.3x EV/EBIDTA and 1.6x and 1.4x P/BV. Its valuation is contingent on the Ultratech-Samruddhi merger ratio and we have considered three scenarios of 2:1, 1.8:1 and 1.5:1 with 25%, 50% and 25% probability, respectively, to value Grasim (valued as a holding company). Reiterate Hold with a revised target price of Rs2,622.
Y/E March (Rsmn) (Standalone) Net sales EBIDTA OPM (%) Depreciation and amortization Interest expenses EBT Other income PBT Provision for tax - effective tax rate Exceptional items (as reported) PAT (adjusted) NPM (%) Source: Company, Centrum Research Q2FY10 30,258 10,582 35.0 1,358 505 8,718 1,011 9,730 2,986 30.7 0 6,743 22.3 Q2FY09 27,005 5,944 20.3 1,069 288 4,587 844 5,431 1236 22.8 0 4,195 14.3 YoY (%) 12.0 78.0 1,469bp
NIFTY (5.8) 28.6 57.3 Source: Bloomberg, Centrum Research *as on 4 November 2009
Q1FY10 30,787 9,187 29.8 1,370 475 7,342 286 7,628 2322 30.4 3,360 5,305 17.2
QoQ (%) (1.7) 15.2 513.1
Q2FY10E Variance (%) 28,906 9,374 35.8 1,349 500 7,524 350 7,874 2,398 30.5 0 5476 20.9 4.7 12.9 (82.9)bp 0.6 1.1 15.9 189.0 23.6 24.6 24.3 23.1 137bps
79.1
27.6
60.7
27.1
Y/E Mar(Rsbn) FY07 FY08 FY09 FY10E FY11E
Rev 140.7 169.7 184.0 201.7 206.3
YoY (%) 37.6 20.6 8.4 9.6 2.3
EBITDA 39.7 49.6 43.3 58.2 51.1
EBITDA (%) 28.2 29.2 23.5 28.9 24.8
Adj PAT 19.7 26.2 21.9 28.3 24.2
YoY % 89.6 33.4 (16.7) 29.5 (14.4)
Fully DEPS 214.6 286.2 238.5 308.8 264.2
RoE (%) 34.5 33.4 21.1 21.9 15.9
RoCE (%) 21.4 21.1 15.0 16.2 12.1
P/BV 4.2 2.8 2.1 1.6 1.4
P/E (x) 10.1 7.6 9.1 7.0 8.2
EV/EBITDA (x) 5.8 4.9 5.5 4.0 4.3
Earnings raised, maintain Hold

We have raised our estimates (consolidated) for FY10 by 7.3% to Rs309 and for FY11 by 7.8% to Rs264 to factor in the better-than-expected performance by the VSF segment. At CMP, the stock trades at 7.0x FY10E and 8.2x FY11E EPS, 4x and 4.3x EV/EBIDTA and 1.6x and 1.4x P/BV. Going forward, the stocks valuation is contingent on the Ultratech-Samruddhi merger ratio. Maintain Hold with a revised target price of Rs2,622, valuing Grasim as a holding company in three merger ratio scenarios of 2:1,1.8:1 and 1.5:1 with a probability of 25%, 50% and 25%, respectively. Exhibit 1: Revised estimates
Y/E March (Rsmn) Net sales EBIDTA Net profit EPS (Rs) Revised FY10E 201,750 58,250 28,310 309 FY11E 206,342 51,073 24,227 264 Earlier FY10E 199,121 55,955 26,428 288 FY11E 203,503 48,594 22,492 245 Change (%) FY10E 1.3 4.1 7.1 7.3 FY11E 1.4 5.1 7.7 7.8
Exhibit 1: Revised VSF performance

Y/E March (Rsmn) Net sales EBIDTA Revised FY10E 26,735 8,822 FY11E 28,873 7,218 Earlier FY10E 24,106 4,821 FY11E 26,034 5,207 Change (%) FY10E 10.9 83.0 FY11E 10.9 38.6
Source: Centrum Research Estimates
Merger ratio key to valuations

We reiterate our Hold on Grasim with a target price of Rs2,622, which provides 21% upside from current levels. While the SamruddhiUltratech merger ratio would be the key for the stocks valuation, the correction has rendered the stock attractive. To value Grasim, we have considered three scenarios and assigned 25%, 50% and 25% probability for each of these scenarios. We have valued Grasim as a holding company of Ultratech/other investments and provided 20% holding company discount to Ultratechs target valuation and 30% discount to other investments at CMP. We have assigned a PE multiple of 8x FY10E to value its VSF business. Under three merger ratio scenarios of 2:1, 1.8:1 and 1.5:1 (shares of Samruddhi for one share of Ultratech), and assigning a probability of 25%, 50% and 25% respectively to these scenarios, we arrive at a fair value of Rs2,622 for Grasim.
Exhibit 2: Three valuation scenarios
Value per share (Rs) Samruddhi Ultratech merger ratio Share in Ultratech (with 20% Holding Company Discount) Share in Ultratech as Samruddhi shareholder (minority) Value of strategic investments (0.7x Mcap) Value of liquid investments (1x) Value of VSF business (8X FY10E) Value of Grasim share post restructuring Source: Company, Centrum Research Scenario I 2:1 1,256 473 185 248 427 2,588 Scenario II 1.8:1 1,261 496 185 248 427 2,616 Scenario III 1.5:1 1,271 537 185 248 427 2,668
Grasim has underperformed the Nifty by 22% and outperformed the Centrum Cement Universe by 4% since our initiation with a Hold in March 2009. The stock broadly outperformed the Nifty and our cement space until the announcement of business restructuring on 1 0ctober 2009.
15
Grasim Industries
Exhibit: 3: Grasims performance vs Nifty and Centrum Cement Universe

(%) 220 200 180 160 140 120 100 80 May-09 May-09 Apr-09 Mar-09 Mar-09 Apr-09 Jun-09 Jun-09 Oct-09 Aug-09 Aug-09 Sep-09 Sep-09 Sep-09 Oct-09 Jul-09 Jul-09 Grasim Performance Vs Nifty & Cement Space
Nifty
Grasim
Robust growth in cement and VSF segments drive earnings

Standalone Q2 net sales grew 12.4% YoY (down 1.7% QoQ) to Rs30.26bn, driven by the 29.8% YoY increase (3.8% QoQ decline) in cement sales to Rs20.6bn and 18.3% YoY (9.8% QoQ) growth in VSF sales to Rs8.49bn. EBITDA grew 78.2% YoY and 15.8% QoQ to Rs10.6bn driven by the 80% YoY increase in cement EBITDA and 140% increase in VSF EBIDTA. It should be noted that the results are not comparable YoY as the sponge iron business was sold in Q1FY10. The cement divisions EBITDA increased 80% YoY to Rs6.83bn on account of higher realizations (up 7.1% YoY and 0.7% QoQ) to Rs3,689/tonne and 23.2% YoY increase (6.6% QoQ decline) in volumes to 4.6mt. Cost savings also helped boost EBITDA. EBITDA in the VSF segment grew 140% YoY and 79.1% QoQ to Rs3.55bn on higher volumes (up 18.3% YoY and 9.8% QoQ) and increased realizations (3.4% YoY and 8% QoQ growth).
Exhibit 4: Segmental performance (standalone)
Y/E March (Rsmn) Cement volumes(mn tonnes) Realization (Rs/ton) Net Sales EBIDTA EBIDTA/Ton (Rs/ton) Margin (%) VSF volumes (tonnes) Realization (Rs/ton) Net Sales EBIDTA EBIDTA/Ton (Rs/ton) Margin (%) Source: Company, Centrum Research Q2FY10 4.6 3,689 2,066 683 1,457 33.1 73,993 105,217 849 355 47,950 41.8 Q2FY09 3.7 3,446 1,591 380 997 23.9 62,536 101,786 691 148 23,618 21 YoY (%) 23.2 7.1 29.8 80 921 bps 18.3 3.4 22.9 140.2 2,040 bps Q1FY10 QoQ (%) Q2FY10 Variance (%) 4.6 3,700 2,046 659 1,410 32.2 70,000 103,000 771 260 37,074 34 (0.3) (0.3) 1.0 3.6 84bps 5.7 2.2 10.1 36.7 812bps 4.9 (6.6) 3,664 0.7 2,147 (3.8) 740 (7.7) 1,484 34.5 (141.4)bps 67,419 9.8 97,543 7.9 716 18.6 198 79.1 29,385 27.7 1,412bps
Higher depreciation (up 27% YoY to Rs1.36bn), increased interest expenses (75% YoY at Rs505mn) and higher other income (up 19% YoY at Rs1.01bn) resulted in a 79.1% growth in PBT to Rs9.73bn. Higher tax provision of Rs2.32bn (up 141% with tax rate of 30.7% of PBT vs 22.8% in Q2FY09) curtailed standalone PAT growth at 60.7% to Rs6.74bn (23% higher than our estimate). On a consolidated basis, net sales increased 6% YoY to Rs47.43bn, operating profit grew 62% to Rs15.4bn and PAT (after minority interest and profit in associates) grew 61% at Rs7.81bn led by better performance of its subsidiary, Ultratech.
16
Grasim Industries
Outlook challenging from H2FY10

