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Cement

January 2013

Mid Caps: Ripe for re-rating

Jinesh Gandhi ([email protected]) + 91 22 3982 5416

Sandipan Pal ([email protected]); +9122 3982 5436

2January 2013

Cement

Mid Caps: Ripe for re-rating

Page No.Summary ........................................................................................................................ 3-10

View on sector remains positive ................................................................................ 11-13

Mid Caps' operating performance to improve ......................................................... 14-15

Applying 5-S scale to pick potential winners ........................................................... 16-19

Recommend basket of BCORP, DBEL, JKCE and OPI .................................................. 20-23

Companies .................................................................................................................. 24-126

Birla Corporation (BCORP) ................................................................... 25-29

Century Textiles (CENT) ........................................................................ 30-42

Dalmia Bharat (DBEL) ........................................................................... 43-56

India Cements (ICEM) ............................................................................ 57-61

JK Cement (JKCE) ................................................................................... 62-75

JK Lakshmi Cement (JKLC) ..................................................................... 76-87

Madras Cements (MC) .......................................................................... 88-99

Orient Paper Industries (OPI) .......................................................... 100-112

Prism Cement (PRSC) ........................................................................ 113-126

Prices as on 15 January 2013

Cement

View on sector positive; reflected in re-rating of large capsOur view on the Cement sector remains positive. Short-term volatility

notwithstanding, we expect sustained volume recovery (~9% CAGR over FY13-15),

slowing capacity addition and higher opex/capex cost to result in strong pricing (INR15/

INR12/bag increase in FY14/FY15). This coupled with cost stabilization, albeit at higher

levels, will drive profitability improvement and capital efficiencies. We expect the

outperformance to continue (after 38% outperformance in CY12), driven by volume

growth recovery, stabilizing cost and improving profitability.

Mid Caps' operating performance to improve, driving re-ratingWe expect the profitability of our Mid Cap Cement Universe to improve by INR154/80

per ton in FY14/FY15 to INR1,033/INR1,113 per ton. We estimate EPS growth of ~42%

CAGR (FY13-15E) for MOSL Mid Cap Universe, translating into ~550bp RoE improvement

as against ~180bp RoE improvement for the Large Caps. Narrowing of the operating

performance gap will drive re-rating.

Applying 5-S scale to pick potential winnersWe have applied a 5-S scale to objectively evaluate 9 Mid Cap Cement companies on

(1) size & scalability, (2) sales mix, (3) supply chain efficiencies, (4) strategic & other

issues, and (5) strength of financials. While the 5-S score ranks these companies on

relative attractiveness on operating parameters, we weigh the 5-S score against the

valuation score to pick potential winners. Based on the 5-S / valuation score analysis,

BCORP and DBEL are the most attractive. JKCE, OPI and MC offer favorable trade-off of

quality and attractive valuations.

Attractive valuations - base case returns of 50%+, bull case returns of 2-4xOur Mid Cap Cement Universe is currently trading at very attractive valuations of

~4.7x/3.9x FY14/FY15 EV/EBITDA and ~USD69/USD64 EV/Ton (FY14/FY15), considering

improvement in operating performance and superior earnings growth. We believe

the Mid Caps offer better risk-reward and initiate coverage on seven Mid Cap Cement

stocks. We recommend Buy on BCORP, DBEL, JKCE, JKLC, OPI, MC, and ICEM and Neutral

on CENT and PRSC. While base case return is over 50% (based on FY15 estimates), bull

case returns could be 2-4x (see our Blue Sky Scenario). Cement upcycle, improvement

in operating performance for Mid Caps, balance sheet deleveraging and increase in

industry consolidation driven by M&A activity would be catalysts for re-rating.

January 2013

Update

3

Mid Caps: Ripe for re-ratingCatalysts: Improving utilization, narrowing operating performance gap

Our view on the Cement sector remains positive, driven by expected pick-up in demand

and slowing capacity addition, thereby driving utilization, pricing and profitability.

Mid Cap Cement stocks are trading at very attractive earnings valuations and significant

discount to replacement cost and large peers. As the operating performance improves, the

Mid Caps should see a re-rating. Pick-up in M&A activity is another potential re-rating trigger.

Mid Caps offer base case upside of over 50%. We initiate coverage on seven Mid Cap

Cement stocks. Buy BCORP, DBEL, JKCE, JKLC, OPI, MC and ICEM; Neutral on CENT and PRSC.

Companies covered Pg

Initiating Coverage

Century Textiles 30

Dalmia Bharat 43

JK Cement 62

JK Lakshmi Cement 76

Madras Cements 88

Orient Paper Inds 100

Prism Cement 113

Existing Coverage

Birla Corporation 25

India Cements 57

4January 2013

Cement

Operating matrix

Capacity (MT) Volumes (MT) EBITDA (INR/Ton) EBITDA (%)

FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E

ACC* 30.7 30.7 30.7 24.2 26.6 29.3 841 900 972 19.0 19.3 19.8

Ambuja* 27.5 27.5 27.5 22.5 24.7 26.7 1,121 1,146 1,218 25.5 24.8 25.0

UltraTech 50.4 60.6 60.6 43.2 47.1 50.4 1,088 1,310 1,368 22.1 24.8 24.3

Shree Cement 15.5 17.5 19.0 13.6 14.6 15.8 1,173 1,339 1,449 28.7 29.8 30.0

Large Caps 124.0 136.2 137.7 103.4 113.0 122.2 1,048 1,181 1,251 23.0 24.1 24.1

Birla Corp 9.3 9.3 9.3 6.5 7.0 7.7 607 742 875 15.3 17.4 19.6

India Cements 15.1 15.1 15.1 10.5 11.6 12.8 888 1,001 1,070 20.6 22.1 22.6

Dalmia Bharat 11.8 12.3 15.0 5.7 6.3 7.1 1,141 1,241 1,325 24.7 25.5 26.0

JK Cement 8.0 8.6 11.6 6.4 7.2 8.1 914 1,134 1,395 19.2 21.5 22.7

JK Lakshmi 5.3 8.0 8.5 5.4 5.9 6.8 804 957 1,046 20.4 22.6 23.4

Madras Cements 13.6 13.6 13.6 8.5 9.4 10.3 1,251 1,360 1,461 28.7 29.3 29.8

Orient Paper 5.0 5.0 8.0 4.2 4.6 5.2 759 908 1,007 8.6 12.4 13.7

Century Textiles 10.0 12.8 12.8 8.0 8.8 9.9 516 654 734 8.7 9.9 11.2

Prism Cement 5.6 5.6 5.6 5.1 5.8 6.4 447 747 853 6.3 10.6 11.4

Mid Caps 83.7 90.4 99.6 60.3 66.6 74.3 833 983 1,094 17.8 19.6 20.6

Aggregate 207.7 226.6 237.3 163.7 179.6 196.5 969 1,108 1,191 21.1 22.5 22.8

Financial matrix

EPS (INR) RoE (%) RoCE (%) Net Debt:Equity (x)


ACC* 66.0 80.4 98.2 16.8 19.0 20.8 18.0 20.6 23.0 -0.4 -0.4 -0.5

Ambuja* 10.6 12.2 14.4 19.3 20.1 21.1 28.7 29.1 30.4 -0.4 -0.4 -0.4

UltraTech 100.6 129.2 147.7 19.6 21.1 20.2 23.2 26.0 25.9 0.1 0.1 -0.1

Shree Cement 306.6 375.6 461.1 34.1 33.1 30.9 27.8 25.3 27.8 -0.5 -0.5 -0.7

Large Caps 20.8 22.5 22.9 23.7 25.3 26.4 -0.2 -0.2 -0.3

Birla Corp 34.7 43.3 58.8 10.9 12.3 14.7 11.9 13.7 16.2 -0.1 -0.2 -0.3

India Cements 7.7 12.6 18.1 5.1 7.8 10.8 8.5 10.3 12.7 0.7 0.6 0.4

Dalmia Bharat 27.9 36.1 38.1 8.5 10.1 10.0 11.1 11.5 11.9 0.7 0.8 0.6

JK Cement 30.6 42.8 60.3 13.3 16.5 19.4 16.1 17.2 19.1 0.9 1.3 1.1

JK Lakshmi 15.9 20.3 25.1 15.0 16.7 17.9 15.6 17.1 18.5 0.5 0.7 0.5

Madras Cements 19.7 25.6 33.1 20.8 22.4 23.5 18.2 21.0 24.8 1.0 0.6 0.2

Orient Paper 6.0 10.6 12.7 10.7 17.1 17.9 12.6 18.3 17.4 0.5 0.7 1.0

Century Textiles -10.6 -5.9 4.6 -1.7 -0.8 0.5 -5.4 -3.2 2.6 2.9 3.6 3.8

Prism Cement -0.1 4.2 6.5 -0.3 17.6 23.5 7.3 19.3 23.6 1.2 1.0 0.8

Mid Caps 11.2 15.3 17.9 10.3 13.2 15.8 1.0 1.1 0.9

Aggregate 17.7 20.3 21.3 18.8 20.8 22.4 0.2 0.2 0.2

5January 2013

Cement

Valuations summary

Reco CMP TP Up- PE EV/EBITDA EV/Ton (USD) EV/ Blue- Up-

(INR) FY15 side (x) (x)* at CMP* Ton Sky side

(INR) (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E at TP TP (%)

ACC* Neutral 1,387 1,712 23.4 21.0 17.3 14.1 11.1 8.9 6.9 135.2 128.0 116.5 153

Ambuja* Buy 198 233 17.9 18.7 16.3 13.7 10.5 9.0 7.3 176.3 169.4 158.6 195

UltraTech Buy 1,920 2,351 22.4 19.1 14.9 13.0 10.6 8.3 7.3 180.3 154.9 152.1 188

Shree Cement Buy 4,517 6,157 36.3 14.7 12.0 9.8 7.8 6.3 4.7 143.5 122.9 97.9 153

Large Caps 18.6 15.1 12.9 10.1 8.2 6.8 164.3 148.3 140.1

Birla Corp Buy 319 464 45.7 9.2 7.4 5.4 5.2 3.6 2.3 40.4 36.3 30.8 53 667 109

India Cements Buy 88 119 35.5 11.5 7.0 4.9 5.8 4.5 3.5 66.1 63.5 57.7 69 217 146

Dalmia Bharat Buy 193 427 122.4 6.9 5.3 5.1 5.4 4.3 4.0 54.8 49.5 45.9 69 669 246

JK Cement Buy 337 554 64.4 11.0 7.9 5.6 5.1 4.5 4.4 69.4 76.7 76.4 90 710 111

JK Lakshmi Buy 141 249 76.5 8.9 7.0 5.6 4.0 4.3 3.2 59.6 55.7 49.3 77 339 140

Madras Cements Buy 233 374 60.9 11.8 9.1 7.0 6.8 5.3 3.9 105.6 98.1 84.4 130 476 105

Orient Paper Buy 79 114 44.7 13.1 7.5 6.2 8.4 4.3 5.7 52.1 28.7 43.2 60 254 221

Century Textiles Neutral 427 460 7.9 -40.4 -72.1 93.0 15.6 14.5 11.0 74.3 78.6 71.0 147 1,028 140

Prism Cement Neutral 49 57 18.1 -724.4 11.7 7.5 12.1 5.9 4.6 99.9 77.0 64.3 79 101 109

Mid Caps 11.9 7.9 6.0 6.2 4.7 3.9 73.1 68.9 63.8

Aggregate 17.3 13.4 11.1 8.9 7.1 5.9 130.3 119.5 110.6

*EV adjusted for CWIP Source: Company, MOSL

6January 2013

Cement

Birla CorpBirla Corp has the potential to double in two years, driven by:

Resolution of the mining ban at its Rajasthan plant, resulting in cost savings of

~INR1b or ~INR150/ton.

Further, the resolution of the mining ban would drive brownfield capacity

addition of ~1.5mtpa.

Captive coal block, with recoverable reserves of 9.4mt has the potential to drive

savings of ~INR720m per year.

Improvement in capital efficiency by ~200bp, led by savings in raw material cost.

Any resolution of the dispute of ownership of the MP Birla group between the

Lodha and Birla families would led to further re-rating, though this is not factored

in our blue sky scenario.

BCORP: Blue Sky Scenario (INR m)

FY15E Catalyst

EBITDA 8,439 Savings of ~INR1b p.a on resolution of mining ban & savings

of ~INR720m from captive coal block

EV/EBITDA Multiple (x) 5 Re-rating with valuations in-line with similar sized

companies

EV 42,196

Net Debt -9,147

Equity value 51,343

TP (INR) 667

Upside (%) 109

Century TextilesCentury Textiles has potential the potential to multiply 2.5x, driven by Mr Kumar

Mangalam Birla, the Chairman of the Aditya Birla Group, inheriting his grandfather,

Mr BK Birla's interests in Century Textiles. Though a timeline cannot be assigned,

such an event could lead to the following:

Consolidation of Century Textiles' cement business with UltraTech.

Hive-off of the paper business, as it would be non-core for the Aditya Birla Group.

Sale of land bank, rather than own development, resulting in faster monetization.

CENT: Blue Sky Scenario (INR m)

Parameter Multiple FY15E Remarks

Texti le EV/Sales 0.4 8,937 No change in business fundamentals

Cement EV/ton(US$) 120 84,480 Merger of cement assets with A.V,Birla Group

Paper EV/Sales 2 28,653 Paper business sale as part of restructuring

on inheritance by A.V.Birla Group

Others EV/Sales 0.5 696

Total EV 122,766

Less: Net Debt 60,150

Add: Value of Land @ INR1.5/acre 33,000 Freehold land sale rather than own devel-

opment on inheritance by A.V.Birla Group

Market Cap 95,616

Fair Value (INR) 1,028

Upside (%) 140

Blue Sky Scenario

7January 2013

Cement

Dalmia BharatDalmia Bharat has the potential to be a 4-bagger in 2-3 years, driven by:

Its being one of the top-4 cement producers in India, with capacity under control

of ~22mtpa (~15mtpa based on economic interest).

Ramp-up in North-East subsidiaries, resulting in higher profitability.

Balance sheet deleveraging, driven by completion of ongoing capex and

significant improvement in cash flow from operations during the upturn in the

cement cycle.

Improvement in capital efficiency, as capex incurred over last 2-3 years starts

contributing.

DBEL: Blue Sky Scenario (FY15)Parameter Multiple INR m Catalyst

DBCL EV/Ton (USD) 100 53,367 Scale-up of capacity to 11.5mt in an upcycle,

improving utilization and beginning of

balance sheet deleveraging

OCL EV/Ton (USD) 100 8,527 Commissioning of new capacity at West

Bengal, driving volumes and profitability

Adhunik EV/Ton (USD) 100 6,961 Improving utilizations driven by strong

growth in North East market, enjoying very

high profitability

Calcom EV/Ton (USD) 100 7,477 Commissioning of clinker capacity driving

cost savings and high profitability

Total EV 76,331

Less: Pro-rata Net Debt (adj for CWIP) 21,992

Total Equity Value 54,340

Fair value (INR/share) 669

Upside (%) 247

India CementsIndia Cements has the potential to multiply 2.5x in 2-3 years, driven by:

Savings of ~INR850m (@ USD30/ton for 0.5m tons) from captive coal block in

Indonesia.

Valuing IPL @ USD200m, if monetized.

Re-rating, led by improvement in core profitability and monetization of IPL.

ICEM: Blue Sky Scenario (FY15)

Parameter INR m Remark

S/A EBITDA 13,750 Assuming savings of ~INR850m from captive coal mine

from Indonesia

Trinetra EBITDA (pro-rata) 839

EV @ 4x EBITDA 72,944

Value for IPL 11,023 Valuing IPL at USD200m

Less: Net debt 21,644

Equity value 62,323

Target Price (INR) 217

Upside (%) 146

Implied EV/Ton (USD) 87

Blue Sky Scenario

8January 2013

Cement

JK CementJK Cement can multiply 2.2x in two years, driven by:

Commissioning of its white cement plant at UAE and be-bottlenecking of white

cement capacities.

Improving efficiency, driven by new gray cement plant in Karnataka and

commissioning of new capacities in Rajasthan (including split grinding units).


significant increase in cash flow from operations due to higher utilization during

the upturn in the cement cycle.

Improvement in capital efficiency, as capex incurred starts contributing fully to

P&L from FY15.

JKCE: Blue Sky ScenarioEV/EBITDA FY14E FY15E

Target EV/EBITDA (x)

Grey Cement 6 32253 39084

White Cement 8 20642 25613

UAE White Cement 8 1,523 9,846

EV (INR m) 54,419 74,543

Consol Net debt (INR m) 12,486 24,879

Equity value (INR m) 41,932 49,664

Equity value (INR/Shr) 600 710

Implied EV/Ton (blended) 117

Implied EV/Ton (Grey) 68

Implied PE (White) 12.5

JK LakshmiJK Lakshmi can potentially double in 2-3 years, driven by:

Ramp-up at its new plant at Durg, which will commission by March 2014, marking

JKLC's entry into East India.

The Durg plant will be more efficient and profitable, thereby boosting overall

profitability.


significant improvement in cash flow from operations during the upturn in the

cement cycle.

Improvement in capital efficiency, as capex incurred over the last 2-3 years

starts contributing to P&L.

JKLC: Blue Sky Scenario

FY15E Remarks

EBITDA (INR m) 8,595 Factoring for scale-up of Durg plant, will boost its

overall profitability

Target EV/EBITDA (x) 5

Target EV(INR m) 42,977

Net debt (INR m) 3,014

Target Equity value (INR m) 39,964

No of share (m) 118

Target Price (INR) 340 Doesn’t include any value from UCW subsidiary

Upside (%) 140

EV/Ton (USD) at TP 92

Blue Sky Scenario

9January 2013

Cement

Madras CementsMadras Cements has the potential to double in 2-3 years, driven by:

Benefit of operating leverage, as it improves utilization from ~63% in FY13 to

~82% in FY16E.

As a result, its balance sheet will turn net cash (~INR3b) by FY16 from current

net debt (~INR25.3b).

Likely improvement in RoE from 18% to 27%.

MC: Blue Sky Scenario

FY15E FY16E

EBITDA (INR m) 16,062 18,119

Target EV/EBITDA (x) 6 6

Target EV(INR m) 96,372 108,714

Net debt (INR m) 7,284 -4,560

Target Equity value (INR m) 89,088 113,274

No of share (m) 238 238

Target Price (INR) 374 476

Upside (%) 60.9 104.6

EV/Ton at TP (USD) 130 147

Orient PaperOrient Paper has the potential to be a 3-bagger in 2-3 years, driven by:

Demerger of cement business (by March 2013).

Scale-up of cement business to 8mtpa amidst the cement upcycle (by 2HFY15).

Ramp-up in Electrical business, driven by continued strong growth in Fans and

CFL business, and scale-up in nascent (started in 2HFY12) Home Appliances

business (by FY15-16).

Potential hive-off of Paper business to focus on Cement and Electrical Appliance

business.

OPI: Blue Sky Scenario (FY15)Parameter Multiple INR m Catalyst

Cement EV/Ton (USD) 100 43,676 Scale-up of capacity to 8mt during cement

upcycle

Electrical PE 20 14,990 Scale-up in home appliance business,

with continous strong growth in fans and

CFL business

Paper EV/Sales 1.6 8,182 Hive-off of Paper business at 40% discount

to AP Paper-International Paper deal

valuations of 2.65x EV/Sales

Total EV 66,848


Equity Value 51,992

Equity Value (INR/sh) 254

Upside (%) 221

Blue Sky Scenario

10January 2013

Cement

Prism CementPrism Cement has the potential to deliver ~86% returns over the next two years,

driven by:

Savings of INR1b from captive coal block, expected from 2HFY14, which is not

factored in our base assumptions.

Coal gasification at Andhra Pradesh plant and availability of LNG at Karnataka

(in 6-9 month) driving cost savings, which are yet to be factored in.

PRSC: Blue Sky Scenario (FY15)

(INR m) Remarks

Cement EV/EBITDA 5x 32263 To be driven by savings of INR1b from

captive coal block, which is not factored in

our base assumptions

RMC EV/EBITDA 6x 4,232

TBK EV/EBITDA 6.5x 22679 Factoring in for EBITDA margin

improvement to 15% driven by change in

fuel mix

Raheja QBE At BV 1,224

Norcros At BV 1,064

Total EV 61,463


Equity Value 51,076

Value/share (INR) 101

Upside (%) 109

Implied Cement EV/Ton (USD) 101

Blue Sky Scenario

11January 2013

Cement

View on sector remains positiveSustained volume recovery + slowing capacity addition = strong pricing,profitability

We expect build-up in volume momentum of the last 12 months (6.8% growth), driven

by (a) interest rate cuts, (b) multiple state/general elections over FY14-15, and (c) focus

on reviving the investment cycle.

Improving demand coupled with slowing capacity addition (~64m tons over FY13-16 v/s

~105m tons over FY09-12) should drive consistent improvement in utilization to 76%/

78% in FY14/FY15.

We expect cement prices to increase by ~INR15/bag in FY14 and ~INR12/bag in FY15. This

coupled with cost stabilization, albeit at higher levels, will drive profitability improvement

and capital efficiencies.

Volume momentum to sustainThe Cement industry has witnessed continued volume recovery in 9MFY13, with 6%

YoY growth (v/s 5.6% YoY in 9MFY12) and ~6.8% TTM growth. We expect momentum to

gather further steam, driven by (a) expected interest rate cuts in 4QFY13, positively

impacting demand from the housing, infrastructure and industry segments, (b)

multiple state/general elections in the next 18 months, (c) the government's focus

on reviving investment demand, and (d) positive outlook on the Rabi crop rubbing off

on rural housing demand. We estimate volume growth of 8% for FY13 and 10% for

FY14, after 6% CAGR over FY10-12.

Increasing demand, slowing capacity addition to drive up utilizationMost of the capacity addition in the industry is behind - only ~64m tons are likely to be

added over FY13-16 as against ~105m tons over FY09-12. Further, announcements of

new capacity additions are far and few. We expect increasing demand and slowing

capacity addition to drive gradual improvement in capacity utilization. With pick-up

in demand from 2HFY12 and decline in the pace of capacity addition, we estimate

capacity utilization to have bottomed out at 74% in FY12 and expect gradual, but

consistent improvement to 76%/78% in FY14/FY15.

Improving utilization, industry discipline and higher cost to support pricing,profitabilityImprovement in capacity utilization (by at least 350bp over three years), driven by

pick-up in demand (9% CAGR over FY13-15) and slowdown in capacity addition would

be the key drivers of cement prices. Further, higher capex and opex cost would

necessitate further price increases. Based on the current variable cost and replacement

cost of USD140/ton, cement prices need to improve by INR55/bag to earn new capacities

15% RoE.

12January 2013

Cement

Volume growth to remain robust, short-term divergence notwithstanding

Demand-supply equilibrium to turn favorable from FY13

Million tonnes FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E

Cement Capacity (Year end) 165.7 189.0 215.2 272.5 304.2 319.6 342.4 376.4 399.9 408.7

Growth 5.2 14.0 13.9 26.6 11.6 5.1 7.2 9.9 6.2 2.2

Clinker Exports 3.1 2.4 2.9 2.8 2.6 2.6 2.6 2.6 2.6 2.6

Cement Despatches 154.9 167.7 181.4 200.2 210.3 224.8 242.6 261.9 287.9 316.4

Growth (%) 9.4 8.2 8.2 10.4 5.0 6.9 7.9 7.9 9.9 9.9

Domestic Consumption 149.4 164.0 178.2 197.7 208.2 222.8 240.6 259.9 285.9 314.5

Growth (%) 10.2 9.8 8.7 10.9 5.3 7.0 8.0 8.0 10.0 10.0

Cement Exports 5.9 3.65 3.2 2.5 2.1 2.0 2.0 2.0 2.0 2.0

Growth (%) -2.3 -37.8 -12.3 -21.9 -16.4 -5.3 0.0 0.0 0.0 0.0

Capacity Util (%) 95.5 90.1 85.7 74.6 70.1 71.2 71.7 70.3 72.7 78.1

Effective Cap. (Qly add-up)* 156.7 171.3 200.7 242.3 282.4 306.9 327.8 353.6 380.0 398.4

Effective Cap. Util. (%) 101.0 99.4 91.9 83.9 75.5 74.2 74.9 74.9 76.5 80.1

Source: CMA, MOST;^ based on Year ending capacity; *Effective cap is adj for non-operative cap & is quarterly add-up of cap additions

Source: Company, MOSL

This coupled with slower capacity addition should drive gradual improvement in utilization…

…translating into strong pricing and profitability

13January 2013

Cement

Recovery in cement prices, stable costs to drive profitability from FY13Cement prices have been volatile in the last 3-4 months due to the monsoon and then

the festive season. We expect prices to improve from 4QFY13, translating into an

increase of INR20/bag in the average price for FY13. Further, we estimate an increase

of INR15/bag in FY14 and INR12/bag in FY15. Higher prices coupled with stabilizing

costs post the recent impact on freight cost due to increase in diesel prices will drive

profitability improvement. We expect EBITDA/ton to improve to ~INR1,156/1,242 in

FY14/15E from INR1,010 in FY13E for our Cement Universe. We estimate ~28% EPS

growth in FY14 and ~24% CAGR over FY13-15. This coupled with higher asset turnover

and lower capex should drive ~350bp RoE improvement in FY15 to ~20.7%.

Expect strong earnings growth and RoE improvement over the next two years


14January 2013

Cement

Narrowing operating performance gap, possible M&A pick-up to drive stockperformanceWe believe that the current cheap valuations of Mid Caps are unsustainable. Re-

rating would be driven by (a) improvement in the cement cycle, (b) narrowing of the

operating performance gap, and (c) higher M&A activity. We expect the profitability

of our Mid Cap Cement Universe to improve by INR154/80 per ton in FY14/FY15 to

INR1,033/INR1,113 per ton. We estimate EPS growth of ~42% CAGR (FY13-15E) for

MOSL Mid Cap Universe, translating into ~550bp RoE improvement for our Mid Cap

Cement Universe (as against ~200bp RoE improvement for the Large Caps). Further,

any increase in industry consolidation, driven by pick-up in M&A activity will also act

as a re-rating trigger. Anecdotal evidence suggests that M&A activity results in an

improvement in the valuations of Mid Caps.

Mid Caps' operating performance to improveNarrowing operating performance gap, possible M&A pick-up to trigger re-rating

We expect the profitability of our Mid Cap Cement Universe to improve by INR154/80

per ton in FY14/FY15 to INR1,033/INR1,113 per ton. We estimate EPS CAGR of ~42%

(FY13-15E) for MOSL Mid Cap Universe, translating into ~550bp RoE expansion.

Cement upcycle, improvement in operating performance for Mid Caps, balance sheet

deleveraging and increase in industry consolidation driven by M&A activity would be

catalysts for re-rating.

Further, stock liquidity would gradually improve, as we enter the upcycle, driven by

improvement in scale and operating performance, and increasing confidence in the

management.

Market share of MOSL Mid Cap Cement Universe Trend in EBITDA/ton

Trend in RoE (%) Re-rating to be driven by cement cycle upturn and revival in M&A

(1)

(2)

(3) (4)

(5) (6)(7)

(8)(9)

Trend in M&A deals (USD/ton)

Acquirer Target Valn

1.Holcim Ambuja 210

2.HeidelbergMysoreCem 98

3.Cimpor ShriDigvijay 135

4.CRH MyHome 212

5.Vicat Bharathi 215

6.KKR DBEL 80

7.JP Group AndhraCem 68

8.DBEL Calcom 115

9.DBEL Adhunik 130

15January 2013

Cement

Stock liquidity to follow improvement in operating fundamentalsCurrent liquidity for Cement Mid Cap stocks is poor and results in high impact cost.

However, we believe liquidity for these Mid Caps will improve as operating

fundamentals continues to improve. Stock liquidity would gradually improve, driven

by a) sector upcycle, b) improvement in their scale, c) improvement in operating

performance, and d) increasing confidence in the management driven by deliverance/

execution capabilities. Poor liquidity notwithstanding, current valuations offers

significant margin of safety and scope for very high returns even after incurring impact

cost.

Mid Caps trading at above average discount to large caps and replacementcostMid Cap Cement stocks are trading at ~60% discount to Large Caps on the basis of EV/

ton and at ~44% discount on the basis of EV/EBITDA. They are available at ~52% discount

to replacement cost against the long period average of ~25%. The long period average

discount to Large Caps is 37% on EV/ton basis and 25% on EV/EBITDA basis. While

some discount vis-à-vis large caps is justified on the basis of (a) size, (b) market

concentration, (c) capital allocation, (d) management bandwidth, (e) balance sheet

quality, and (f) liquidity, the current discounts are too steep and are unlikely to sustain.

Trend in EV/ton (USD) Trend in discounts (%)

Trend in EV/EBITDA

Liquidity for Mid Caps poorcurrently (INR m)

6m avg Free-

vol. float (%)

Ambuja Cem. 476 49.3

ACC 414 49.7

UltraTech Cem. 339 37.2

Century Textiles 330 59.6

Grasim Inds 258 74.5

India Cements 151 71.8

Shree Cement 99 35.2

Madras Cement 54 57.7

J K Cements 44 33.4

JK Lakshmi Cem. 40 54.1

Orient Paper 21 62.5

Birla Corpn. 14 37.1

Prism Cement 13 25.1

Dalmia Bharat 3 34.8

16January 2013

Cement

Applying 5-S scale to pick potential winnersBCORP and DBEL are the most attractive

We have applied a 5-S scale to objectively evaluate 8 Mid Cap Cement companies on (1)

size & scalability, (2) sales mix, (3) supply chain efficiencies, (4) strategic & other issues,

and (5) strength of financials.

While the 5-S score ranks these companies on their relative attractiveness on operating

parameters, we weigh the 5-S score against the valuation score to pick potential winners.

Based on the 5-S / valuation score analysis, Birla Corp (BCORP) and Dalmia Bharat (DBEL)

are the most attractive. JK Cement (JKCE), JK Lakshmi (JKLC), Orient Paper (OPI) and

Madras Cements (MC) offer favorable trade-off of quality and attractive valuations.