Cement segment
Grasim has been a prime beneficiary of its expansion in the northern region where the demandsupply dynamics are favourable on account of higher demand, relatively lower capacity addition and higher consolidation in the region. The cement division has higher earnings visibility on account of its higher exposure to the northern and central regions, where prices are likely to be stable over a longer period. The company would also benefit from cost efficiencies brought about by setting up additional captive power plants (CPPs). However, the correction in cement prices has already started and the impact on realizations and profit would be felt from Q3FY10 onwards. Exhibit 5: Grasim: Regional exposure
Central South West East North 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 12.5 37.5 40.0 15.6 15.6 18.8
Contribution to sales (%) Source: Company, Centrum Research
VSF segment
The VSF segment primarily benefited from strong domestic demand, higher penetration in exports markets, earlier price hikes and fall in input costs of pulp and chemicals,. However, given the widening price differential with substitutes like cotton and PSF, a further increase in VSF realization looks unlikely. On the other hand, the rise in pulp prices would put pressure on margins, going forward. Grasim plans to set up 80,000-tonne green-field project at Vilayat, Gujarat, at a cost of Rs10bn to meet the expected growth in demand for which the commercial production is expected to commence in FY13. The company has already acquired the land for the project and received the requisite environmental approvals.
Status of expansion plans

During H1FY10, the company augmented its cement capacity to 45.65mt (standalone 22.55mt and UltraTechs 23.1mt) by adding 4.1mt grinding capacity (Shambhupura II, Rajasthan 1.6mt, Aligarh grinding unit 1.3mt under Grasim and 1.2mt at Tadpatri in Ultratech). Further, additional grinding capacity of 3.1mt is likely to be commissioned in Q3FY10, taking its combined capacity to 48.8mt.
17
Grasim Industries
Financials (Consolidated)
Y/E Mar (Rsmn) Revenues Growth in revenues (%) EBITDA EBITDA Margin Depreciation PBIT Interest expenses PBT from operations Other non operating income PBT before extra-ordinary items Extra-ordinary income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin FY07 140,695 37.6 39,723 28.2 6,100 33,623 2,286 31,337 3,177 34,514 34,514 10,922 31.6 23,593 3,915 19,678 19,678 14.0 14.0 FY08 169,739 20.6 49,598 29.2 6,703 42,895 2,221 40,674 4,623 45,296 45,296 14,658 32.4 30,639 4,565 26,073 26,073 15.5 15.4 FY09 184,039 8.4 43,296 23.5 8,658 34,638 3,105 31,534 4,532 36,066 36,066 9,914 27.5 26,152 4,445 21,708 21,708 11.9 11.8 FY10E 201,749 9.6 58,250 28.9 10,397 47,852 3,817 44,036 4,000 48,036 48,036 14,411 30.0 33,625 5,310 28,314 28,314 14.0 14.0 FY11E 206,342 2.3 51,073 24.8 11,600 39,473 3,817 35,656 4,500 40,156 40,156 12,047 30.0 28,109 3,883 24,227 24,227 11.7 11.7

Y/E Mar (Rs mn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op & EI CF from investing Capex Investment Cash from investment CF from financing Proceeds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 3,422 11,175 (2,286) (5,612) 6,699 1,318 634 7,201 (3,095) (185) 4,555 (789) 438 7,991 (3,483) (3,553) 1,392 (633) (62) (500) (3,817) (4,836) (9,215) 19,868 (500) (3,817) (4,836) (9,152) 21,741 (26,851) (8,168) (35,019) (51,181) 5,885 (45,296) (26,468) (10,183) (36,651) (27,370) (27,370) (15,800) (15,800) 34,514 6,100 712 41,326 (1,132) 40,194 (10,557) 29,638 29,638 45,296 6,703 (382) 51,617 (574) 51,043 (14,072) 36,972 2,980 39,952 36,066 8,658 67 44,791 (4,657) 40,134 (5,509) 34,625 34,625 48,036 10,397 3,817 62,250 (3,186) 59,064 (13,392) 45,672 10,781 56,453 40,156 11,600 3,817 55,573 (3,192) 52,381 (10,047) 42,334 4,360 46,694 FY07 FY08 FY09 FY10E FY11E
Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed FY07 917 64,706 65,623 8,587 48,730 11,526 134,466 FY08 917 90,462 91,438 12,760 55,771 11,575 171,544 FY09 917 114,662 115,701 16,704 59,162 15,919 207,485 FY10E 917 142,001 142,977 22,014 58,662 17,919 241,572 FY11E 917 161,392 162,368 25,897 58,162 19,919 266,346

Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity 0.6 0.3 16.1 10.1 3.0 5.8 1.7 1.4 0.5 0.3 21.4 7.6 2.2 4.9 1.5 1.2 0.4 0.2 12.6 9.1 1.7 5.5 1.4 1.1 0.3 0.0 13.6 7.0 1.4 4.0 1.2 1.0 0.3 (0.1) 11.5 8.2 1.2 4.3 1.1 1.0 Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales 214.6 281.1 27.5 715.7 286.2 359.3 30.0 997.3 238.5 332.9 30.0 1,261.9 308.8 422.2 45.0 1,559.4 264.2 390.7 45.0 1,770.8 1.0 (7.2) 21.4 63.4 34.7 1.0 (20.2) 21.9 79.1 37.0 0.9 (11.0) 16.3 70.8 43.4 0.8 (6.1) 20.0 68.0 41.9 0.8 (2.1) 22.0 66.0 41.9 37.6 92.1 89.6 21.4 23.4 34.5 20.6 24.9 33.4 21.1 24.9 33.4 8.4 (12.7) (16.7) 15.0 16.3 21.1 9.6 34.5 29.5 16.2 21.0 21.9 2.3 (12.3) (14.4) 12.1 14.7 15.9 28.2 26.2 24.5 14.0 29.2 28.0 26.7 15.5 23.5 21.3 19.6 11.9 28.9 25.7 23.8 14.0 24.8 21.3 19.5 11.7 FY07 FY08 FY09 FY10E FY11E
Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current liab & provisions Net current assets Misc. Expenditure Total Assets
143,718 60,125 83,593 19,572 103,165 22,719 13,581 8,252 3,692 7,479 33,004 24,429 8,575
157,198 63,397 93,801 55,335 149,136 16,607 17,443 10,185 2,903 12,047 42,578 36,783 5,795
210,623 68,254 142,369 19,822 162,191 35,626 22,210 8,239 2,270 12,615 45,333 35,685 9,649
219,772 74,152 145,620 28,223 173,843 35,626 23,491 11,055 21,528 13,615 69,688 37,586 32,102
247,142 85,751 161,391 12,553 173,944 35,626 24,026 12,437 43,009 14,615 94,087 37,311 56,775
134,467
171,544
207,484
241,572
266,346
18
Grasim Industries
INDIA Cement
UltraTech Cement
Q2FY10 Update 6 November 2009
Key Data
Hold
Target Price: Rs884 CMP: Rs734* Upside: 20%
Merger ratio key to valuation
UTCEM IN Q2 sales and operating profit were in line with our Bloomberg Code Reuters Code ULTC.BO estimate but lower interest and higher other income Current Shares O/S (mn) 124.5 drove PAT 9% above our estimate. Transfer of Grasims Diluted Shares O/S(mn) 124.5 cement business would make Ultratech a pan-India Mkt Cap (Rsbn/USDbn) 91.4/1.9 player with 20% market share. The stock is attractively 52 Wk H / L (Rs) 920/245 valued under three assumed merger ratio scenarios. We Daily Vol. (3M NSE Avg.) 222,231 maintain Hold with a target price of Rs884. Face Value (Rs) 10 Inline result: Q2 net sales grew 10% YoY (but down 21% 1 USD = Rs47.1 QoQ) to Rs15,408mn. EBIDTA surged 58% YoY (down 34% QoQ) to Rs4,700mn (Rs4,641mn). However, higher other One year Indexed Stock Performance income and lower interest cost resulted in PAT growing 300 53% YoY (down 39.9% QoQ decline) to Rs2,509mn, 9.2% 250 above our estimate of Rs2,297mn. 200 Naked cement realization drops; maintain estimates: 150 Though blended realization fell just 0.8% QoQ (up 7.85% 100 YoY) to Rs3,425/tonne, naked realization (blended 50 0 realization minus freight cost per tonne) fell 4.8% QoQ (up Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 5.2% YoY) to Rs2,737/tonne, inline with our estimate of ULTRATECH CEMENT NSE S&P CNX NIFTY INDEX Rs2,727/tonne. We retain FY10E and FY11E earnings. Samruddhi Cement merger ratio key to valuation: Price Performance (%) Grasim Industries has spun off its cement assets into 1M 6M 1Yr Samruddhi as a precursor to its merger with UltraTech. We (9.9) 29.2 112.3 believe the merger ratio would be key to Ultratechs UltraTech NIFTY (5.3) 28.6 57.3 valuation. We arrive at a fair valuation of Rs806-Rs945 for Source: Bloomberg, Centrum Research UltraTech, assuming a merger ratio of 1.5, 1.8 and 2 shares *as on 4 November 2009 of Samruddhi for one share of UltraTech. Maintain Hold: Assigning a 50% probability to scenario II (merger ratio 1.8) and 25% each to scenario I (2) and III (1.5), we arrive at a target price of Rs884.
Y/E Mar (Rsmn) Net sales Power and Fuel % of sales Logistics % of sales Other Expenses % of sales EBITDA EBITDA Margin (%) EBITDA /ton Dep and amortisation Interest EBT Other income PBT Provision for tax Effective Tax Rate ( %) PAT (adjusted) NPM (%) EPS (adjusted) Q2FY10E Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10E Variance (%)
15,408 3,162 21.0 2,861 19.0 2,772 18.0 4,700 30.5 1,130 967 298.7 3,435 308 3,743 1,234 33.0 2,509 16.3 20.2
13,962 3,945 28.0 2,343 17.0 2,617 18.7 2,967 21.3 727 808 308.8 1,851 278 2,129 487 22.9 1,642 11.8 13.2
10.0 (20.0) (773) bps 22.0 179 bps
58.0 925 bps
86.0 75.8
53.0 452.4 bps
19,528 3,833 20.0 3,049 16.0 2,454 12.6 7,168 36.7 1,355 936 330 5,902 343 6,245 2,067 33.1 4,178 21.4 33.6
(21.1)
(6.2) 295 bps 13.0 542 bps (34.4) (620) bps
(41.8) (40.1)
(39.9) (511) bps
15,600 3,118 20.0 2605 17.0 2,795 18.0 4,641 30 1,079 1,000 390 3,251 200 3451 1,306 27.3 2,297 14.7 18.5
(1.2)
9.8 187 (Bps)
1.3 75.5 bps
5.7 8.5
9.2 156 bps
Source: Company, Centum Research Y/E Mar (Rsbn) FY07 FY08 FY09 FY10E FY11E Rev 49.7 56.2 65.6 72.2 71.1 YoY (%) 46.8 13.2 16.7 10.0 (1.5) EBITDA 14.3 17.3 17.2 22.0 17.3 EBITDA (%) 28.8 30.8 26.2 30.5 24.3 Adj PAT 7.8 10.1 9.8 11.7 8.6 YoY (%) 248.7 28.7 (3.2) 20.1 (26.9) Fully DEPS 63.1 81.1 78.6 94.3 69.0 RoE (%) 55.9 45.2 31.0 28.3 16.9 RoCE (%) 24.2 23.8 18.6 18.1 11.8 P/BV 5.2 3.4 2.5 1.9 1.7 P/E (x) 11.6 9.0 9.3 7.8 10.6 EV/EBITDA (x) 7.5 6.4 6.3 4.6 5.5
Inline results
Q2 net sales grew 10% YoY (but down 21% QoQ) to Rs15,408mn vs our estimate of Rs15,600mn. EBIDTA surged 58% YoY (down 34% QoQ) to Rs4,700mn (our estimate: Rs4,640mn). However, higher other income and lower interest cost resulted in PAT growing 53% YoY (down 39.9% QoQ decline) to Rs2,509mn, 9.2% above our estimate of Rs2,297mn.
Naked realization drops; indicates start of price war

Q2 net sales grew 10% YoY (21% QoQ decline) to Rs15,408mn, mainly due to the 1.8% YoY volume increase to 4.16mt (down 21% QoQ) and 7.85% YoY increase in blended realization to Rs3,425/tonne (down 0.83% QoQ). However, naked realization (blended realization minus freight cost per tonne) dropped 4.85% QoQ to Rs2,737/tonne, which is inline with our estimate of Rs2,727/tonne. Naked realization, the companys realization per tonne after deducting freight cost from total realization, declined 4.8% QoQ, a clear indication of the emerging price competition in the cement sector, particularly the southern zone. This also indicates that the companies need to sell in far off market leading to higher lead distances and freight cost. Significant savings in power and fuel costs (down 20% YoY and 17.5% QoQ) helped offset higher logistic cost (up 22% YoY and down 6.2% QoQ) and other expenses (up 6% YoY and 13% QoQ). Operating profit rose 58% YoY (down 34.4% QoQ) to Rs4,700 mn. EBITDA margin expanded 925bp YoY (and contracted 620bp QoQ) to 30.5%. Lower interest cost (down 3% YoY and 9.4% QoQ), higher depreciation (up 20% YoY) and other income (up 11% YoY) resulted in PBT growing 75.8% YoY (40% QoQ decline) to Rs3,743mn. However, increased tax outgo (up 153% YoY) curtailed PAT growth to 52.8% YoY (40% QoQ decline) to Rs2,509mn.
Per tonne analysis

While blended realization increased 7.85% YoY (down 0.83% QoQ) to Rs3,425 per tonne, higher logistics cost per tonne (up 19.86% YoY and 19.32% QoQ) led to naked realization falling 4.86% QoQ (up 5.2% YoY) to Rs2,737/tonne. Raw material costs increased 14.9% YoY to Rs444, power and fuel costs were down 21.3% YoY and 4.91% QoQ due to lower prices of international coal and increased use of captive power. Other expenses stood at Rs666/tonne, up 4% YoY and 43.65% QoQ, on account of higher maintenance expenses. EBIDTA/tonne increased 55.5% YoY (16.6 % Lower QoQ) to Rs1,130 which was 4.7% higher than our estimate. Exhibit 1: Per tonne realization and costs
(Rs/tonne) Blended Realization Naked Realization RM Energy Logistics Other Exp EBIDTA/Tonne Q2FY10 3,425 2,737 444 760 688 666 1,130 Q2FY09 3,176 2,601 387 966 574 641 727 YoY (%) 7.9 5.2 14.9 (21.3) 19.9 4.0 55.5 Q1FY10 3,453 2,877 428 725 576 464 1,355 QoQ% (0.8) (4.9) 3.8 4.9 19.3 43.7 (16.6) Q2FY10E 3,333 2,727 428 725 606 650 1,079 Variance (%) 2.8 0.4 3.9 4.9 13.5 2.5 4.7
20
UltraTech Cement
Samruddhi Cement merger ratio key to valuation