5-S scale - focus on key operating and financial parametersWe have formulated a 5-S scale to objectively evaluate Mid Cap Cement companies

on key operational and financial parameters. We have applied it to the 9 companies

covered in this report - Birla Corp (BCORP), India Cements (ICEM), Century Textiles

(CENT), Dalmia Bharat (DBEL), JK Cement (JKCE), JK Lakshmi (JKLC), Madras Cements

(MC), Orient Paper (OPI) and Prism Cement (PRSC). We have evaluated these

companies on (1) size & scalability, (2) sales mix, (3) supply chain efficiencies, (4)

strategic & other issues, and (5) strength of financials. These parameters have been

weighted in terms of their relative importance.

While 5-S score ranks these companies on their relative attractiveness on operating

parameters, we weigh the 5-S score against the valuation score to pick potential

winners from the group. Based on the 5-S / valuation score analysis, BCORP and DBEL

are the most attractive. JKCE, JKLC, OPI and MC offer favorable trade-off of quality

and attractive valuations. On the other hand, PRSC and CENT do not offer favorable

risk-reward, considering that their 5-S / valuation scores are the lowest.

5-S Matrix for Mid Cap Cement companies

Ratings Scale [100] BCORP ICEM CENT DBEL JKCE JKLC MC OPI PRSC

1. Size & scalability [30] 18 23 22 29 23 17 24 22 12

a. Existing capacity [15] 10 15 12 14 10 7 13 7 7

b. Room for growth [15] 8 8 10 15 13 10 11 15 5

2. Sales Mix [20] 16 12 18 14 16 15 13 15 17

a. Quantitative [14] 12 9 14 10 11 11 9 12 14

b. Qualitative [6] 4 3 4 4 5 4 4 3 3

3. Supply chain efficiencies [20] 14 10 11 10 10 12 8 12 10

a. Cost Structure [12] 10 4 8 5 7 10 6 12 5

b. Cost saving potential [8] 4 6 3 5 3 2 2 0 5

4. Strategic & Other issues [10] 7 3 5 9 10 9 9 8 3

a. Other businesses/Diversification 5 2 2 5 5 5 4 3 1

b. Management/Strategic issues 2 1 3 4 5 4 5 5 2

5. Strength of financials [20] 12 10 7 12 10 13 14 9 12

a. Profit & earnings growth [12] 6 7 7 9 6 9 7 6 8

- EBITDA/Ton [4] 2 3 0 4 1 3 4 2 0

- PAT Growth (FY12-15E CAGR) [4] 2 1 4 3 4 4 2 0 4

- Dividend Payout (%) [4] 2 3 3 2 1 2 1 4 4

b. Capital structure & efficiencies [8] 6 3 0 3 4 4 7 3 4

- Net Debt:Equity (x) [4] 4 2 0 2 1 2 3 1 1

- RoCE (%) [4] 2 1 0 1 3 2 4 2 3

5-S Score 67 58 63 74 69 66 68 66 54


17January 2013

Cement

Valuation score for Mid Cap Cement companies

Valuations [100] BCORP ICEM CENT DBEL JKCE JKLC MC OPI PRSC

- EV/ton [30] 30 24 20 28 20 24 15 28 20

- EV/EBITDA [30] 30 28 10 28 25 28 25 20 15

- PE [20] 18 19 6 20 20 18 15 16 10

- PB [20] 16 18 6 20 16 15 10 15 8

Valuation Score 94 89 42 96 81 85 65 79 53


5-S-Valuation score matrix


We discuss each of the 5-S parameters and enlist the rationale behind the scores

assigned.

1. Size & scalability [30]

Existing Room for Total Remark

capacity growth

[15] [15]

BCORP 10 8 18 Current cap. at 9.3mt, with no visibility of new

capacity addition

ICEM 15 8 23 Largest cap. with 15.1mt, with no further capacity

addition till FY15

CENT 12 10 22 Current cap. of 10mt, with additional 2.8mt by 2HFY14

DBEL 14 15 29 Existing cap. of 11.8mt (~17mt under control) going up

to 15mt by FY15 (~22mt under control)

JKCE 10 13 23 Existing capacity of 7.5mt, being expanded to 10.5%

by 2HFY14

JKLC 7 10 17 Current cap. of 5.2mt, with additional 2.7mt at Durg

by Dec-13

MC 13 11 24 No further cap. addition expected beyond 13.6mt

OPI 7 15 22 Current cap. of 5mt, with additional 3mt by 2HFY15

PRSC 7 5 12 Among smallest player within the group with no new

cap. expected till FY15, leaving limited headroom

to grow

Rated based on capacities as of FY13, with highest score for biggest company (based on economic

interest). Also, qualitative assesment of adequacy of clinker capacity to meet grinding capacity.

18January 2013

Cement

2. Sales Mix [20]

Quantitative Qualitative Total Remark

[14] [6]

BCORP 12 4 16 Focus on North, Central & East

ICEM 9 3 12 Dominant in South, with smaller diversification to

West and North. Even within South, higher

contribution from AP.

CENT 14 4 18 Focus on East, Central and West, with new

capacities coming in East and West

DBEL 10 4 14 South and East focused mix, but AP only ~8%

of total volumes

JKCE 11 5 16 Focus on North with 50% contribution, with balance

equally coming from West, Central and South

JKLC 11 4 15 Focus on North and Gujarat market, however, new

plant at Durg to diversify in East

MC 9 4 13 South concentration, with small contribution from

East. Enjoys best realizations within the group.

OPI 12 3 15 Maharashtra and AP focused player, with new plant

at Karnataka to increase contribution from South

PRSC 14 3 17 Central and East focus play, resulting in above

average realizations. Plans to set-up plant in AP.

Focus on current market mix, based on demand-supply equilibrium. Further, qualitative assessment of

state mix within regional mix, any potential mix change due to new capacities and pricing power.

3. Supply chain efficiencies [20]

Cost Cost saving Total Remark

Structure potential

[12] [8]

BCORP 10 4 14 Cost efficient producer, being currently impacted

by limestone mining ban at its Rajasthan plant.

Any resolution of mining ban and operating

leverage will help reducing cost.

ICEM 4 6 10 Highest cost structure within the group. However,

increase in contribution from CPP, captive

Indonesian coal and operating leverage to drive

cost savings.

CENT 8 3 11 Higher dependence on linkage coal. New CPP and

new plant to improve cost structure, but shrinking

linkage coal & to hurt energy cost.

DBEL 5 5 10 Higher energy cost & -ve op. leverage resulting in

high cost structure; Calcom clinker plant and OCL

captive mine potential cost saving triggers.

JKCE 7 3 10 Newer plants to improve operating

efficiencies;Focus on increasing rail usage

JKLC 10 2 12 Cost efficient player, with no dependence on

linkage coal. However, new plant to result in

operating deleverage

MC 6 2 8 Average cost producer, with potential cost saving

from new CPP & improving utilizations

OPI 12 0 12 Least cost producer currently due to higher

dependence on linkage coal, which is expected to

shrink

PRSC 5 5 10 Reconstruction of Silo at new plant to drive

improvement in utilizations and save cost; Captive

coal mine to start operations in 2HFY14 and drive

savings of INR1b

Evaluated based on current cost structure (FY13) and potential changes in cost structure

19January 2013

Cement

4. Strategic & Other issues [10]

Other Management/ Total Remark

businesses/ Strategic

Diversification issues

BCORP 5 3 8 No significant other businesses; Professional management till ownership

issue is resolved; Captive coal block offer option value; Future capacity

growth constraint by litigation

ICEM 2 1 3 Capital allocation to shipping for ferrying own coal and investment in IPL;

Further significant inter group company loans given; Treasury stock remains

unutil ized

CENT 2 3 5 Significant capital allocation to Textile and Papers; Real estate would drive

value, although realization would be back ended; K.M.Birla to inherit this

company

DBEL 5 4 9 Pure Cement play post demerger; However, recent open offer for DBSL for

26% stake is not consistent with demerger of cement to bring focus

JKCE 5 5 10 Allied White Cement business is cash cow with very high profitability

JKLC 5 4 9 Pure Cement company; Bought back shares; Acquiring defunct Udaipur Cement

Works from the promoter group companies

MC 4 5 9 Has 15% of capital employed in Windpower, which has poor RoCE

OPI 3 5 8 Both paper and electrical businesses would witness cost savings/

improvement in margins in FY14-15; Cement being demerged into separate

company

PRSC 1 2 3 Significant capital allocation to TBK and RMC; Investments in General

Insurance business and merger of RMC & TBK at very high valuations for

promoter companies

Assigning higher score for companies with pure play on cement, attractiveness of other businesses for diversified players. Also, evaluating

any management/ strategic issues influencing companies

5. Strength of financials [20]

Profit & earnings growth [12] Capital structure & efficiencies [8]

EBITDA PAT Gr. Dividend Net Debt: RoCE (%) Total

/Ton (FY12-15E Payout (%) Equity (x) [4]

[4] CAGR) [4] [4] [4]

BCORP 2 2 2 4 2 12

ICEM 3 1 3 2 1 10

CENT 0 4 3 0 0 7

DBEL 4 3 2 2 1 12

JKCE 1 4 1 1 3 10

JKLC 3 4 2 2 2 13

MC 4 2 1 3 4 14

OPI 2 0 4 1 2 9

PRSC 0 4 4 1 3 12


20January 2013

Cement

View on sector positiveWe believe the worst is behind for the Cement sector and expect gradual improvement

in operating performance. Though the sector will continue to be plagued by over-

capacity, we expect gradual and consistent improvement in capacity utilization, driven

by sustained volume recovery and slowing capacity addition. As a result, we expect

cement prices to increase by ~INR15/bag in FY14 and ~INR12/bag in FY15. This coupled

with cost stabilization, albeit at higher levels, will drive profitability improvement

and capital efficiencies.

Earnings growth to drive the large capsAfter the recent outperformance (34% to Sensex in the last 12 months), Large Cap

Cement stocks have got re-rated (33% on EV/ton basis and 20% on EV/EBITDA basis).

They are trading at premium to historical average valuations (~18% premium on EV/

EBITDA) and replacement cost (~20% premium), leaving limited room for further re-

rating. Hereon, we expect strong earnings growth to be the key driver of stock

performance. Among Large Caps, we prefer UltraTech/Grasim and Shree Cements.

Mid caps offers both growth and valueWhile our Mid Cap Cement Universe has delivered performance similar to Large Cap

Cement stocks, the re-rating in Mid Caps has been much smaller (6% on EV/EBITDA

and 20% on EV/ton). Mid Cap Cement stocks are trading at ~60% discount to Large

Caps on the basis of EV/ton and at ~44% discount on the basis of EV/EBITDA. They are

available at ~52% discount to replacement cost against the long period average of

~25%. We believe cement Mid Caps superior returns would be function of strong

earnings growth and re-ratings.

In FY14, we expect earnings to grow ~52% for our Mid Cap Cement Universe as against

29% for our Large Cap Universe. RoE is likely to improve by ~550bp for our Mid Cap

Cement Universe over FY13-15 v/s ~200bp improvement for the Large Caps. As the

operating performance gap vis-à-vis Large Caps narrows, so will the discount. Further,

any increase in industry consolidation, driven by pick-up in M&A activity will also act

as a re-rating trigger for the Mid Caps.

We initiate coverage on seven Mid Cap Cement stocks - Century Textiles (CENT,

Neutral), Dalmia Bharat (DBEL, Buy), JK Cement (JKCE, Buy), JK Lakshmi (JKLC, Buy),

Madras Cements (MC, Buy), Orient Paper (OPI, Buy) and Prism Cement (PRSC, Neutral).

We maintain Buy on Birla Corp (BCORP) and India Cements (ICEM).

Recommend basket of BCORP, DBEL, JKCE and OPIEmulates large cap quality, but available at significant discount

Our view on the Cement sector remains positive. We expect sustained volume recovery,

slowing capacity addition and higher opex/capex cost to result in strong pricing.

Large Cap Cement stocks have seen significant re-rating over the last 12 months and

stock performance hereon should be a function of earnings growth.

However, our Mid Cap Cement Universe is currently trading at very attractive valuations

and returns would be driven by both strong earnings growth and re-rating.

We believe Mid Caps offer base case upside of over 50% and initiate coverage on seven

Mid Cap Cement stocks. Buy BCORP, DBEL, JKCE, JKLC, OPI, MC, and ICEM; Neutral on CENT

and PRSC.

21January 2013

Cement

Recommend 'basket' approach to emulate large cap quality at mid cap valuationsConsidering the diversity in our Mid Cap Cement Universe, we recommend a 'basket'

approach. Based on our 5-S ratings and valuation scores, we have created a basket of

four stocks - BCORP, DBEL, JKCE and OPI, which mimics Large Caps with respect to size,

diversification and profitability, but at a deep discount to the Large Caps. Our basket

represents total capacity of ~41m tons (based on economic interest), offers market

mix similar to the industry mix, headroom to grow volumes (~70% utilization in FY15)

and ~33% earnings growth. Despite this, it is trading at ~68% discount on EV/ton, ~60%

discount on EV/EBITDA and ~75% on P/B vis-à-vis our Large Cap Universe (based on

FY15 estimates).

Basket offers diversified market mix, ~41m ton capacity and room to grow at ~75% utilization

Capacity (MT) Capacity utilization (%)

Lower realization and EBITDA (INR/ton) reflected in pricing discount


22January 2013

Cement

EV/Ton (USD) EV/EBITDA (x)


Operating matrix

Capacity (MT) Volumes (MT) EBITDA (INR/Ton) EBITDA (%)


ACC* 30.7 30.7 30.7 24.2 26.6 29.3 841 900 972 19.0 19.3 19.8

Ambuja* 27.5 27.5 27.5 22.5 24.7 26.7 1,121 1,146 1,218 25.5 24.8 25.0

UltraTech 50.4 60.6 60.6 43.2 47.1 50.4 1,088 1,310 1,368 22.1 24.8 24.3

Shree Cement 15.5 17.5 19.0 13.6 14.6 15.8 1,173 1,339 1,449 28.7 29.8 30.0

Large Caps 124.0 136.2 137.7 103.4 113.0 122.2 1,048 1,181 1,251 23.0 24.1 24.1

Birla Corp 9.3 9.3 9.3 6.5 7.0 7.7 607 742 875 15.3 17.4 19.6

India Cements 15.1 15.1 15.1 10.5 11.6 12.8 888 1,001 1,070 20.6 22.1 22.6

Dalmia Bharat 11.8 12.3 15.0 5.7 6.3 7.1 1,141 1,241 1,325 24.7 25.5 26.0

JK Cement 8.0 8.6 11.6 6.4 7.2 8.1 914 1,134 1,395 19.2 21.5 22.7

JK Lakshmi 5.3 8.0 8.5 5.4 5.9 6.8 804 957 1,046 20.4 22.6 23.4

Madras Cements 13.6 13.6 13.6 8.5 9.4 10.3 1,251 1,360 1,461 28.7 29.3 29.8

Orient Paper 5.0 5.0 8.0 4.2 4.6 5.2 759 908 1,007 8.6 12.4 13.7

Century Textiles 10.0 12.8 12.8 8.0 8.8 9.9 516 654 734 8.7 9.9 11.2

Prism Cement 5.6 5.6 5.6 5.1 5.8 6.4 447 747 853 6.3 10.6 11.4

Mid Caps 83.7 90.4 99.6 60.3 66.6 74.3 833 983 1,094 17.8 19.6 20.6

Aggregate 207.7 226.6 237.3 163.7 179.6 196.5 969 1,108 1,191 21.1 22.5 22.8

Financial matrix

EPS (INR) RoE (%) RoCE (%) Net Debt:Equity (x)


ACC* 66.0 80.4 98.2 16.8 19.0 20.8 18.0 20.6 23.0 -0.4 -0.4 -0.5

Ambuja* 10.6 12.2 14.4 19.3 20.1 21.1 28.7 29.1 30.4 -0.4 -0.4 -0.4

UltraTech 100.6 129.2 147.7 19.6 21.1 20.2 23.2 26.0 25.9 0.1 0.1 -0.1

Shree Cement 306.6 375.6 461.1 34.1 33.1 30.9 27.8 25.3 27.8 -0.5 -0.5 -0.7

Large Caps 20.8 22.5 22.9 23.7 25.3 26.4 -0.2 -0.2 -0.3

Birla Corp 34.7 43.3 58.8 10.9 12.3 14.7 11.9 13.7 16.2 -0.1 -0.2 -0.3

India Cements 7.7 12.6 18.1 5.1 7.8 10.8 8.5 10.3 12.7 0.7 0.6 0.4

Dalmia Bharat 27.9 36.1 38.1 8.5 10.1 10.0 11.1 11.5 11.9 0.7 0.8 0.6

JK Cement 30.6 42.8 60.3 13.3 16.5 19.4 16.1 17.2 19.1 0.9 1.3 1.1

JK Lakshmi 15.9 20.3 25.1 15.0 16.7 17.9 15.6 17.1 18.5 0.5 0.7 0.5

Madras Cements 19.7 25.6 33.1 20.8 22.4 23.5 18.2 21.0 24.8 1.0 0.6 0.2

Orient Paper 6.0 10.6 12.7 10.7 17.1 17.9 12.6 18.3 17.4 0.5 0.7 1.0

Century Textiles -10.6 -5.9 4.6 -1.7 -0.8 0.5 -5.4 -3.2 2.6 2.9 3.6 3.8

Prism Cement -0.1 4.2 6.5 -0.3 17.6 23.5 7.3 19.3 23.6 1.2 1.0 0.8

Mid Caps 11.2 15.3 17.9 10.3 13.2 15.8 1.0 1.1 0.9

Aggregate 17.7 20.3 21.3 18.8 20.8 22.4 0.2 0.2 0.2

23January 2013

Cement

Valuations summary

Reco CMP TP Up- PE EV/EBITDA EV/Ton (USD) EV/ Blue- Up-

(INR) FY15 side (x) (x)* at CMP* Ton Sky side

(INR) (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E at TP TP (%)

ACC* Neutral 1,387 1,712 23.4 21.0 17.3 14.1 11.1 8.9 6.9 135.2 128.0 116.5 153

Ambuja* Buy 198 233 17.9 18.7 16.3 13.7 10.5 9.0 7.3 176.3 169.4 158.6 195

UltraTech Buy 1,920 2,351 22.4 19.1 14.9 13.0 10.6 8.3 7.3 180.3 154.9 152.1 188

Shree Cement Buy 4,517 6,157 36.3 14.7 12.0 9.8 7.8 6.3 4.7 143.5 122.9 97.9 153

Large Caps 18.6 15.1 12.9 10.1 8.2 6.8 164.3 148.3 140.1

Birla Corp Buy 319 464 45.7 9.2 7.4 5.4 5.2 3.6 2.3 40.4 36.3 30.8 53 667 109

India Cements Buy 88 119 35.5 11.5 7.0 4.9 5.8 4.5 3.5 66.1 63.5 57.7 69 217 146

Dalmia Bharat Buy 193 427 122.4 6.9 5.3 5.1 5.4 4.3 4.0 54.8 49.5 45.9 69 669 246

JK Cement Buy 337 554 64.4 11.0 7.9 5.6 5.1 4.5 4.4 69.4 76.7 76.4 90 710 111

JK Lakshmi Buy 141 249 76.5 8.9 7.0 5.6 4.0 4.3 3.2 59.6 55.7 49.3 77 339 140

Madras Cements Buy 233 374 60.9 11.8 9.1 7.0 6.8 5.3 3.9 105.6 98.1 84.4 130 476 105

Orient Paper Buy 79 114 44.7 13.1 7.5 6.2 8.4 4.3 5.7 52.1 28.7 43.2 60 254 221

Century Textiles Neutral 427 460 7.9 -40.4 -72.1 93.0 15.6 14.5 11.0 74.3 78.6 71.0 147 1,028 140

Prism Cement Neutral 49 57 18.1 -724.4 11.7 7.5 12.1 5.9 4.6 99.9 77.0 64.3 79 101 109

Mid Caps 11.9 7.9 6.0 6.2 4.7 3.9 73.1 68.9 63.8

Aggregate 17.3 13.4 11.1 8.9 7.1 5.9 130.3 119.5 110.6

*EV adjusted for CWIP Source: Company, MOSL

24January 2013

Cement

Companies

Companies covered Pg

Initiating Coverage

Century Textiles 30

Dalmia Bharat 43

JK Cement 62

JK Lakshmi Cement 76

Madras Cements 88

Orient Paper Inds 100

Prism Cement 113

Existing Coverage

Birla Corporation 25

India Cements 57

Birla Corporation

25January 2013

CMP: INR319 TP: INR464 Buy

Stock performance (1 year)

Valuation summary (INR b)Y/E March 2013E 2014E 2015E

Sa les 25.7 29.7 34.3

EBITDA 3.9 5.2 6.7

NP 2.7 3.3 4.5

Adj. EPS (INR) 34.7 43.3 58.8

EPS Gr. (%) 11.7 24.8 35.8

BV/Sh. (INR) 317.2 351.1 399.4

RoE (%) 10.9 12.3 14.7

RoCE (%) 11.9 13.7 16.2

Payout (%) 25.3 21.6 17.9

Valuations

P/E (x) 9.2 7.4 5.4

P/BV (x) 1.0 0.9 0.8

EV/EBITDA (x) 5.2 3.6 2.3

EV/Ton (x) 40.4 36.3 30.8

Stock Info

Bloomberg BCORP IN

Equity Shares (m) 77.0

52-Week Range (INR) 342/202

1,6,12 Rel. Perf. (%) 13/28/-7

M.Cap. (INR b) / (USD b) 25/0.4

BSE SENSEX S&P CNX

19,987 6,057

Cost efficient playerPossible resolution of mining ban, a key trigger; Buy

Birla Corp (BCORP) is one of the most cost efficient cement producers, with average

cost of production being consistently 8-10% lower than the MOSL Cement Universe.

We expect strong scale-up in BCORP's volumes over FY12-15 on the back of stabilization

of recently added capacities and favorable market mix.

The ban on limestone mining at its Rajasthan plant has impacted its volumes and cost

adversely. Resolution of the mining ban would be a key trigger.

Strong balance sheet renders flexibility to expansion as both expansion plans marred

by litigation. We value BCORP at INR464/share (4x FY15E EV/EBITDA with implied EV/

ton of USD52). Maintain Buy; our target price implies 46% upside.

Capacity addition, favorable market mix to aid volume growthBCORP has posted subdued dispatch growth (CAGR of 2.7%) over FY10-12 due to

capacity constraints. However, we expect strong scale-up in volumes over FY13-

15 (8.7% CAGR), despite mining ban on the back of stabilization of recently added

capacities (1.7mtpa in Satna, 1.2mtpa in Chanderia and 0.6mtpa in Durgapur in

3QFY12) and favorable market mix. BCORP's sales mix is concentrated in North,

Central and East India, where demand-supply outlook remains healthy. We

expect favorable market mix to drive ~9.5% CAGR in average realization over

FY13-15 (INR29/15/10 per bag increase in FY13/14/15).

Cost efficient player; resolution of mining ban key triggerBCORP is highly cost efficient cement producers, with average cost of production

being consistently 8-10% lower than the MOSL average. The cost advantage is

attributable to high dependence on linkage coal (~65%), superior fuel efficiency

and low cost power generation (captive power accounts for 66% of requirement).

The recently imposed ban on limestone mining at its Rajasthan plant has impacted

its volumes and cost adversely. Resolution of the mining ban would be critical

for future volume growth and normalization of profitability. While BCORP is also

in the process of setting up two CPPs at Chanderia (50MW) and Satna (35MW),

we are yet to account for any benefit due to lack of visibility on the timeline. We

expect EBITDA/ton to improve to INR1,019 in FY15 from INR660 in FY12 (16%

CAGR).

Strong balance sheet, FCF generation to support growthBCORP's both the expansion plans are marred by litigation. However its healthy

cash surplus of ~INR5.1b as of FY14E, coupled with strong FCF visibility of ~INR9.2b

over FY13-15 offers healthy growth potential here on. We model in for likely

expansion in capital efficiencies(RoCE/RoE by 4.3/3.8pp) on the back of

deployment of surplus cash.

Trading at steep discount; reiterate BuyBCORP trades at FY15E EV of USD32/ton (v/s USD64/ton for MOSL Mid Cap Cement

Universe and USD111/ton for MOSL Cement Universe) and 2.4x FY15E EBITDA (v/

Shareholding pattern (%)As on Sep-12 Jun-12 Sep-11

Promoter 62.9 62.9 62.9

Dom. Inst 15.5 15.1 14.2

Foreign 4.9 6.1 7.0

Others 16.7 16.0 15.9

5-S framework

5-S score, Rank 67 4

Valuation score, Rank 94 2

Target price & upside

Base case INR464 46%

Blue Sky INR667 109%

Update | Sector: Cement

Birla Corporation

26January 2013

Blue Sky Scenario Birla Corp

3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for

MOSL Cement Universe). We expect revenue/EBITDA/PAT CAGR of 16%/30%/31%

over FY13-15. We value BCORP at INR464/share (4x FY15E EV/EBITDA with implied

EV/ton of USD52). Maintain Buy; our target price implies 46% upside.

About Birla Corp

Birla Corp (BCORP) is a part of the MP Birla group. It has cement capacity of 9.3mtpa

across plants located in Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal.

BCORP's ownership is sub-judice, as the will of Late Mrs Priyamvada Birla bequeathing

all M.P.Biral group property to Late Mr Rajendra Lodha is being contested by Birla

family.

Strong balance sheet, steady volume growth, cost leadership and attractive valuations

position BCORP as one of our preferred bets in the mid cap universe.

BCORP: 5-S Analysis

5-S Score Rank Average

1. Size & scalability [30] 18 7 21

2. Sales Mix [20] 16 3 15

3. Supply chain efficiencies [20] 14 1 11

4. Strategic & Other issues [10] 7 6 7

5. Strength of financials [20] 12 3 11

5-S Score 67 4 65

Valuation Score 94 2 76

Birla Corp has the potential to double in two years, driven by:

Resolution of the mining ban at its Rajasthan plant, resulting in cost savings of

~INR1b or ~INR150/ton.

Further, the resolution of the mining ban would drive brownfield capacity

addition of ~1.5mtpa.

Captive coal block, with recoverable reserves of 9.4mt has the potential to drive

savings of ~INR720m per year.

Improvement in capital efficiency by ~200bp, led by savings in raw material cost.

Any resolution of the dispute of ownership of the MP Birla group between the

Lodha and Birla families would led to further re-rating, though this is not factored

in our blue sky scenario.

BCORP: Blue Sky Scenario (INR m)

FY15E Catalyst

EBITDA 8,439 Savings of ~INR1b p.a on resolution of mining ban & savings

of ~INR720m from captive coal block

EV/EBITDA Multiple (x) 5 Re-rating with valuations in-line with similar sized

companies

EV 42,196

Net Debt -9,147

Equity value 51,343

TP (INR) 667

Upside (%) 109

Birla Corporation

27January 2013

5-S Analysis [Score 67 / 100] & [Rank 4]

Size & Scalability [18 / 30] Has cement capacity of 9.3mtpa across plants located

in Rajasthan, Madhya Pradesh, Uttar Pradesh and

West Bengal.

Expect strong scale-up in volumes over FY12-15

(8.7% CAGR) on the back of stabilization of recently

added capacities (1.7mtpa in Satna, 1.2mtpa in

Chanderia and 0.6mtpa in Durgapur in 3QFY12) and

favorable market mix.

No major capacity addition in foreseable future, as

both planned expnasion at Rajasthan & MP are

impacted by litigation.

Strategic & Other Issues [7 / 10] BCORP's ownership is sub-judice, as the will of Late

Mrs Priyamvada Birla bequeathing all M.P.Biral

group property to Late Mr Rajendra Lodha is being

contested by Birla family.

BCORP is largely a pure cement player, with

insignificant contribution from Jute and other

business to its revenue and profit.

With regards to mining ban, High court has levied a

compensation of INR45m. Currently, the matter is

subjudice and resolution would be critical.

Sales Mix [16 / 20] Sales mix concentrated in North, Central and East

India, where demand-supply outlook remains

healthy.

Expect favorable market mix to drive ~9.5% CAGR in

average realization over FY12-15 (INR29/15/10 per

bag increase respectively).

While its expansion at MP and Rajasthan are

impacted by litigation, as and when it is cleared, it

will strengthen presence in NEC market.

Strength of Financials [12 / 20] Expect EBITDA/ton to improve to INR976 in FY15 from

INR660/780 in FY12/13E (12% CAGR).

Expect revenue/EBITDA/PAT CAGR of 16%/31%/30%

over FY13-15.

No major capacity addition in foreseable future, as

both planned expnasion at Rajasthan & MP are

impacted by litigation.

Net cash of ~INR5.1b as on FY14E and strong

operating cash flow visibility (INR15.7b over FY13-

15) to address capex.

Improvement in operating cycle to augment RoCE

and RoE by 4.3pp and 3.8pp, respectively.

Supply Chain Efficiencies [14 / 20] One of the most cost efficient cement producers,

with average cost of production being consistently

8-10% lower than the MOSL average.

Cost advantage attributable to high dependence on

linkage coal (~65%), superior fuel efficiency and low

cost power generation (captive power accounts for

66% of requirement).

Ban on limestone mining at its Rajasthan plant has

impacted its volumes and cost adversely (~INR1b of

overall cost impact).

While BCORP is also in the process of setting up two

CPPs at Chanderia (50MW) and Satna (35MW), we

are yet to account for any benefit due to lack of

visibility on the timeline.

Valuation & View [94 / 100] BCORP trades at an FY15E EV of USD32/ton (v/s

USD64/ton for MOSL Mid Cap Cement Universe and

USD111/ton for overall Cement Universe) and 2.3x

FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid

Cap Cement Universe and 5.9x FY15E EBITDA for

overall Cement Universe).