Grasim Industries has spun off its cement assets into Samruddhi as a precursor to its merger with UltraTech. The merger would transform UltraTech into a 49.8mt pan-India Cement behemoth with 20% all-India market share. We believe UltraTech would command a premium over peers on account of scale and pan-India exposure. The merger ratio between Samruddhi Cement and UltraTech would determine the extent of upside available for UltraTech shareholders. We believe that a fair merger ratio could be 1 share of Ultratech for 1.8 shares of Samruddhi cement based on a 20% premium to Samruddhi Cements book value. We have considered three merger ratios of 2, 1.8 and 1.5 shares of Samruddhi for 1 share of UltraTech. Scenario I and II are earnings-accretive for Ultratech Share holders. Exhibit 2: UltraTechs valuation pre-merger
Valuation Pre Merger EPS (Rs) FY10 E FY11E 94 69 Fair Value (Rs) PE 10.25 xFY11E & USD 92 707
Existing estimates
Exhibit 3: Valuation of UltraTech post Samruddhi merger

Conversion Ratio(x) Samruddhi : Ultratech shares Scenario I Scenario II Scenario III 2.0:1 1.8:1 1.5:1 New EPS (Rs) FY10 E 103 98 88 FY11E 79 75 68 P/E 11.5 x FY11E (A) 911 862 778 Fair Value (Rs) EV/Ton of $125 (B) 980 925 835 Average of A and B 945 893 806
Maintain Hold
A re-rating of the stock would lead to the UltraTechs fair valuation going up from 10.2x FY11E to 11.5x FY11E and EV/tonne of $92/tonne to $125. Based on the average of 11.5x FY11E and EV/tonne of $125, UltraTech would be fairly valued at between Rs806-Rs945. Assigning a 50% probability to scenario II, which we consider more likely scenario and 25% each to scenario I and III, we arrive at a target price of Rs884. We recommend Hold.
21
UltraTech Cement
Financials
Y/E Mar (Rsmn) Revenues Growth in revenues (%) Raw Material % of Sales Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBT from operations Other non op. income PBT before extra-ord. items Extra-ordinary income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin FY07 49,684 46.8 4,230 8.5 11,392 22.9 8,880 17.9 7,548 15.2 14,316 28.8 837 2,287 12,030 868 11,161 592 11,753 0 11,753 3,887 33 7,867 17.5 7,849 7,849 248.7 15.8 FY08 56,238 13.2 6,227 11.1 12,542 22.3 9,345 16.6 9,200 16.4 17,308 30.8 1,004 2,396 14,912 757 14,155 998 15,153 0 15,153 5,038 33 10,115 14.6 10,101 10,101 28.7 18.0 FY09 65,636 16.7 8,442 12.9 17,142 26.1 10,712 16.3 10,727 16.3 17,185 26.2 942 3,258 13,927 1,256 12,671 1,007 13,678 0 13,678 3,882 28 9,796 15.6 9,781 9,781 (3.2) 14.9 FY10E 72,223 10.0 8,807 12.2 14,208 19.7 12,409 17.2 12,281 17.0 22,029 30.5 1,093 4,042 17,988 1,560 16,428 1,100 17,528 0 17,528 5,784 33 11,744 0 11,744 11,744 20.1 16.3 FY11E 71,107 (1.5) 10,456 14.7 13,869 19.5 13,839 19.5 13,055 18.4 17,300 24.3 831 4,475 12,825 1,360 11,465 1,350 12,815 0 12,815 4,229 33 8,586 0 8,586 8,586 (26.9) 12.1
Exhibit 6: Cash Flow

Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op Ex OI CF from investing Capex Investment Cash from investment CF from financing Proceeds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 1,310 (892) (824) (406) 335 1,667 (890) (8) 769 158 3,831 (1,176) (740) 1,915 (133) (500) (1,560) (874) (2,934) 3,503 (500) (1,360) (874) (2,734) 3,612 (7,628) (2,838) (17,921) 3,502 (8,345) (8,182) (10,330) (8,910) (8,910) 11,753 2,287 639 14,679 738 15,418 (4,210) 11,208 11,208 15,153 2,396 423 17,973 674 18,646 (4,837) 13,809 13,809 13,678 3,258 974 17,910 (1,302) 16,608 (2,129) 14,479 14,479 17,528 4,042 1,560 23,129 (1,578) 21,551 (4,784) 16,767 16,767 12,815 4,475 1,360 18,650 (165) 18,485 (3,229) 15,256 15,256 FY07 FY08 FY09 FY10E FY11E
(10,466) (14,419) (16,527) (10,330)
Source: Company, Centrum Research Estimate

Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) FY07 28.8 24.2 23.7 15.8 46.8 149.1 248.7 24.2 26.6 55.9 1.4 (10.3) 12.6 54.9 32.0 63.1 81.4 4.0 142.0 0.9 0.8 16.5 11.6 5.2 7.5 2.2 1.8 FY08 30.8 26.5 26.9 18.0 13.2 20.9 28.7 23.8 25.8 45.2 1.3 (29.4) 13.0 82.0 39.7 81.1 100.4 5.0 217.1 0.6 0.6 22.9 9.0 3.4 6.4 2.0 1.6 FY09 26.2 21.2 20.8 14.9 16.7 (0.7) (3.2) 18.6 20.5 31.0 1.1 (19.6) 10.4 68.6 38.7 78.6 104.7 5.0 290.1 0.6 0.6 13.7 9.3 2.5 6.3 1.7 1.4 99.9 FY10E 30.5 24.9 24.3 16.3 10.0 28.2 20.1 18.1 21.3 28.3 1.0 (10.7) 10.6 61.1 39.8 94.3 126.8 6.0 377.4 0.4 0.3 14.1 7.8 1.9 4.6 1.5 1.3 97.2 FY11E 24.3 18.0 18.0 12.1 (1.5) (21.5) (26.9) 11.8 13.8 16.9 0.9 (11.3) 11.2 64.6 42.0 69.0 104.9 6.0 439.4 0.4 0.2 12.7 10.6 1.7 5.5 1.4 1.3 86.8

Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets FY07 1,245 16,437 17,682 53 15,786 5,621 39,142 48,199 22,742 25,458 6,972 32,429 4,592 4,412 1,739 1,001 2,543 9,695 7,574 2,121 39,142 FY08 1,245 25,781 27,026 57 17,405 5,454 49,942 50,050 24,795 25,255 22,834 48,089 1,467 6,197 2,026 1,143 3,830 13,196 12,809 387 49,942 FY09 1,245 34,868 36,113 68 21,429 7,276 64,885 74,375 27,759 46,616 6,783 53,398 10,095 7,056 1,889 1,047 3,908 13,899 12,512 1,388 64,881 FY10E 1,245 45,738 46,983 68 20,929 8,276 76,255 84,375 31,801 52,574 7,113 59,687 10,095 7,981 2,137 4,550 4,066 18,733 12,264 6,469 76,255 FY11E 1,245 53,450 54,695 68 20,429 9,276 84,467 91,705 36,276 55,429 8,693 64,122 10,095 8,298 2,221 8,170 4,316 23,004 12,751 10,254 84,467
22
UltraTech Cement
INDIA Cement
India Cements
Q2FY10/ Target price change 6 November 2009
Key Data
Sell
Target Price: Rs91 CMP: Rs108* Downside: 15.7%
Fraught with challenges