We value BCORP at INR464/share (4x FY15E EV/

EBITDA with implied EV/ton of USD52). Maintain

Buy; our target price implies 46% upside.

Our Blue Sky scenario analysis indicates that BCORP

has potential to double in 2 years time, with target

price of INR667.

Birla Corporation

28January 2013

Financials and Valuation

Income Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 21,570 21,238 22,469 25,660 29,747 34,305

Change (%) 20.5 -1.5 5.8 14.2 15.9 15.3

Total Expenditure 14,519 17,059 19,345 21,733 24,566 27,586

EBITDA 7,051 4,179 3,124 3,927 5,182 6,719

Change (%) 65.6 -40.7 -25.2 25.7 32.0 29.7

Margin (%) 32.7 19.7 13.9 15.3 17.4 19.6

Depreciation 556 648 800 1,098 1,269 1,343

EBIT 6,495 3,530 2,324 2,829 3,913 5,376

Int. and Finance Charges 270 526 525 899 899 899

Other Income - Rec. 1,383 1,372 1,662 1,620 1,551 1,722

PBT 7,608 4,376 3,461 3,549 4,564 6,198

Change (%) 74.3 -42.5 -20.9 2.6 28.6 35.8

Tax 2,036 1,177 1,068 878 1,232 1,674

Tax Rate (%) 26.8 26.9 30.9 24.8 27.0 27.0

PAT 5,572 3,199 2,392 2,671 3,332 4,525

Change (%) 72.2 -42.6 -25.2 11.7 24.8 35.8

Margin (%) 25.8 15.1 10.6 10.4 11.2 13.2

Balance Sheet (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Equity Share Capital 770 770 770 770 770 770

Reserves 17,142 19,809 21,664 23,659 26,270 29,984

Net Worth 17,912 20,579 22,434 24,429 27,040 30,754

Loans 7,092 10,158 11,243 11,243 11,243 11,243

Deferred Liabilities 795 1125 1533 1595 1686 1810

Capital Employed 25,799 31,862 35,210 37,267 39,969 43,807

Gross Block 14300 17513 21968 29107 30607 32607

Less: Accum. Deprn. 7313 7759 8486 9584 10853 12196

Net Fixed Assets 6,987 9,754 13,482 19,523 19,754 20,411

Capital WIP 3278 4889 5139 1000 1000 1000

Investments 11417 11692 10448 3000 3000 3000

Curr. Assets 8,418 10,559 11,526 20,012 23,468 27,798

Inventory 2837 3596 4171 4875 5652 6518

Account Receivables 221 443 372 513 595 686

Cash and Bank Balance 3393 3711 4386 11288 13354 16135

Others 1966 2810 2597 3336 3867 4460

Curr. Liability & Prov. 4,299 5,032 5,386 6,268 7,253 8,402

Account Payables 3,650 4,507 4,744 5,389 6,247 7,204

Provisions 649 526 642 880 1,006 1,198

Net Current Assets 4,118 5,527 6,140 13,743 16,215 19,396

Appl. of Funds 25,799 31,862 35,210 37,267 39,969 43,807

E: MOSL Estimates

Birla Corporation

29January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

EPS 72.4 41.5 31.1 34.7 43.3 58.8

Cash EPS 79.6 50.0 41.5 48.9 59.7 76.2

BV/Share 232.6 267.2 291.3 317.2 351.1 399.4

DPS 6.0 6.0 6.0 7.5 8.0 9.0

Payout (%) 9.7 16.9 22.6 25.3 21.6 17.9

Valuation (x)

P/E 10.3 9.2 7.4 5.4

Cash P/E 7.7 6.5 5.3 4.2

P/BV 1.1 1.0 0.9 0.8

EV/Sales 0.7 0.8 0.6 0.5

EV/EBITDA 5.1 5.2 3.6 2.3

EV/Ton - Cap (US$) 37 40 36 31

Dividend Yield (%) 1.9 2.4 2.5 2.8

Return Ratios (%)

RoE 31.1 15.5 10.7 10.9 12.3 14.7

RoCE 30.5 15.4 11.3 11.9 13.7 16.2

Working Capital Ratios

Inventory (Days) 48 62 68 69 69 69

Debtor (Days) 4 8 6 7 7 7

Working Capital Turnover (Days) 0.8 0.7 0.6 0.7 0.7 0.8

Leverage Ratio

Current ratio 2.0 2.1 2.1 3.2 3.2 3.3

Debt/Equity (x) 0.4 0.5 0.5 0.5 0.4 0.4

Cash Flow Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Op.Profit/(Loss) before Tax 7,301 4,456 3,124 3,927 5,182 6,719

Interest/Dividends Recd. 567 719 1,662 1,620 1,551 1,722

Direct Taxes Paid -1,913 -1,089 -1,068 -816 -1,141 -1,550

(Inc)/Dec in WC -894 -687 62 -702 -405 -400

CF from Operations 5,060 3,398 3,779 4,029 5,187 6,491

(inc)/dec in FA -2,795 -4,927 -4,778 -3,000 -1,500 -2,000

(Pur)/Sale of Investments -5,555 -152 1,244 7,448 0 0

CF from Investments -8,350 -5,079 -3,534 4,448 -1,500 -2,000

(Inc)/Dec in Debt 4,368 3,104 1,085 0 0 0

Interest Paid -252 -566 -525 -899 -899 -899

Dividend Paid -631 -539 -541 -676 -721 -811

CF from Fin. Activity 3,485 1,999 23 -1,575 -1,620 -1,710

Inc/Dec of Cash 196 318 268 6,902 2,066 2,781

Add: Beginning Balance 3,197 3,393 3,711 4,386 11,288 13,354

Closing Balance 3,393 3,711 4,385 11,288 13,354 16,135

Century TextilesCMP: INR427 TP: INR460 Neutral


Cement poised for growth, performance improvementDelay in land value unlocking, high leverage to remain near-term drags

Century Textiles (CENT) is likely to witness 11% CAGR in cement volumes over FY13-15,

driven by 4.3mtpa expansion in Maharashtra and West Bengal by mid-FY14.

Cost savings from upcoming CPP and new capacity with better operating efficiency will

enhance operating margins of the cement business.

However, acute margin pressure in non-cement segments, high leverage (net debt of

INR62.5b in FY15E) and delay in real estate value unlocking would limit upside potential.

We initiate coverage with a Neutral rating; our target price of INR460 implies 8%

upside.

Real estate value unlocking potential significant, but back-endedCENT has 40 acres of mill land in Worli, one of Mumbai’s most attractive real

estate micro-markets. Recent transactions/PE deals in Central Mumbai have

materialized at a valuation of INR1.6b-1.8b/acre. We value CENT’s mill land with

~5msf of leasable area at ~INR26b (FY15E NAV). Our valuation implies land value

of ~INR1.2b/acre, 25-30% discount to the recent deals. We believe that the implied

discount is attributable to (a) back-ended land monetization plan under

commercial leasing model, and (b) prevailing challenges in the Central Mumbai

commercial real estate market due to weak demand, threat of oversupply and

high vacancy.

Capacity additions, cost saving triggers to improve cement profitabilityAfter stagnancy in capacity growth over FY08-12, we expect CENT’s 4.3mtpa

expansion in Maharashtra and West Bengal by mid-FY14 to aid meaningful volume

growth visibility (estimate 11% CAGR over FY13-15 v/s flat volume over FY10-12).

Demand outlook is strong due to fundamentally sound market mix (West, Central

and East India). Historically, CENT has posted lower cement profitability (EBITDA/

ton of INR456/516 v/s average INR894/1,010 for MOSL Cement Universe in FY12/

13E) owing to lower realizations, high freight cost and vintage plants. Going ahead,

we believe cost savings from upcoming CPP (would meet 80% requirement) and

new cement plants with better operating efficiency will enhance operating

margins, though it will be difficult to completely bridge the gap with peers. We

expect 19% CAGR in cement EBITDA/ton over FY13-15 to INR734.

Non-cement segments, high leverage to remain near-term dragsRevival in textiles (revenue/EBITDA contribution of 26%/4%) and paper (revenue/

EBITDA contribution of 17%/15%) hinges on demand recovery, softening of input

costs (e.g. cotton) and its ability to tackle competitive pressure. We expect both

the segments to continue with weak margins and subdued RoCE. Its spiraling

debt (net debt of INR62.5b in FY15E) and high interest on the back of ongoing

capex stoke further concerns.


Promoter 40.4 40.4 40.4

Dom. Inst 17.1 17.4 18.2

Foreign 10.4 8.8 6.9

Others 32.2 33.5 34.6


Sa les 58.0 68.9 80.6

EBITDA 5.0 6.8 9.0

NP -1.0 -0.6 0.4

Adj EPS (INR) -10.6 -6.3 3.8

EPS Gr. (%) -544.9 -40.9 -160.8

BV/Sh. (INR) 188.3 176.7 175.3

RoE (%) -5.4 -3.4 2.2

RoCE (%) 3.2 4.5 6.4

Payout (%) -49.8 -84.2 138.5

Valuations

P/E (x) -40.4 -68.4 112.5

P/BV (x) 2.3 2.4 2.4

EV/EBITDA (x) 15.6 14.4 11.0

EV/Ton (USD) 79 78 73

Stock Info

Bloomberg CENT IN



1,6,12 Rel. Perf. (%) 1-1/24/51

M.Cap. (INR b) / (USD b) 40/0.7

BSE SENSEX S&P CNX

19,987 6,057

5-S framework




Base case INR460 8%

Blue Sky INR 1,028 140%

30January 2013

Initiating Coverage | Sector: Cement

Century Textiles

31January 2013

Blue Sky Scenario Century Textiles

Near-term upside potential limited; initiate with NeutralWhile the cement business is poised for steady improvement, acute margin

pressure in non-cement segments, high leverage (FY15E net debt-equity of 4.9x)

and delay in real estate value unlocking would limit upside potential. CENT trades

at 11.1x FY15E EBITDA. For the cement business, this implies FY15E EV of USD72/ton

v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall

Cement Universe. Our SOTP-based valuation is INR460/share: (1) cement (USD75/

ton), (2) paper (1x FY15E sales), (3) textiles (0.4x FY15E sales), and (4) land (FY15E

NAV). We initiate coverage with a Neutral rating; our target price implies 8% upside.

About Century Textiles

Century Textiles (CENT), BK Birla group’s flagship, is a diversified company with presence

in cement, textiles, paper & pulp, and chemicals.

It has 8.5mtpa of cement capacity (to be expanded to 12.8mtpa by FY14) and has the

largest market share in Central India.

Given the near-term challenges in the textiles and paper businesses, the robust outlook

on cement and significant value unlocking potential in real estate will be the key drivers.

CENT: 5-S Analysis



2. Sales Mix [20] 18 1 15




5S Score 63 7 65


Century Textiles has potential the potential to multiply 2.5x, driven by Mr Kumar

Mangalam Birla, the Chairman of the Aditya Birla Group, inheriting his grandfather,

Mr BK Birla's interests in Century Textiles. Though a timeline cannot be assigned,

such an event could lead to the following:

Consolidation of Century Textiles' cement business with UltraTech.

Hive-off of the paper business, as it would be non-core for the Aditya Birla Group.

Sale of land bank, rather than own development, resulting in faster monetization.

CENT: Blue Sky Scenario (INR m)

Parameter Multiple FY15E Remarks

Texti le EV/Sales 0.4 8,937 No change in business fundamentals

Cement EV/ton(US$) 120 84,480 Merger of cement assets with A.V,Birla Group

Paper EV/Sales 2 28,653 Paper business sale as part of restructuring

on inheritance by A.V.Birla Group

Others EV/Sales 0.5 696

Total EV 122,766


Add: Value of Land @ INR1.5/acre 33,000 Freehold land sale rather than own devel-

opment on inheritance by A.V.Birla Group

Market Cap 95,616

Fair Value (INR) 1,028

Upside (%) 140

Century Textiles

32January 2013


Size & Scalability [22 / 30] Existing cement capacity of 8.5mt with no major

expansion over FY08-12.

Posted muted volume growth (1% CAGR) over FY09-

12 at high utilization (95-99%).

Ongoing greenfield expansion of 1.5mt in West

Bengal (INR5.2b by March 2013) and 2.8mt fo

brownfield expansion in Maharashtra (INR16b

including 60MW power plant by September 2013)

would be the key drivers of volume growth

(estimate 11% CAGR) over FY13-15E.

Strategic & Other Issues [5 / 10] CENT's 40-acre mill land in Worli offers significant

value unlocking potential. However, given delayed

monetization and subdued commercial demand, we

value the land at 25-30% discount to recent

transactions at INR26b (INR281/share).

Textile (revenue/EBITDA contribution of 26%/4%)

and paper (17%/15%) businesses remain near-term

drags on margins and capital efficiency.

Sales Mix [18 / 20] Fundamentally sound market mix, with ~49% of

dispatches to Central India, while East and West

India account for 27% and 24% of dispatches,

respectively.

CENT commands 10-11% market share in Central

India and 4-5% each in East and West India.

The trade segment contributes ~90% of CENT's

cement sales (v/s industry average of 65%), resulting

in lower pricing volatility.

We model INR15/15/10 per bag increase in

realizations over FY13/FY14/15.

Strength of Financials [7 / 20] Profitability significantly lower than peers in cement

(FY12/13E EBITDA/ton at INR456/516 - 45-50%

discount to MOSL Cement Universe).

Expect 19% CAGR in EBITDA/ton over FY13-15 to

INR734, though it would be difficult to completely

bridge the gap with peers.

Expect revenue/EBITDA CAGR of 18%/34% over FY13-

15. High interest cost (1.25-1.6x EBIT) to dent FY13-

14 PAT.

Net debt to peak out in FY15. We estimate net debt

of ~INR52.5b (net debt-equity of 4.9x) in FY15 on

the back of INR28b capex over FY13-15E in cement

and commercial construction.

Supply Chain Efficiencies [11 / 20] Cost of production at par with MOSL Cement

Universe. High proportion (~60%) of coal linkages

and high blending (1.43x) enable energy cost

advantage.

Freight cost to remain high due to high lead (450-

500km) distance - 50% sold outside home markets.

Vintage cement plants (average age of 24 years) have

lower operating efficiencies. New plants with

various subsidies to aid cost savings.

Upcoming CPP to enable 80% self sufficiency at

extended capacity (v/s 75% currently).

Expect cost of cement production per ton to grow at

a moderate 5% CAGR over FY13-15E.

Valuation & View [42 / 100] ENT trades at 11.1x FY15E EBITDA. For the cement

business, this implies Fy15E EV of USD72/ton

v/s USD64/ton for MOSL Mid Cap Cement Universe

and USD111/ton for overall Cement Universe.

Our SOTP-based valuation is INR460/share: (1)

cement (USD75/ton), (2) paper (1x FY15E sales), (3)

textiles (0.4x FY15E sales), and (4) land (FY15E NAV).

We initiate coverage with a Neutral rating; our target

price implies 8% upside.

Our Blue Sky scenario analysis suggets that CENT

has potential to be 2.5x, driven by inheritance of

Century textile by A.V.Birla group, although timeline

can't be assigned.

Century Textiles

33January 2013

Size & Scalability: Ongoing expansion to aid healthy recovery Volume growth drivers in place for cement business

CENT has cement capacity of 8.5mtpa, including (1) 2.1mtpa in Chhattisgarh, (2) 1.9mtpa

in Maharashtra, and (3) 3.8mtpa in Madhya Pradesh plus recent upgradation of

0.8mtpa. It has not had any major expansions since FY08 and has posted muted volume

growth (1% CAGR) over FY09-12. Capacity utilization has improved to 95-99%. The

ongoing greenfield expansion of 1.5mtpa in West Bengal (capex INR5.2b; by March

2013) and 2.8mtpa split grinding capacity in Maharashtra (capex of INR16b including

60MW power plant by September 2013) would be the key driver of volume growth

(estimate 11% CAGR over FY13-15).

Sales Mix: Market mix favorable Favorable market mix aids resilience in cement demand

CENT has a fundamentally sound market mix (West, Central and East India), where we

foresee healthy demand-supply dynamics. Almost 49% of its dispatches cater to Central

India, while East and West India account for 27% and 24%, respectively. It commands

10-11% market share in Central India and 4-5% each in East and West India. The trade

segment contributes ~90% of CENT’s cement sales (v/s industry average of 65%),

rendering relatively low pricing volatility. CENT’s blended cement realization has

been historically lower than peers (5-10% lbelow MOSL Cement Universe average)

due to relatively weaker brand equity. We model INR15/15/10 per bag YoY increase in

realizations over FY13/14/15.

Expect ongoing expansion to revive volume growth hereon


Market mix skewed towards better performing states Historically, realizations have been lower than peers (INR/ton)


Century Textiles

34January 2013

Supply Chain Efficiencies: Vintage plant, high lead distance remain overhangs Cost of production at par with MOSL Cement Universe average

CENT’s cost of cement production in FY12 was INR2,999/ton against INR2,959/ton for

our Cement Universe. In FY12, CENT’s total cost/ton had increased by 17.3%, led by

sharp rise in energy cost (24% owing to price escalation) and ~22% hike in rail freight

(freight mix is skewed towards railways: 68%).

High dependence on linkage coal; vintage plant, high lead distance key overhangs

Coal linkages account for 60% of CENT’s fuel mix, while domestic open market

purchases account for the balance 40%. While the high proportion of linkage coal

gives CENT a cost advantage, currently, shrinking of coal linkage to result in increasing

energy cost pressure. Its high blending at 1.43x clinker (~95% blended cement) has

led to better than average power consumption (~78KWH/ton of cement v/s 77-90KWH/

ton for peers).

However, we expect freight cost to remain an overhang, as ~50% of its production is

sold outside home markets, resulting in higher lead distance (450-500km). Moreover,

the average age of CENT’s cement plants is 24 years; these vintage plants have

comparatively lower operating efficiencies.

Additional CPP, new plants to aid cost savings

Currently, CENT’s 75MW captive power plant (CPP) fulfills 70-75% of its power

requirement; it purchases the balance requirement from the grid. The average cost

of power generation through the CPP is INR4.2/unit as compared to INR6.1/unit for

grid purchases and INR15-16/unit for DG-set produced power. CENT is setting up a

60MW power plant at Manikgarh (Maharashtra) by September 2013, which would

take total CPP capacity to 115MW. On its expanded capacity of 12.8mtpa, the CPP

would be able to supply almost 80% of its requirement. This would help reduce power

cost. Besides, its upcoming cement capacities in Maharashtra and West Bengal would

reduce the average age of its plants. The new plants would also be eligible for various

incentives such as capital/VAT/electricity/CST subsidies.

Expect cost pressure to moderate over FY12-15

On the back of moderation in energy cost escalation and higher efficiencies aided by

new plants, we expect CENT’s cost of cement production to grow at a moderate 5%

CAGR over FY13-15E. However, shrinking cosl linkage would result in rise in energy

cost.

High freight cost to

remain an overhang as

~50% of its production is

sold outside home

markets

Upcoming CPP in

Maharashtra would make

it ~80% self sufficiency in

power

Vintage plants: Average age 28years

Established Capacity (mt) Age (years)

Century Cement (Chattisgarh) 1974 2.1 38

Maihar Cement (MP) -I 1980 1.8 32

Manikgarh Cement (Maharashtra) 1985 1.9 27

Maihar Cement (MP) -II 1996 2.0 16

Total 7.8 28


Century Textiles

35January 2013

Strategic & Other Issues: Value unlocking from real estate a key trigger Worli land offers huge value unlocking opportunity...

CENT has 40 acres of mill land in Worli, which is one of Mumbai’s most attractive real

estate micro-markets. Recent transactions/PE deals in Central Mumbai have

materialized at a valuation of INR1.6b-1.8b/acre, which indicates significant value

unlocking potential. However, CENT plans to monetize the land only under

commercial leasing so that it provides steady rental income to overcome the cyclicality

of other businesses.


CPP addresses significant energy requirement (%) Total cost/ton to witness 5% CAGR over FY13-15

Location of CENT’s mill land at Worli


Century Textiles

36January 2013

Source: Industry, MOSL

... but litigation overhangs limits developable potential

Of the total 40 acres, CENT owns ~22 acres, while 10 acres is on lease from the Wadia family

and 8 acres is occupied by the housing colony. The lease is for 999 years (~113 years

lapsed), renewable for another 999 years. However, the leasehold portion is currently

under litigation with the Wadia family and lacks monetization certainty. While the company

is yet to freeze on a development plan (potential area, product mix, scheme of

development, etc) for the balance land , it plans to undertake commercial development

under lease model. We assume ~5msf of potential developable area considering 2.66x

FSI (net of workers’ rehab and disputed area) under IT Park scheme.

Valuing Worli mill land at ~INR26b (INR281/share)

We value CENT’s mill land with ~5msf of leasable area at ~INR26b (FY15E NAV). Our

valuation implies land value of ~INR1.2b/acre, 25-30% discount to the recent deals.

We believe the implied discount is attributable to (a) prolonged land monetization

plan, and (b) prevailing challenges in Central Mumbai commercial real estate due to

weak demand, oversupply threat and high vacancy.

Albeit slower value unlocking, lease model aids steady annuity stream

Currently, CENT has two commercial projects under construction (1) adjacent to

Century Bhavan (0.3msf/0.58msf of leasable area/construction area at total cost of

INR3.5b; to be completed by March 2013), and (2) on mill land (0.38msf/0.8msf of

leasable area/construction area at total cost of INR4.3b; to be completed by June

2013). Both the projects have witnessed significant progress (INR2.8b yet to be

incurred) and should begin yielding rent income from FY14. We estimate rent income

of INR0.7b/1.2b/1.5b in FY14/15/16E from ongoing development.

Value of Central Mumbai land transactions has been spiraling since FY05

Due to back ended

development plan, we

value Worli land at

almost 25-30% discount

to recent transactions

Century Textiles

37January 2013

Non-cement businesses remain a drag on capital efficiency

CENT is a diversified company, with presence in cement, textiles, paper & pulp, and

chemicals. Cement is the biggest contributor to CENT’s sales (~56%) and EBITDA (~74%),

while textiles (revenue/EBITDA contribution of 26%/4%) and paper (revenue/EBITDA

contribution of 17%/15%) account for the balance. Historically, diversification has

helped CENT to address the vagaries of cyclical industries. Nonetheless, on the back

of recent operating performance, we believe paper (-2.1% RoCE against 52% of

allocated capital) and textiles (-2.6% RoCE against 21% of allocated capital) remain a

drag on overall capital efficiency.

Segment-wise revenue mix Segment-wise EBITDA mix

Capital allocation skewed towards non-cement businesses, yet RoCE low for paper and textiles


Paper – capacity stabilization to drive growth amidst margin pressure

CENT offers a wide range of paper products catering to niche segments – pulp, writing

& printing paper, tissue paper, multi-layered packaging board, etc. The paper business

has posted negative CAGR of 3% over FY09-12 (led by 21% drop in FY12) owing to stiff

competition from China/Indonesia, stringent forest norms, etc. However, domestic

demand outlook remains stable (7-8% CAGR), also led by the government’s literacy

drive. CENT has ramped up its paper capacity to 0.42mtpa v/s 0.24mtpa in FY11 with

the commencement of its multi-layered packaging board plant (0.18mtpa). CENT has

0.16mtpa of pulp capacity, which would aid uninterrupted pulp supply for good quality

production. The company has incurred capex of ~INR22.6b in the paper segment over

FY09-12. We do not expect any major capex hereon, with focus on improving capital

efficiency (RoCE at -2.1/-2.9% in FY12/1HFY13).

The paper business has

posted negative revenue

CAGR of 3% over FY09-12

owing to stiff

competition from China/

Indonesia, stringent

forest norms, etc.

Century Textiles

38January 2013

We model 22% revenue CAGR over FY12-15, which would be attributable to (a)

stabilization of newly added capacity, (b) focus on speciality products, and (c) tapping

of export markets (UK, Iran, UAE, South East Asia, etc). Declining paper realizations

and sustained pressure of raw material (pulp) cost and supplies would keep margins

under pressure. We expect PBIDT margin to recover from 5% in FY13 (9.2% in FY12) to

8-10% in FY14-15.

Textiles – weak demand, intense competition remain headwinds

In the textiles segment, CENT has 25mtpa of capacity in Gujarat along with 21m meters

of denim, 26,000 tons of viscose, and 24,960 spindles (yarn) in Indore. The key products

include 100% cotton fabric, denim, viscose filament yarn (VFY), rayon yarn, etc. It has

forward integrated into the ready-to-wear segment by introducing the brand “Cottons

by Century” and has also developed export markets (Brazil, Chile and Bolivia) for VFY.

Weak global demand, spiraling cotton prices and competition from Chinese/

Bangladeshi products have led to significant pressure on the segment, with muted

PBDIT margin (negative to 2% over FY09-12), despite revenue CAGR of 24%. However,

encouraging recovery in demand and soft cotton prices over 1HFY13 bodes well for

margin recovery. We model 24% revenue CAGR over FY13-15, with 2-5pp margin

expansion.


Strength of Financials: Sharp rise in leverage a concern Expect profitability to revive on the back of cost saving triggers

The profitability of CENT’s cement business has been significantly lower than the

industry average, with FY12/13E cement EBITDA at INR456/516 per ton against INR850/

1,010 per ton for MOSL Cement Universe. This is largely on account of lower

realizations, vintage plants, and high lead distance. We expect cement business

profitability to improve over FY13-15 on account of (a) pricing strengths in operating

markets, (b) input cost moderation, and (c) benefit of upcoming CPP and new plants

(with subsidy incentives and better efficiencies). The 1.5mtpa grinding unit in West

Bengal would further increase blending. However, given its vintage plants, it would

be difficult for the company to completely bridge the gap between its current

profitability and the industry’s average profitability. We estimate 19% CAGR in CENT’s

cement EBITDA/ton over FY13-15 to INR734 (discount with peers to narrow by 5pp),

implying uptick in EBITDA margin from 13.2% in FY12 to 16-17% in FY13-15E.

Encouraging recovery in

demand & soft cotton

prices over 1HFY13 bodes

well for 2-5pp margin

expansion

over FY13-15

Cement business

profitability to improve

over FY13-15 on account

of cost saving triggers

and improving

pricing

Expect capacity addition to drive paper sales Expect moderate margin expansion in textiles

Century Textiles

39January 2013

Expect 34% EBITDA CAGR over FY13-15; high interest cost to drag PAT

We expect CENT to post revenue/EBITDA CAGR of 18%/34% over FY13-15E, as against

4%/-32% over FY10-12, on the back of steady volume growth and margin expansion in

the cement business. However, high interest cost on the back of spiraling debt would

eat away meaningful profit over FY13-14 (estimate interest cost at 1.25-1.6x EBIT).

Expect cost saving triggers to improve profitability Interest cost to eat way significant profit (Interest/EBIT)


Net debt to increase further on the back of ~INR28b capex over FY13-15

We expect CENT’s installed capacity to increase from 8.5mtpa to 12.8mtpa by

September 2013, along with additional CPP of 60MW. The capex includes (1) greenfield

capacity of 1.5mtpa in West Bengal (capex of INR5.2b by March 2013), and (2) brownfield

expansion of 2.8mtpa in Manikgarh, Maharashtra (INR16b including 60MW of power

plant by September 2013). Both the projects have been delayed on account of

challenges relating to forest clearance, labor issues, etc. CENT has already incurred

~INR6b (of the total INR21b) till FY12; it plans to incur INR3.5b in FY13 and the balance

in FY14-15. This coupled with INR2.5b-3b towards ongoing commercial building would

necessitate ~INR28b of capex over FY13-15.

We model minimal capex towards textiles and paper as per management guidance,

since CENT has already heavily invested in these segments over FY09-12 (INR30b+).

We expect CENT’s net debt to peak out in mid-FY14. We estimate net debt of ~INR55b

(net debt-equity of 3x) in FY14 as against INR39.8b (net debt-equity of 2.1x) in FY12.

High leverage would remain an overhang for the company.

Expect non-cement capex to moderate (INR b) High cement and real estate capex to dent FCF (INR b)

Cement capacity

expansion and ongoing

commercial building

would necessitate

~INR28b of capex

over FY13-15

Century Textiles

40January 2013

Net debt to peak out in FY15 (INR b) Capital efficiency to revive slowly over FY13-15 (%)


Valuation & View Value unlocking in real estate could be back-ended

While the cement business is poised for steady improvement, acute margin pressure

in non-cement segments (textiles and paper) and high leverage (FY14E net debt-

equity of 3x) would remain drags in the near term. Though real estate offers

meaningful value unlocking potential, slow monetization, coupled with the relatively

weak outlook for commercial real estate in Mumbai would dilute upside potential.

Initiating coverage with a Neutral rating

CENT trades at 11.1x FY15E EBITDA. For the cement business, this implies FY15E EV of

USD72/ton v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for

overall Cement Universe. Our SOTP-based valuation is INR460/share: (1) cement

(USD75/ton), (2) paper (1x FY15E sales), (3) textiles (0.4x FY15E sales), and (4) land

(FY15E NAV). We initiate coverage with a Neutral rating; our target price implies 8%

upside.