+91 22 4215 9640
ICEM IN India Cements reported better-than-expected Q2 on the Bloomberg Code Reuters Code ICMN.BO back of higher volumes and lower-than-expected decline Current Shares O/S (mn) 282.5 in realization. Cement prices fell towards the end of Q2 Diluted Shares O/S(mn) 282.5 (more than anticipated) and we expect to see the impact Mkt Cap (Rsbn/USDmn) 30.5/646.4 of this in the forthcoming quarters. We reiterate Sell with 52 Wk H / L (Rs) 180/79 a revised target price of Rs91 (earlier Rs114). Daily Vol. (3M NSE Avg.) 2,142,874 10 Result beats expectation: Net sales increased 7% YoY Face Value (Rs) 1 USD = Rs47.1 and 4.3% QoQ to Rs9,949mn, 2% higher than our estimate. Operating profit at Rs3,032mn (up 1% YoY and 5.9% QoQ) and net profit at Rs1,377mn (down 11% YoY One year Indexed Stock Performance and 6.5% QoQ) were 24% and 20%, respectively, higher 250 than our estimates. 200 Pricing pressure to reflect from Q3FY10: Cement prices 150 have fallen sharply in parts of India Cements key markets 100 and are declining in other regions. The impact of this 50 decline would be reflected from Q3FY10. 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Revisit of expansion plan to increase capex: India INDIA CEMENTS NSE S&P CNX NIFTY INDEX Cements capex is slated to increase from Rs8bn to Rs15bn over FY10-11E, as it now plans to set up its planned 100MW power plant itself. A promoter-controlled Price Performance (%) entity was to set-up the plant, according to its earlier plan. 1M 6M 1Yr Challenges ahead; Maintain Sell: At CMP, the stock India C. (17.7) (7.9) 21.1 trades at 9.6x FY11E earnings, 5.9x EV/EBIDTA and 0.83x NIFTY (5.8) 28.6 57.3 P/BV. Its assets are valued at US$81 on its FY11E capacity Bloomberg, Centrum Research of 14.3mt. Given the challenging dynamics in the Source: *as on 4 November 2009 southern zone and low visibility on earnings, we reiterate Sell with a revised target price of Rs91, valuing the stock at 8x FY11E earnings. Switch to Shree Cements (Hold) or Ultratech Cements (Hold) and Grasim Industries (Hold). Y/E March (Rsmn) Net sales RM % of Sales Power & Fuel % of Sales Logistics % of Sales Other Expenses % of Sales Operating Profit OPM (%) Depreciation & amortization Interest expenses EBT Other income PBT Extraordinary Item Provision for tax - effective tax rate PAT (reported) Exceptional item (post tax) PAT (adjusted) NPM (%) Source: Company, Centrum Research Q2FY10 9,949 1,189 12 2,442 25 1,459 15 1,250 13 3,032 30 572 374 2,086 0 2,086 (13) 704 34 1,369 (8) 1,377 14 Q2FY09 9,296 946 10 2,263 24 1,276 14 1,276 14 2,991 32 498 248 2,245 0 2,246 (296) 608 31 1,343 (203) 1,546 17 YoY (%) 7.0 Q1FY10 9,535 1123 12 2,438 26 1,308 14 1,566 16 2,863 30 571 385 1,908 68 1,976 210 755 35 1,430 137 1,293 14 QoQ (%) 4.3 Q2FY10E 9,737 1,220 13 2,439 25 1,463 15 1,615 17 2,449 25 583 290 1,576 125 1,701 25 561 33 1,165 (17) 1,148 12 Variation(%) 2.2 (2.5) (57.4) 0.1 (50.7) (0.3) (36.7) (22.6) (402.3) 23.8 531bps (1.9) 29.0 32.3 (100.0) 22.6 25.4 2.9 17.5 19.9 205bps
1.3 (171)bps 14.9 50.7 (100.0) (7.1) 15.9 2.0 (10.9) (279)bps
5.9 44bps 0.2 (2.8) (100.0) 5.6 (6.8) (4.3) 6.5
Y/E Mar (Rsbn) FY07 FY08 FY09 FY10E FY11E
Rev 22.6 30.6 34.3 35.9 35.6
YoY (%) 46.3 35.6 12.1 4.9 (0.8)
EBITDA 7.3 10.9 10.0 11.0 8.8
EBITDA (%) 32.6 35.7 29.1 30.6 24.7
Adj PAT 4.8 6.7 4.9 4.9 3.2
YoY % 791.4 39.2 (26.8) (0.0) (34.4)
Fully DEPS 18.4 23.7 17.3 17.3 11.3
RoE (%) 41.9 33.1 17.5 15.3 9.0
RoCE (%) 20.9 19.1 12.0 10.7 7.2
P/E (x) 5.9 4.6 6.3 6.3 9.6
EV/EBITDA (x) 6.2 4.0 4.8 4.6 5.9
P/BV 2.0 1.2 1.0 0.90 0.83
Source: Company, Centrum Research Estimates Please refer to important disclosures/disclaimers inside
Result above expectations on higher volumes and realization

Q2 net sales at Rs9,949mn (up 7% YoY and 4.3% QoQ) rose 2% higher than our estimate. Operating profit at Rs3,032mn (up 1% YoY and 5.9% YoY) and net profit at Rs1,377mn (down 11% YoY and 6.5% QoQ) were 24% and 20%, respectively, higher than our estimates. Net sales was driven by 14.8% YoY and 13.4% QoQ volume growth to 2.79mt and 1.2% YoY (and 3.5% QoQ) decline in net realization to Rs3,590 per tonne. Revenue from shipping freight, Indian Premier League (IPL) and wind power stood at Rs142mn (vs Rs281.1mn in Q2FY09), Rs79mn (Rs138mn) and Rs7.57mn (Rs49.1mn), respectively. While power & fuel cost increased 8% YoY, raw material (up 26% YoY) and logistics costs (up 14% YoY) were inline with our estimate. Employee cost (up 44% YoY) was higher than our estimate while other expenses (down 18% YoY) came 23% lower than our estimate on account of lower IPL revenue as well as costs booked on account of IPL and profits reported in shipping freight (Rs37mn) and IPL (Rs54mn). This led to YoY flat operating profit (up 5.9% QoQ) of Rs3,032mn (24% higher than our estimate). Margin contracted 171bp YoY (but up 44bp QoQ) to 30%. Higher depreciation (up 15% YoY to Rs572mn) and interest expenses (up 51% YoY to Rs374mn), and provisioning for tax (34% of PBT to Rs704mn) resulted in adjusted PAT declining 11% YoY to Rs1,377 mn.
Impact of pricing pressure to be felt Q3FY10 onward

Cement prices fell sharply in parts of India Cements key markets of Andhra Pradesh and declining in remaining parts of the Southern and Western regions. The impact of this decline would be felt from Q3FY10. For instance, cement prices in Hyderabad which hovered at Rs220-230/bag until late July 2009, corrected to Rs160-170/bag by end September. Prices in India Cements other key markets too corrected by about Rs20/bag during the same period. While the full impact of this decline would get reflected in Q3FY10 numbers, price environment in the southern and western zones remains challenging, as supply from new capacities is slated to increase. These include, JK Cements (3mt), Kesoram Industries (1.65mt), Dalmia Cement (5mt), Orient Paper & Industries (1.6mt), Bharathi Cements (2.5mt), Zuari Cements (2mt), NCL Industries (1.5mt) and Andhra Cements (2mt).
Expansion plans
India Cement commissioned a cement clinkerization facility at its Malkapur and Parli grinding units in the current year. The kiln at Chilamkur (Tamil Nadu) is being upgraded from 3,600tpd to 4,500tpd. The company expects to add a new line in Rajasthan of 1.5mt by mid 2010. It has taken steps to set-up two 100 MW power plants - one in Tamil Nadu and other in Andhra Pradesh. The company has also intimated that it is in advanced stages of finalizing the acquisition of coal concession in Indonesia to meet the captive requirements of cement and power generation. However, India Cements capex would increase from Rs8bn to Rs15bn over FY10-11E, as it now plans to set up its planned 100MW power plant itself. A promoter-controlled entity was to set-up the plant, according to its earlier plan.
Maintain Sell despite sharp underperformance

India Cements has underperformed the Nifty by 61% and Cement Index by 35% since our initiation with a Sell in March 2009. At CMP, the stock trades at a 9.6x FY11E earnings, 5.9x EV/EBIDTA and 0.83x P/BV. Its assets are available at US$81 on its FY11E capacity of 14.3mt. Given the challenging dynamics in the southern zone and low visibility on earnings, we reiterate our Sell rating on the stock with a target price of Rs91, valuing it at 8x FY11E earnings. We advise investors to switch to Shree Cements (Hold) a play in north India or Ultratech Cements (Hold) and Grasim Industries (Hold) (both pan India players).
24
India Cement
Exhibit 1: India Cement has underperformed Nifty and the Centrum cement index
(%) 200 180 160 140 120 100 80 May-09 May-09 Sep-09 Sep-09 Sep-09 Oct-09 Aug-09 Aug-09 Mar-09 Mar-09 Jun-09 Jun-09 Apr-09 Apr-09 Oct-09 Jul-09 Jul-09 ICL Performance Vs Nifty & Cement Space
Nifty
India Cements
Exhibit 2: Peer comparison