SOTP Valuation (INR m)

Parameter Multiple FY14E FY15E Remarks

Textile EV/Sales 0.4 7,771 8,937 Valued at 20-30% discount to peers

Cement EV/ton(USD) 75 52,800 52,800 Valued at 50% discount to replacement cost

Impl ied EV/EBITDA 9.2 7.3

Paper EV/Sales 1 12,735 14,327 Valued at 30-40% discount to peers

Others EV/Sales 0.5 632 696

Total EV 73,938 76,759

Less: Net Debt 59,009 60,150

Add: PV of Land 22,655 26,177 Valued at 30% discount to recent transaction

Market Cap 37,585 42,787

Fair Value (INR) 404 460

Upside (%) (5) 8


Century Textiles

41January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 44,529 46,772 47,892 58,017 68,854 80,634

Change (%) 16.7 5.0 2.4 21.1 18.7 17.1

EBITDA 7,311 5,762 3,420 5,024 6,824 9,037

Margin (%) 16.4 12.3 7.1 8.7 9.9 11.2

Depreciation 2,345 2,397 2,581 3,952 4,655 5,369

EBIT 4,966 3,366 839 1,072 2,169 3,668

Interest Expenses 1,005 1,183 1,721 3,363 4,055 4,511

Other Income - Rec. 903 1,254 1,107 978 1,110 1,314

PBT before EO Expense 4,864 3,437 226 -1,312 -775 471

Extra Ordinary Expense/(Income) -529 139 3 0 0 0

PBT after EO Expense 5,392 3,298 223 -1,312 -775 471

Current Tax 2,220 931 16 -328 -194 118

Deferred Tax -387 126 -12 0 0 0

Tax Rate (%) 34.0 32.0 1.9 25.0 25.0 25.0

Reported PAT 3,560 2,241 219 -984 -582 354

PAT Adj for EO items 3,211 2,335 221 -984 -582 354

Change (%) 15.9 -27.3 -90.5 -544.9 -40.9 -160.8

Margin (%) 7.2 5.0 0.5 -1.7 -0.8 0.4


Y/E March 2010 2011 2012 2013E 2014E 2015E


Fully Dilute Eq Sh Cap 930 930 930 930 930 930

Other Reserves 16,822 18,601 18,059 16,585 15,513 15,377

Total Reserves 16,822 18,601 18,059 16,585 15,513 15,377

Net Worth 17,752 19,531 18,989 17,515 16,444 16,307

Deferred Liabilities 3,576 3,577 4,633 4,633 4,633 4,633

Total Loans 23,668 31,115 40,344 50,544 60,544 63,044


Gross Block 46,748 48,120 67,130 76,850 100,150 103,891

Less: Accum. Deprn. 21,904 24,121 26,038 29,990 34,645 40,014

Net Fixed Assets 24,844 23,999 41,092 46,859 65,505 63,877

Capital WIP 12,874 19,976 11,119 11,800 1,000 2,392

Investments - Trade 584 684 714 714 714 714

Curr. Assets, Loans and Advances 20,339 20,156 22,002 23,159 25,281 29,078

Inventory 8,684 10,707 10,952 11,444 12,639 14,359

Account Receivables 2,251 3,072 3,335 3,974 4,150 5,523


Loans and Advances 7,702 2,252 2,104 2,543 2,830 3,535

Others 1,128 3,720 5,110 5,096 5,126 5,158



Other Current Liabilities 172 2,744 3,575 3,656 3,773 3,976

Provisions 5,525 800 925 -656 -388 118


Appl. of Funds 44,995 57,154 67,309 76,035 84,964 87,327

E: MOSt Estimates

Century Textiles

42January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR)

EPS 34.5 25.1 2.4 -10.6 -6.3 3.8

Cash EPS 59.7 50.9 30.1 31.9 43.8 61.5

BV/Share 190.8 209.9 204.1 188.3 176.7 175.3

DPS 5.5 5.5 4.5 4.5 4.5 4.5

Payout (%) 16.8 26.7 223.9 -49.8 -84.2 138.5

Valuation (x)

P/E 179.7 -40.4 -68.4 112.5

Cash P/E 14.2 13.4 9.8 6.9

P/BV 2.1 2.3 2.4 2.4

EV/Sales 1.4 1.3 1.4 1.2

EV/EBITDA 19.9 15.6 14.4 11.0

EV/Ton (USD) 90 79 78 73

Dividend Yield (%) 1.1 1.1 1.1 1.1

Return Ratios (%)

RoE 20.3 12.5 1.1 -5.4 -3.4 2.2

RoCE 16.1 10.0 3.5 3.2 4.5 6.4


Fixed Asset Turnover (x) 1.0 1.0 0.7 0.8 0.7 0.8

Asset Turnover (x) 1.0 0.8 0.7 0.8 0.8 0.9

Debtor (Days of sales) 18 24 25 25 22 25

Creditor (Days of sales) 65 32 24 22 22 21

Inventory (Days of sales) 71.2 83.6 83.5 72.0 67.0 65.0

Working Capital Turnover (Days of sales)50 94 106 104 91 90

Leverage Ratio (x)

Debt/Equity 1.3 1.9 2.6 3.6 4.6 4.9


Y/E March 2010 2011 2012 2013E 2014E 2015E

Oper. Profit/(Loss) before Tax 7,311 5,762 3,420 5,024 6,824 9,037

Interest/Dividends Recd. 903 1,254 1,107 978 1,110 1,314

Direct Taxes Paid -2,607 -3,513 -252 328 194 -118

(Inc)/Dec in WC 130 -3,386 -503 -2,677 -648 -2,632

CF from Operations 5,736 117 3,772 3,653 7,479 7,602

EO Income/(Exp) 1,957 2,666 423 0 0 0

CF from Operating incl EO Expense 7,693 2,783 4,195 3,653 7,479 7,602

(inc)/dec in FA -11,982 -8,654 -10,818 -10,400 -12,500 -5,134

(Pur)/Sale of Investments -119 -99 -30 0 0 0

CF from Investments -12,101 -8,753 -10,848 -10,400 -12,500 -5,134

(Inc)/Dec in Debt 6,085 7,447 9,229 10,200 10,000 2,500

Interest Paid -1,005 -1,183 -1,721 -3,363 -4,055 -4,511

Dividend Paid -599 -599 -490 -490 -490 -490

CF from Fin. Activity 4,317 5,802 6,748 6,347 5,455 -2,501

Inc/Dec of Cash -91 -167 95 -400 435 -33

Add: Beginning Balance 665 574 406 501 101 536

Closing Balance 574 407 501 101 536 503

Dalmia BharatCMP: INR193 TP: INR427 Buy


Poised for fast-track growth, with entry into top leagueDe-risking market mix; initiating with Buy

Dalmia Bharat (DBEL) is poised for strong scale-up, driven by sustained focus on capacity

and market expansion through both organic and inorganic routes.

DBEL to post 13% volume CAGR (FY13-15) on the back of (1) new expansion, (2) demand

recovery in southern states, and (3) uptick in utilization in North East capacity.

Strong operating cash flow (~INR23b over FY13-15, ex-subsidiaries) to support on-

going capex and later balance sheet de-leveraging.

DBEL trades at attractive valuations of USD46/ton for 15mtpa of pro-rata capacity

(~22mtpa capacity under control). We initiate coverage with a Buy rating; our target

price of INR427 implies 122% upside.

Capacity expansion to drive superior volume growthDBEL is poised for strong operational scale-up, driven by sustained focus on

capacity and market expansion through both the organic and inorganic routes.

We expect its recent acquisitions of 2.8mtpa capacity in the North East (Adhunik

and Calcom), coupled with ongoing expansion – (a) 2.5mtpa of greenfield plant

in Karnataka (DCBL), (b) 1.5mtpa of grinding unit in West Bengal (OCL), and (c)

0.9mtpa of brownfield expansion at Calcom – to place it among the top-4 cement

groups in India in terms of capacity under management (21.9mtpa by FY15, with

effective stake of 15mtpa). We expect DBEL to post 12.7% volume CAGR FY13-15

(v/s 8.3% for our Cement Universe) on the back of (1) new expansion, (2) demand

recovery in southern states, and (3) uptick in utilization in North East capacities.

Diversifying market mix – not merely South-centeredDBEL (standalone) is a dominant player in the South (fourth-largest by FY14),

with the largest sales exposure in Tamil Nadu and Kerala (but with limited

exposure to AP with ~13% contribution). While unfavorable market outlook in

south and demand de-growth in Andhra Pradesh render near-term uncertainty,

the company has de-risked itself through (a) entry into the fast-growing North

East market, and (b) exposure to the better performing East market through OCL.

Superior profitability to sustain; balance sheet strength offers comfortDBEL and OCL enjoy superior profitability on account of higher realizations and

operational efficiency. We expect the trend to continue, with added benefits

from (a) new CPP, (b) lower imported coal prices, and (c) positive operating

leverage, with recovery in demand in southern states and uptick in utilization in

newly acquired plants. We expect DBEL’s EBITDA/ton (ex-subsidiaries) to improve

from INR1,031 in FY12 to INR1,241/1,325 in FY14/15 (8% CAGR over FY12-15).

Ongoing capex plan of ~INR26.5b (including subsidiaries) would drive up effective

net debt to INR26b by FY14 as against INR8.7b in FY12. However, strong operating

cash flow (~INR23b over FY13-15 in standalone operations) visibility gives healthy

cushion to address capex need and future acquisitions. DBEL has maintained a

dividend payout of 18-20% over FY11-12.


Promoter 62.8 62.8 58.3

Dom. Inst 3.5 3.3 3.4

Foreign 14.4 14.6 18.0

Others 19.3 19.3 20.4


Sa les 26.5 30.7 36.2

EBITDA 6.5 7.8 9.4

NP 2.5 3.3 3.6

Adj EPS (INR) 27.9 36.1 38.1

EPS Gr. (%) 33.9 29.4 5.6

BV/Sh. (INR) 383.3 419.4 458.3

RoE (%) 8.5 10.1 10.0

RoCE (%) 11.1 11.5 11.9

Payout (%) 14.6 12.9 12.9

Valuations

P/E (x) 6.9 5.3 5.1

P/BV (x) 0.5 0.5 0.4

EV/EBITDA (x) 4.6 3.4 3.1

EV/Ton (USD) 55 50 46

Stock Info

Bloomberg DBEL IN



1,6,12 Rel. Perf. (%) 5/54/19

M.Cap. (INR b) / (USD b) 15.6/0.3

BSE SENSEX S&P CNX

19,987 6,057

5-S framework






43January 2013


Dalmia Bharat

44January 2013

Trading at steep discount for 4th larget player; initiating with BuyDBEL trades at an EV/EBITDA of 3.4x/3.1x FY14/FY15 and EV of USD46/ton, for highly

efficient player who will evolve to be fourth largest player by FY15. Our SOTP value

stands at INR427/share: (1) DCB and OCL at 5x FY15E EBITDA, and (2) Adhunik and

Calcom at USD70/ton (FY15E capacity; as against acquisition cost of USD120-130/

ton), implying equity value of INR1.8b for Adhunik and a negative INR100m for

Calcom (owing to high debt and lower utilization till FY14). We initiate coverage

with a Buy rating; our target price of INR427 implies 122% upside.

About Dalmia Bharat (DBEL)

DBEL is a holding company (85% stake) for in Dalmia Cement Bharat (DCBL) - a SPV

owning all cement assets, with Kohlberg Kravis Roberts (KKR) holding the balance 15%.

DCBL has cement capacity of 9mtpa in Tamil Nadu and Andhra Pradesh. DCBL also holds

45.37% stake in OCL India (5.4mtpa capacity in Orissa), 100% stake in Adhunik Cement

(1.5mt capacity in Meghalaya) and 76% stake in Calcom (1.3mt capacity in Assam).

DBEL holds effective stake of 96.1% in DCB Power Venture, which has thermal power

generation capacity of 72MW.

Dalmia Bharat has the potential to be a 4-bagger in 2-3 years, driven by:

Its being one of the top-4 cement producers in India, with capacity under control

of ~22mtpa (~15mtpa based on economic interest).

Ramp-up in North-East subsidiaries, resulting in higher profitability.

Deleveraging, driven by completion of ongoing capex and significant improvement

in cash flow from operations during the upturn in the cement cycle.

Improvement in capital efficiency, as capex over last 2-3 years starts contributing.

DBEL: Blue Sky Scenario (FY15)Parameter Multiple INR m Catalyst

DBCL EV/Ton (USD) 100 53,367 Scale-up of capacity to 11.5mt in an upcycle,

improving utilization and beginning of

balance sheet deleveraging

OCL EV/Ton (USD) 100 8,527 Commissioning of new capacity at West

Bengal, driving volumes and profitability

Adhunik EV/Ton (USD) 100 6,961 Improving utilizations driven by strong

growth in North East market, enjoying very

high profitability

Calcom EV/Ton (USD) 100 7,477 Commissioning of clinker capacity driving

cost savings and high profitability

Total EV 76,331

Less: Pro-rata Net Debt (adj for CWIP) 21,992

Total Equity Value 54,340

Fair value (INR/share) 669

Upside (%) 247

Blue Sky Scenario Dalmia Bharat

DBEL: 5-S Analysis5-S Score Rank Average


2. Sales Mix [20] 14 7 15




5-S Score 74 1 65


Dalmia Bharat

45January 2013


Size & Scalability [29 / 30] Existing capacity of 9mtpa in DCBL, along with

5.35mtpa in associate, OCL (stake of 38.6%).

Recently acquired (a) 76% stake in Assam-based

Calcom Cement (1.3mtpa), and (b) 100% in

Meghalaya-based Adhunik Cement (1.5mtpa).

Strong expansion plans: (1) DCBL: 2.5mtpa at

Karnataka with 45MW CPP by 4QFY14, (2) OCL:

1.5mtpa grinding unit in West Bengal by 3QFY14, and

(3) Calcom: 0.9mtpa brownfield expansion.

Capacity to reach 21.9mtpa (~15mtpa pro-rata) in

FY15, placing DBEL among the top-4 in India.

We model 12.7% volume CAGR for DCBL (including

acquisitions) over FY13-15.

Strategic & Other Issues [9 / 10] In the refractories segment, DBEL has installed

capacity of 0.08mtpa, while OCL has 0.11mtpa.

The total industry capacity is 2.5mtpa. Most of the

production capacity is underutilized (current

capacity utilization of 65%). Growth in the steel

industry (which accounts for 75% of the demand for

refractories) will be critical for demand uptick in the

refractories segment.

For DBEL's refractories business, we model 4%

volume CAGR and 9% revenue CAGR over FY12-15.

Recent open offer for Dalmia Bharat Sugar Ltd (DBSL)

for 26% stake is not consistent with demerger of

cement to bring focus.

Sales Mix [14 / 20] Dominant player in South India (fourth largest in

India by FY15), with largest sales exposure to Tamil

Nadu and Kerala, but limited contribution from AP.

Unfavorable Andhra Pradesh (~13% of standalone

volumes) market renders near-term uncertainty.

Has de-risked market mix with (a) entry into fast

growing North East market, and (b) exposure in

better performing East market through OCL.

We model price uptick of INR12.5/12.5 per bag in

FY13/14/15 for DCBL - 5.5% CAGR over FY13-15. For

OCL, we assume INR15/12.5 per bag price uptick,

implying 6% CAGR over FY13-15.

Strength of Financials [12 / 20] Expect DBEL's (standalone) EBITDA/ton to improve

from INR1,031 in FY12 to INR1,325 in FY15 (8% CAGR).

Revenue/EBITDA to post 17%/20% CAGR over FY13-

15 (ex subsidiaries).

Capex of ~INR26.5b (includng subsidiaries) likely to

augment effective net debt to INR26.4b by FY14 as

against INR8.7b in FY12.

Strong standalone operating cash flow (~INR23b over

FY13-15) visibility to support on-going capex and

later drive balance sheet de-leveraging.

Has maintained dividend payout 18-20% over FY11-

12).

Supply Chain Efficiencies [10 / 20] DBEL enjoys superior profitability due to higher

realizations and operational efficiency.