India Cement Capacity Presence CMP (Rs) PE (X) EV/EBIDTA (X) EV/Ton ($) P/BV (X) 14.31 South and West 108 9.6 5.9 81 0.83 Shree Cement 11.4 North and Central 1,574 7.3 4.9 83.4 1.6
Source: Companies, Centrum Research
25
India Cement
Financials
Y/E Mar (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBT from operations Other non operating income PBT before extra-ordinary items Extra-ordinary income/ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin FY07 22,552 46.3 5,488 24 3,588 15.9 2,735 12.1 7,345 32.6 871 1,026 6,318 1,498 4,820 101 4,922 0 4,922 131 2.7 4,790 4,790 4,790 791.4 21.2 FY08 30,578 35.6 6,907 23 4,600 15.0 3,437 11.2 10,930 35.7 1,185 1,279 9,650 1,099 8,552 275 8,827 (378) 8,448 2,071 24.5 6,377 6,377 6,667 39.2 21.8 FY09 34,268 12.1 8,917 26 4,860 14.2 4,982 14.5 9,962 29.1 1,093 2,033 7,928 1,122 6,807 470 7,276 (794) 6,482 2,161 33.3 4,321 4,321 4,879 (26.8) 14.2 FY10E 35,932 4.9 8,326 23 5,319 14.8 5,139 14.3 10,978 30.6 1,115 2,404 8,574 1,208 7,366 289 7,656 0 7,656 2,586 33.8 5,069 5,069 4,878 (0.0) 13.6 FY11E 35,638 (0.8) 8,693 24 5,832 16.4 5,590 15.7 8,816 24.7 816 2,729 6,087 1,373 4,714 432 5,146 0 5,146 1,758 34.2 3,388 3,388 3,198 (34.4) 9.0

Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Extraordinary Inc (Exp) Cash From Op Inc EO CF from investing Capex Investment Cash from investment CF from financing Proceeds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) FY07 4,920 1,026 1,493 7,439 (375) 7,064 (127) 6,937 (507) 6,431 (1,392) (1,004) (2,396) 1,252 (584) (2,893) (2,224) 1,811 FY08 8,928 1,279 1,048 11,255 357 11,613 (963) 10,650 (481) 10,169 (9,182) (991) (10,173) 5,833 (1,917) (1,958) 1,959 1,955 FY09 6,483 2,033 1,581 10,097 (2,205) 7,891 (830) 7,061 7,061 (9,538) 120 (9,418) 28 981 (2,056) (1,048) (3,405) FY10E 7,656 2,404 1,208 11,267 (662) 10,605 (2,586) 8,019 8,019 (7,500) (7,500) 1,000 (1,208) (661) (869) (350) FY11E 5,146 2,729 1,373 9,248 (210) 9,038 (1,758) 7,280 7,280 (7,500) (7,500) 2,000 (1,373) (661) (34) (254)

Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) FY07 32.6 28.0 21.8 21.2 46.3 181.5 791.4 20.9 22.2 41.9 0.9 12.1 42.1 70.2 40.2 18.4 22.3 1.0 54.8 1.5 1.3 4.9 5.9 2.0 6.2 2.1 1.2 FY08 35.7 31.6 28.9 21.8 35.6 48.8 39.2 19.1 20.1 33.1 0.9 5.0 37.1 74.0 41.9 23.7 28.2 2.0 92.1 0.8 0.6 10.2 4.6 1.2 4.0 1.5 1.0 FY09 29.1 23.1 21.2 14.2 12.1 (8.9) (26.8) 12.0 11.9 17.5 0.8 (8.6) 37.7 88.0 41.6 17.3 24.5 2.0 105.0 0.8 0.7 9.1 6.3 1.0 4.8 1.5 0.9 84.0 FY10E 30.6 23.9 21.3 13.6 4.9 10.2 (0.0) 10.7 10.9 15.3 0.7 (5.2) 38.5 86.3 42.6 17.3 25.8 2.0 120.6 0.7 0.6 9.3 6.3 0.90 4.6 1.4 0.9 77.2 FY11E 24.7 17.1 14.4 9.0 (0.8) (19.7) (34.4) 7.2 7.0 9.0 0.7 (3.1) 38.5 84.2 42.6 11.3 21.0 2.0 130.3 0.7 0.6 6.6 9.6 0.83 5.9 1.5 0.9 80.5

Y/E Mar (Rsmn) Share Capital Reserves Shareholders' fund Minority Interest Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current lia & provisions Net current assets Misc. Expenditure Total Assets FY07 2,604 11,662 14,266 20,588 430 35,283 30,741 10,602 20,139 1,428 21,566 551 2,485 2,602 2,302 9,786 17,175 4,340 12,835 331 35,283 FY08 2,819 23,150 25,968 18,115 2,257 46,340 39,844 12,442 27,402 5,749 33,151 1,293 3,506 3,111 4,256 10,621 21,494 9,835 11,659 238 46,340 FY09 2,824 26,829 29,653 19,882 2,556 52,092 46,476 15,053 31,423 9,040 40,464 1,590 3,909 3,540 852 13,134 21,435 11,533 9,902 136 52,091 FY10E 2,824 31,238 34,062 20,882 2,556 57,501 57,976 17,457 40,519 5,040 45,560 1,590 4,192 3,793 503 13,134 21,622 11,407 10,215 136 57,501 FY11E 2,824 33,965 36,789 22,882 2,556 62,228 66,476 20,186 46,290 4,040 50,331 1,590 4,158 3,762 249 13,134 21,303 11,132 10,171 136 62,228
26
India Cement
INDIA Cement
Shree Cement
Q2FY10 /Estimate change 6 November 2009
Key Data
Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDbn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 USD = Rs47.1 SRCM IN SHCM.BO 34.8 34.8 54.9/1.2 1790/320 22,920 10
Hold Target Price: Rs1,727 CMP: Rs1,574* Upside: 10%

Power shift
Shree Cement posted inline Q2 numbers though PAT was higher than our estimate due to lower taxes. We raise earnings estimate to factor in higher merchant power sales and lower taxes. We like the strategy of higher capex allocation to power, as robust earnings from power would help the company tide over the adverse cement cycle. We raise our target price to Rs1,727. Reiterate Hold. Result inline, lower tax boosts PAT: Q2 PAT surged 153% YoY (down 1% QoQ) to Rs2,915mn vs our estimate of Rs2,421mn. Net sales grew 43% YoY to Rs8,996mn, but fell about 4.7% short of our estimate on account of lower volumes and realization. Operating profit rose 123% YoY to Rs4,082mn (3% higher than estimate) on account of lower energy cost. Earning estimates raised: We raise our FY10E and FY11E EPS (adjusted for depreciation policy differences) by 16% each to Rs280 and Rs216, respectively, on higher power sales and lower tax assumptions. Further, the positive outlook for cement in the northern zone enhances Shree Cements earnings visibility over peers. Increased focus on merchant power: The company will likely add 300MW power capacity during FY12 meant for merchant sale. Besides, it is putting up a 1mt clinker unit at Ras, Rajasthan. We are positive on the managements shift towards higher capex for power. Upgrade target price, maintain Hold: At CMP, the stock trades at 7.3x FY11E EPS, 4.9x EV/EBITDA and 1.6x P/BV and US$83.7 EV/tonne, respectively (adjusted for deprecation policy differences). We maintain Hold but have raised our target price to Rs1,727 (earlier Rs1,575), valuing the stock at a 8x FY11E earnings.
Y/E Mar (Rsmn) Net sales Power & Fuel % of Sales Logistics % of Sales Other Expenses % of Sales Operating Profit OPM (%) Depreciation & amortization Interest expenses EBT Other income PBT Provision for tax - effective tax rate PAT (reported) Exceptional item (post tax) PAT (adjusted) NPM (%) EPS (adjusted) Source: Company, Centrum Research Q2FY10E 8,996 1,361 15.1 1,787 19.9 781 8.7 4,082 45.4 998 155 2,929 316 3,245 326 10 2,889 26 2,915 32.4 84 Adj PAT 1.6 2.9 5.5 7.4 5.6 YoY % 899.0 81.3 92.2 33.7 (23.8) Q2FY09 6,292 1,594 25.3 1,131 18.0 754 12.0 1,828 29.0 537 167 1,124 336 1,460 288 21 1,075 77 1,151 18.3 33 YoY% 43.0

450 400 350 300 250 200 150 100 50 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
SHREE CEMENT

1M 6M 1Yr
Shree C. (1.9) 95.0 257.8 NIFTY (5.8) 28.6 57.3 Source: Bloomberg, Centrum Research *as on 4 November 2009
Q1FY10 9,224 1,399 15.2 1,842 20.0 667 7.2 4,250 46.1 973 152 3,125 468 3,594 645 18 2,906 34 2,941 31.9 84 RoCE (%) 15.2 18.9 28.3 27.1 17.9
QoQ% (2.5) (2.7) (4.0) (3.0) (10.8) 17.0 144.7 (4.0) (70)bps 2.6 1.9 (6.3) (32.6) (9.7) (49.4) (0.6) (0.9) (53)bps
Q2FY10E 9,441 1,651 17.5 1,844 19.5 892 9.5 3,978 42.1 973 279 2,726 300 3,026 605 2,421 2,421 25.6 69 P/E (x) 34.5 19.0 9.9 7.4 9.7
Variance % (4.7) (17.6) (236.4) (3.1) 32.4 (12.5) (77.6) 2.6 323bps 2.6 (44.5) 7.4 5.2 7.2 (46.1) 1,014.8 19.3 20.4 676Bps 20.4 EV/EBITDA (x) 9.9 6.8 5.5 3.5 3.9
123.3 1,632bps 85.9 (7.1) 160.6 (6.0) 122.3 13.4 168.8 153.2 1,410bps
Y/E Mar(Rsbn) FY07 FY08 FY09 FY10E FY11E
Rev 14.1 21.1 27.2 33.3 33.2
YoY (%) 102.3 50.1 28.7 22.6 (0.3)
EBITDA 5.9 8.6 9.5 13.7 11.1
EBITDA (%) 42.1 40.9 35.0 41.2 33.4
Fully DEPS 45.6 82.6 158.9 212.4 161.9
RoE (%) 42.3 51.1 58.8 48.1 26.7
P/BV 10.9 8.2 4.5 2.9 2.3
Earnings estimates raised on higher power sales, lower taxes

Higher income from power sales, lower energy cost and lower tax assumption (18% of PBT vs 25% assumed earlier) has led us to increase our EPS estimate by 16.7% each for FY10 and FY11 to Rs280 and Rs216, respectively. Exhibit 1: Revised estimates
Revised (Rsmn) Power sales Cement sales Net sales EBITDA Net profit EPS (Rs) Net profit* EPS* (Rs) FY10E 1,746 31,544 33,290 13,703 7,398 212 9751 280 FY11E 4,539 28,644 33,183 11,068 5638 162 7518 216 Earlier FY10E 1,202 31,544 32,746 12,788 6,021 173 8,374 240 FY11E 3,470 28,644 32,114 10,399 4,788 137 6,456 185 Change (%) FY10E 45 0 1.7 7.2 22.9 22.8 16.4 16.7 FY11E 31 0 3.3 6.4 17.8 18.2 16.4 16.7
Note: * Adjusted for difference in deprecation policy Source: Centrum Research Estimates
Higher realizations, lower costs propel profit growth

Net sales grew 43% YoY (down 2% QoQ) to Rs8,996mn led by 36% YoY growth in cement revenue to Rs8,560mn (5.7% below our estimate) and merchant power sales of Rs436mn. The growth in cement revenue was led by the 23% YoY volume growth to 2.48mt and 12.9% rise in blended realizations to Rs3,449/tonne (3% below our estimate). Power revenue grew 2.4x to Rs436mn. Easing energy costs during the quarter (down 15% YoY and 3% QoQ) led to the 123% YoY surge in operating profit to Rs4,082mn (3% above estimate). EBITDA margin expanded 1,632bp YoY (but contracted 70bp QoQ) to 45%. Flat growth in other income (5% above estimate) and lower interest cost (down 7% YoY) offset higher depreciation expenses (up 86% YoY), resulting in PBT growth of 122% YoY to Rs3,245mn. However, lower tax rate of 10% vs 21% in Q1FY09 boosted PAT to Rs2,915mn (up 153% YoY and 1% lower QoQ).
All-time high EBITDA/tonne on higher realization, lower costs

The companys EBITDA/tonne touched an all-time high of Rs1,645 (5.4% higher than our estimate) owing to higher realization and lower costs. Blended realization rose 12.8% YoY (down 1% QoQ) to Rs3,449/tonne, which was 3% below our estimate. However, key costs were lower than our estimates. For instance, power & fuel cost fell 35.5% YoY and 2.3% QoQ to Rs490 per tonne due to lower pet coke prices. Logistics cost increased 28.3% YoY to Rs720/tonne (flat QoQ) due to higher lead distance as well as the increase in freight expenses due to restriction on overloading in Rajasthan. Other expenses declined 16% YoY (up 20% QoQ) to Rs314/tonne (10% lower than our estimate). Exhibit 2: Per tonne analysis
(Rs/tonne) Blended realizations Naked Realization Energy Logistics Other expenses EBIDTA/tonne Q2FY10 3,449 2,729 490 720 314 1,645 Q2FY09 3,055 2,495 758 561 374 906 YoY (%) 12.9 9.0 (35.4) 28.4 (15.9) 81.5 Q1FY09 3,477 2,754 501 723 262 1,668 QoQ (%) (0.8) (1.0) (2.3) (0.4) 20.2 (1.4) Q2FY10E 3,560 2,837 600 723 350 1,560 Variance (%) (3.1) (4.0) (18.4) (0.5) (10.2) 5.4
28
Shree Cements
Increased thrust on merchant power - a long term positive

The company expects to set-up a 300MW power plant by FY12 meant for merchant sales, in addition to the 145MW power plant already in the pipeline. It is also setting-up 1mt clinker unit at Ras, Rajasthan. We are impressed by the managements decision to allocate higher capex to power (incremental capex for power is Rs12bn vs Rs3.5bn for cement). This move would enable the company to sustain its earnings in an environment of falling cement prices, in our opinion.
Higher exposure to the northern and central markets to aid earnings

Shree Cements exposure remains favourable, with cement prices in the northern and central zones (from where it derives 100% sales volumes) having risen sharply over the last six months. Higher consolidation and likely delays in commissioning of new plants augurs well for the company. Shree Cements markets would see relatively high stability in prices vs the southern and western region. Exhibit 3: Shree Cements major markets
Central
18
West
North
81
10
20
30
40
50
60
70
80
90
Zonaz Exposure (%)

Still the best bet despite sharp outperformance, maintain Hold

Shree Cement has outperformed the Nifty by 94% and the Centrum Cement index by 120% since our initiation with a Buy in March 2009. At CMP, the stock trades at 7.3x FY11E earnings, 4.9x EV/EBITDA and 1.59x P/BV. Its assets are available at US$83/tonne on FY11E capacity of 11.4mt. At 7.3x FY11E earnings and US$83/ton, the stock is available at a reasonable discount to ACC and Ambuja Cement. We assign a fair value of Rs1,727 (earlier Rs1,575), valuing the stock at 8x FY11E earnings. Maintain Hold.
Exhibit 4: Shree Cements performance vs the Nifty and Centrum cement universe
(%) 330 280 230 180 130 80 Oct-09 Mar-09 Mar-09 May-09 May-09 Jun-09 Jun-09 Sep-09 Sep-09 Aug-09 Aug-09 Sep-09 Apr-09 Apr-09 Oct-09 Jul-09 Jul-09
Shree Cement Performance Vs Nifty & Cement Space
Nifty
Shree Cement
29
Shree Cements
Financials
Y/E Mar (Rsmn) Revenues Growth in revenues (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interest expenses PBT from operations Other non operating income PBT before extra-ordinary items Extra-ordinary income/ (exp) PBT Provision for tax Effective tax rate PAT PAT after minority int. Adjusted PAT Growth in PAT (%) PAT margin Cash Profit Growth in Cash Profit (%) PAT margin 1,588 899.0 11.3 5,918 185.5 42.1 2,879 81.3 13.6 7,666 29.5 36.3 5,532 92.2 20.4 7,586 (1.0) 27.9 7,398 33.7 22.2 12,439 64.0 37.4 5,638 (23.8) 17.0 10,397 (16.4) 31.3 FY07 14,055 102.3 2,345 16.7 2,243 16.0 1,343 9.6 5,922 42.1 1,225 4,331 1,592 104 1,488 212 1,700 195 1,894 124 6.6 1,770 FY08 21,091 50.1 3,672 17.4 3,598 17.1 1,850 8.8 8,624 40.9 1,360 4,788 3,837 497 3,339 733 4,072 (389) 3,683 1,079 29.3 2,604 FY09 27,150 28.7 6,058 22.3 4,593 16.9 2,524 9.3 9,508 35.0 1,122 2,054 7,454 744 6,709 829 7,538 309 7,848 1,449 18.5 6,398 FY10E 33,290 22.6 5,216 15.7 5,576 16.7 2,920 8.8 13,703 41.2 1,525 5,040 8,663 990 7,673 1,350 9,023 9,023 1,624 18.0 7,398 FY11E 33,183 (0.3) 5,644 17.0 6,026 18.2 3,156 9.5 11,068 33.4 862 4,759 6,309 990 5,319 1,557 6,876 6,876 1,238 18.0 5,638 CF from financing Proceeds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec) 5,586 13 (437) 5,162 3,345 3,993 (476) 3,517 1,157 1,655 (755) (326) 573 50 360 (815) (455) 2,040 0 567 (815) (248) 4,624

Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC change Working capital adjustment Gross cash from operations Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op Ex OI CF from investing Capex Investment Cash from investment (5,974) (452) (6,425) (4,234) (4,768) (9,002) (5,330) (3,215) (8,545) (8,541) (1,202) (9,743) (4,500) (4,500) 1,894 4,331 (316) 5,909 (380) 5,529 (1,133) 4,395 212 4,608 3,683 4,788 334 8,804 (539) 8,265 (1,235) 7,030 (389) 6,641 7,229 2,054 472 9,755 219 9,975 (1,644) 8,331 (309) 8,021 9,023 5,040 (360) 13,703 159 13,862 (1,624) 12,238 12,238 6,876 4,759 (567) 11,068 (458) 10,610 (1,238) 9,372 9,372 FY07 FY08 FY09 FY10E FY11E

FY07 Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Cash Earning Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$) 42.1 11.3 12.1 11.3 102.3 171.6 899.0 185.5 15.2 17.6 42.3 1.0 (34.0) 8.5 83.0 40.5 45.6 154.2 144.6 2.0 1.2 57.1 34.5 10.9 9.9 4.3 3.9 FY08 40.9 18.2 19.3 13.6 50.1 45.6 81.3 34.8 18.9 31.5 51.1 1.1 (53.6) 7.8 92.0 30.6 82.6 207.9 193.1 2.0 0.4 17.3 19.0 8.2 6.8 3.0 2.6 FY09 35.0 27.5 27.8 20.4 28.7 10.2 92.2 9.3 28.3 48.1 58.8 1.0 (49.0) 12.0 81.7 20.8 158.9 227.2 347.3 1.2 0.1 12.8 9.9 4.5 5.5 2.1 2.0 126.3 FY10E 41.2 26.0 27.1 22.2 22.6 44.1 33.7 57.2 27.1 46.9 48.1 1.0 (39.8) 12.0 81.8 30.0 212.4 357.2 536.3 0.8 (0.1) 13.8 7.4 2.9 3.5 1.6 1.6 106.4 FY11E 33.4 19.0 20.7 17.0 (0.3) (19.2) (23.8) (16.4) 17.9 30.9 26.7 0.9 (34.8) 12.0 81.8 35.0 161.9 298.5 674.6 0.6 (0.3) 11.2 9.7 2.3 3.9 1.5 1.7 83.7

Year to Mar (Rsmn) Share Capital Reserves Shareholders' fund Debt Deferred Tax Liability Total Capital Employed Gross Block Accumulated dep. Net Block Capital WIP Total Fixed Assets Investments Inventories Debtors Cash & bank balances Loans and Advances Total current assets Current liab & provisions Net current assets Misc. Expenditure Total Assets FY07 348 4,197 4,546 9,314 (38) 13,822 16,081 11,092 4,990 3,438 8,427 500 1,561 263 3,533 2,384 7,741 2,846 4,895 13,822 FY08 348 6,380 6,728 13,307 (185) 19,851 21,873 14,273 7,600 180 7,779 5,910 1,766 494 4,674 4,026 10,960 4,799 6,161 19,850 FY09 348 11,752 12,100 14,962 (104) 26,958 22,559 16,291 6,269 4,789 11,057 8,448 1,545 583 4,723 7,443 14,294 6,842 7,452 26,958 FY10E 348 18,336 18,684 14,962 (104) 33,542 33,659 21,331 12,328 2,230 14,558 9,650 2,736 1,094 6,763 6,193 16,787 7,454 9,333 33,542 FY11E 348 23,159 23,507 14,962 (104) 38,365 39,159 26,090 13,069 1,230 14,299 9,650 3,182 1,091 11,387 6,193 21,853 7,437 14,416 38,365
30
Shree Cements
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31
Shree Cements
Sanjeev Patni T. S. Baskaran Research

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32
Shree Cements

Cement Sector - Q2FY10 Update - Centrum-061109

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INDIA Cement

Impact of price fall to be felt from Q3

Inventory levels on the rise

Cement Inventory (Days)

Cement and clinker inventory (Days)

Source: Bloomberg, Centrum Research

Rajan Kumar rajan.kumar@centrum.co.in

EV/Ton ($) FY11E 93 116

P/BV (x) FY11E 2.0 1.8 1.4

Sell Sell Hold Hold Sell Hold

137.6 136.0 198.8 91.4 30.6 54.8

1.6 0.8 1.6

Results slightly better; Cement price fall to impact from Q3FY10

Source: Company, Centrum Research

Sector underperforms broad indices

Exhibit 3: Cement component of Nity: Performance vs Nifty

Source: Bloomberg, Centrum Research

Source: Bloomberg, Centrum Research

Regional dynamics favor northern exposure

Source: Company, Centrum Research

Inventory levels on the rise

Cement Inventory (Days)

Cement and clinker inventory (Days)

Muted despatch growth over next 10 months

Growth Base Case (8.7%)/Actual Growth at 10% for full Yr FY10/FY11

Growth at 9.5% for full Yr FY10/FY11

Source: CMA, Centrum Research Estimates

Overview of quarterly results

Sell Target Price: Rs707 CMP: Rs729* Downside: 3 %

Greater challenges ahead

One year Indexed Stock Performance

NSE S&P CNX NIFTY INDEX

Price Performance (%)

Rajan Kumar rajan.kumar@centrum.co.in

Source: Bloomberg, Centrum Research *as on 4 November 2009

QoQ (%) (5.4)

59.0 49.0 40.0 54.0 629.0

(10.1) (10.1) (9.8) (10.3) (121.0)

Please refer to important disclosures/disclaimers inside

Higher realizations, lower costs propel profit growth

Muted profit from Q4CY09 onwards

Zonal exposure to worsen post expansion in south and west

Source: Company, Centrum Research

Rich valuations; Sell on challenging outlook

Centrum Cement Index

Exhibit 6: Cash flow

(5,333) (1,392) (6,724)

(8,319) (2,185) (10,504)

(15,772) 3,999 (11,773)

(13,200) 169 (13,031)

(16,800) 3,000 (13,800)

216 (1,917) (890) (1,681) (4,273) 5,162

40 (4,393) (862) (5,356) (10,571) 1,240

14 1,766 (413) (4,351) (2,985) 2,499

(550) (4,396) (4,947) 1,096

8,000 (990) (4,396) 2,613 7,079

Source: Company, Centrum Research Estimates

Exhibit 7: Key Ratios

Source: Company, Centrum Research Estimates

Exhibit 5: Balance Sheet

Source: Company, Centrum Research Estimates

Source: Company, Centrum Research Estimates

Sell Target Price: Rs83 CMP: Rs89* Downside: 6.7%

Exceptionals inflate profits