Expect the trend to continue, with added benefits

from (a) new CPP, (b) lower imported coal prices,

and (c) positive operating leverage.

Limited clinker capacity to be drag on raw material

cost or volume growth for OCL and Calcom in short

term.

Higher lead distance due to rising dispatches outside

Andhra Pradesh to impact freight cost.

We model 4% CAGR in cost per ton over FY13-15.

Its recent acquisitions, Calcom and Adhunik, will

enjoy superior profitability due to subsidies offered

in North East and favorable demand-supply.

Valuation & View [96 / 100] DBEL trades at an EV/EBITDA of 3.4x/3.1x FY14/FY15

and EV of USD46/ton, for highly efficient player who

will evolve to be fourth largest player by FY15.

Our SOTP value stands at INR427/share: (1) DCB and

OCL at 5x FY15E EBITDA, and (2) Adhunik and Calcom

at USD70/ton (FY15E capacity; as against acquisition

cost of USD120-130/ton), implying equity value of

INR1.8b for Adhunik and a negative INR100m for

Calcom (owing to high debt and lower utilization

till FY14).

We initiate coverage with a Buy; our target price of

INR427 implies 122% upside. Our Blue-sky scenario

suggests fair value of ~INR669, an upside of 247%.

Dalmia Bharat

46January 2013


Expect 13% volume CAGR over FY13-15

DCB has been operating at low capacity utilization owing to weaker business dynamics

in the southern states. OCL’s operations were impacted due to the mining ban in

Orissa in 4QFY12. DCB’s recent acquisitions in the North East are also witnessing

subdued utilization (25-35%) on account of various operational bottlenecks. Hence,

demand recovery coupled with easing of bottlenecks will drive volume growth. DBEL

has posted 15% CAGR in dispatch volumes over FY10-12 (v/s industry CAGR of 6%), led

by stabilization of capacity added over FY09-10. We expect the healthy growth trend

to continue, led by (1) steady expansion through organic and inorganic routes, (2) de-

bottlenecking of North East capacity, and (3) demand recovery in the southern states.

We model 13% volume CAGR for DCBL (pro-rata) and 7% for OCL (despite weaker

FY13) over FY12-15 v/s 8.3% for our Cement Universe.

Lower utilization offers huge scope for uptick in operating leverage

Utilization FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

DCBL 79 95 52 50 58 60 63 71 66

OCL 94 100 50 57 64 58 62 53 57

Calcom* 25 29 37 40

Adhunik* 35 42 49 57


Size & Scalability: Organic and inorganic expansion to aid strong scale-up Organic/inorganic expansion to aid strong operational scale-up

DBEL has existing capacity of 9mtpa in DCBL, along with 5.35mtpa in associate, OCL

(effective stake of 38.6%). It has recently acquired (a) 76% stake in Assam-based

Calcom Cement (1.3mtpa), and (b) 100% in Meghalaya-based Adhunik Cement

(1.5mtpa), which will enhance its footprint in the fast growing North East market.

Besides strategic acquisitions, DBEL also has strong organic expansion plans:

DCBL: 2.5mtpa greenfield plant in Karnataka with 45MW CPP (INR13b ex CPP) by

4QFY14,

OCL: 1.5mtpa grinding unit in West Bengal (INR5-5.5b) by 3QFY14

Calcom: 0.9mtpa brownfield expansion (clinker capacity expansion of 1mtpa)

We expect capacity to reach 21.9mtpa (effective stake of 15mtpa) in FY15 as against

the current 17.1mtpa (effective stake of 11.8mtpa), placing DBEL among the top-4

cement groups in India in terms of capacity under management.

Strong scale-up in cement capacity would place DBEL among the top 4 cement groups in India

DBEL is expected to be

among the top 4 cement

players in India by FY15

in terms of capacity

under management

We expect healthy

volume growth trend to

continue, led by steady

expansion, de-

bottlenecking of North

East capacity, and

demand recovery south.

Dalmia Bharat

47January 2013

Sales Mix: Diversification to de-risk market-mix Core market unfavorable at present - de-risking strategy a positive direction

DBEL (through DCBL) is the sixth-largest cement player in the South and is likely to be

the fourth-largest by FY15, post the commissioning of its 2.5mtpa greenfield expansion

in Karnataka. Its plants are located near limestone reserves in Tamil Nadu and Andhra

Pradesh, and are strategically positioned to cater to all the southern states.

The southern region has been a major underperformer on account of prevailing

oversupply scenario, subdued demand and political crisis in key cement consuming

state- Andhra Pradesh (demand de-growth of 9%/5% in FY12/YTDFY13). However,

DCBL has posted steady volume growth of 16%/7.2% in FY12/9MFY13, given that its

market mix is skewed towards non-AP southern states, where growth has been largely

stable. Nonetheless, recovery in Andhra Pradesh would be a definite trigger, hereon.

OCL’s market mix remains steady due to favorable demand-supply dynamics at the

eastern region (demand growth of 7%). Additionally, upcoming elections in the key

demand-driving states like Karnataka, Andhra Pradesh and Orissa should boost

infrastructure commitments.

Steady market diversification to balance out southern headwinds

While unfavorable market outlook in south and sustained demand de-growth in

Andhra Pradesh render near-term uncertainty, the company has de-risked itself

through (a) exposure to the better performing East market through OCL, and (b) entry

into the fast-growing North East market. OCL India is focused on Orissa, West Bengal,

Bihar and Jharkhand. The company has ~23% market share in Orissa.

DCB’s recent acquisition of (a) 76% stake in Assam-based Calcom Cement, and (b)

100% stake in Meghalaya-based Adhunik Cement would strengthen its footprint in

the fast growing North East market, where it will manage 2.8mtpa out of the total

7mtpa existing capacity. De-risking of market concentration is in line with DBEL’s

objective of a Pan India presence. The North East market is attractive, with cement

demand growing at 10-15% per year. Also, DCB’s local manufacturing presence will

give it a strong substitution opportunity, as ~30% of the cement demand in the North

East is currently being addressed by mainland sources.

We model 13% volume CAGR for DCBL (including acquisitions), including 8.5% CAGR for OCL

* including recent acquisitions Source: Company, MOSL

De-risking of market

concentration is in line

with DBEL’s objective of a

Pan India presence

DCB's market mix is

skewed towards non-AP

southern states (TN and

Kerala), where

growth has been

largely stable

Dalmia Bharat

48January 2013

Expect realization CAGR of 5% over FY13-15

Historically, both DCB and OCL have enjoyed higher realizations than our Cement

Universe (10-15% premium), owing to its market mix. The supply overhang and lower

capacity utilization in the South could lead to pricing volatility in the region. We

model price uptick of INR12.5/12.5 per bag in FY14/15 for DCBL – 5% CAGR over FY13-

15. For OCL, we assume INR15/12.5 per bag price uptick, implying 6% CAGR over FY13-

15 on the back of healthy outlook for the East market.

Supply Chain Efficiencies: CPP offers meaningful self sufficiency in power Cost structure at par with MOSL Cement Universe

DCB’s cost of production is broadly in line with the industry average. It has installed

thermal power capacity of 72MW in DCBL Power Venture (effective stake of 96.1%),

which makes it ~60% self sufficient in energy at full capacity. Fuel mix is skewed

towards imported coal/pet coke from Indonesia (85%). The lower proportion (15%)

of linkage coal leads to higher energy cost for DCBL, despite superior energy efficiencies

– power utilization at 73kwh/ton (v/s 79-93kwh/ton for MOSL Cement Universe) and

coal requirement of <100kg/ton (v/s 120-160kg/ton for MOSL Cement Universe).

OCL’s market mix OCL has the largest market share in Orissa


DCB’s market mix suggests lower exposure in AP DCB has leading market share in major southern states

Dalmia Bharat

49January 2013

OCL sources almost 45% of its fuel through linkage coal, 20-25% from open market

and the rest from imported coal. The higher proportion of linkage coal aids energy

efficiency for OCL. The management has indicated that due to no major linkage option,

its North East plants are likely to source fuel through open market purchases, which

could be a drag on overall energy cost.

We model 4% CAGR in cost of production over FY13-15.

DBEL’s energy cost structure Fuel mix skewed towards imported coal


Increase in CPP capacity to lower OCL’s energy cost

While DCB is ~60% self sufficient in energy requirement, OCL has commenced a 54MW

coal-based CPP (second unit of 27MW completed in April 2012) in Rajgangpur, Orissa.

This will significantly improve OCL’s cost efficiency, as ~90% of its power requirement

was earlier met through purchased power. Given that DCB’s upcoming plants will be

together with 45MW CPP, it will be able to meet ~75% of its power requirement in-

house by FY15.

DCB to benefit from softening of imported coal prices

Prices of imported coal and pet coke have softened meaningfully – down 13% in

YTDFY13 in INR terms. We expect this to translate into significant moderation in energy

cost, as imported coal accounts for ~85% of DCB’s fuel mix.

Limited clinker expansion in OCL a concern; expect synergies in North East

Limited expansion in clinker capacity (leading to higher purchased clinker) would be

drag on volume growth/ raw material cost for OCL. At its expanded capacity, cement:

clinker ratio would stand at 1.4x for DCBL and 2.3x for OCL. While clinker capacity is a

constraint at its recently acquired Calcom plant, we believe (1) 1mtpa of clinker

expansion by FY14-end, and (2) synergy with Adhunik plant (excess clinker) would

partially mitigate the concern.

Lower clinker capacity could be a drag on raw material cost / cement volume growth

Capacities (MT) Current Expansion Total

Clinker Cement Clinker Cement Clinker Cement

DCBL 6.5 9.0 1.6 2.5 8.1 11.5

OCL 2.9 5.3 - 1.4 2.9 6.7

Calcom 0.3 1.3 1.0 0.9 1.3 2.1

Adhunik 1.0 1.5 - - 1.0 1.5

Total 10.7 17.1 2.6 4.7 13.3 21.8


Dalmia Bharat

50January 2013

Freight cost impacted by higher lead distance

DBEL’s freight cost grew at ~14% CAGR over FY09-12, driven by diversification of its

market mix outside Andhra Pradesh. Given that its logistics mix is skewed towards

road transport (81%), we factor in ~10% increase in freight cost in FY13 to capture the

recent INR5/liter (+12.5%) hike in diesel prices. DBCL has set up a railway siding at

Andhra Pradesh plant, resulting in deeper market reach and lower logistics costs.

Acquisition of Calcom and Adhunik would make DBEL the only large player in the

North East with substantial logistics synergies.

Strategic & Other Issues: Steel Industry key to refractory demand growth Fortunes of steel industry key to demand for refractories

DBEL has installed capacity of 0.08mtpa, while OCL has 0.11mtpa. The industry capacity

is 2.5mtpa, which is largely underutilized at 65% utilization. Growth in the steel

industry will be critical for growth in the refractories segment. For DBEL’s refractories

business, we model 4% volume CAGR and 9% revenue CAGR over FY12-15.

Ongoing open offer for DBSL for 26% stake is not consistent with demerger of

cement, although cash outflow would be insignificant at less than INR500m.

Strength of Financials: Leverage to increase led by ~INR29b over FY13-14 Superior profitability to continue with cost benefits

Both DCB and OCL enjoy superior profitability on account of higher realizations and

operational efficiency. However, higher raw material cost owing to purchased clinker

(further aggravated in case of OCL due to mining ban in Orissa) and spiraling energy

cost resulted in subdued EBITDA over FY11-12. We expect steady uptick in DCBL’s

profitability on the back of (a) improvement in realizations (expect increase of INR12.5/

bag in FY14 and INR12.5/bag in FY15), (b) moderating input cost inflation and benefit

of softening imported coal prices, and (c) positive operating leverage. We expect

DCBL’s cement EBITDA/ton to increase from INR1,031 in FY12 to INR1,325 in FY15 (9%

CAGR over FY12-15).

OCL is likely to post a sharp uptick in profitability over FY13-15, led by (1) INR15/12.5

per bag increase in realizations in FY14/15, and (2) cost savings following the

commencement of mining operations and full benefit of captive power plants. We

expect EBITDA/ton of INR1,363 in FY15 (v/s INR596 in FY12 and INR899 in FY11).

Capital efficiency to improve with uptickExpect above par profitability to sustain (EBITDA/ton) in utilization and profitability (%)


Dalmia Bharat

51January 2013

Premium profitability at North East plants

DBCL’s North East acquisitions (Calcom and Adhunik) are expected to enjoy multiple

subsidies such as VAT subsidy (INR400-500/ton for 10 years), transport subsidy (INR250-

300/ton for 5 years), and excise subsidy (~INR300/ton for 10 years). These translate

into total potential subsidy of INR1,000-1,200/ton, which should augment profitability,

despite poor capacity utilization (25-35%). While the management has not shared the

financials of recent acquisitions, we model EBITDA/ton of INR1,540 for Adhunik and

INR531 for Calcom (due to high clinker purchase) in FY13. Calcom is likely to witness

uptick in profitability once its clinker facility commences operations by early FY15.

We believe that strengthening of profitability hinges on (1) synergistic benefits in

logistics and clinker (excess clinker in Adhunik can be sourced by Calcom), (2) higher

realizations on account of branding, and (3) operating leverage.

Undergoing strong operational scale-up

DBEL is undergoing a strong capex cycle comprising both organic and inorganic

expansion to achieve its objective of Pan India footprints. Since January 2012, it has

acquired (a) 76% stake in Assam-based Calcom Cement with existing capacity of

1.3mtpa for INR3.15b, and (2) 100% stake in Meghalaya-based Adhunik Cement with

1.5mtpa capacity for INR5.6b. Its ongoing 0.9mtpa brownfield expansion at Calcom

plant (clinker capacity expansion of 1mtpa) will be operational by FY14-end,

necessitating capex of INR4b-5b.

Moreover, DCB has 2.5mtpa of upcoming greenfield expansion in Karnataka along

with 45MW CPP for total capex of INR16b, which is expected to be completed towards

the end of FY14. OCL is setting up a 1.5mtpa grinding unit at Medinipur, West Bengal at

a cost of INR5b. The project has already received most approvals and is expected to

get commissioned by November 2013. The company has recently commissioned a

10km conveyor belt for transportation of limestone from mines to plant.

Major expansion to conclude over FY13-15 (MT)

Current Expansion Total

Clinker Cement Clinker Cement Clinker Cement Capex Time line

DCBL 6.5 9.0 1.6 2.5 8.1 11.5 16.0 4QFY14/1QFY15

OCL 2.9 5.3 - 1.4 2.9 6.7 5.5 3QFY14

Calcom 0.3 1.3 1.0 0.9 1.3 2.1 5.0 FY14-end

Adhunik 1.0 1.5 - - 1.0 1.5 NA 4QFY14/1QFY15

Total 10.7 17.1 2.6 4.7 13.3 21.8 26.5


OCL has obtained environment clearance for production of 2.7mtpa cement at its

Kapilas Cement Manufacturing Works, which currently has installed capacity of

1.35mtpa, although there are no immediate plans for expansion. It is also in the

process of obtaining requisite approvals and acquiring land for its captive coal block

in Orissa (14.7% stake with OCL Iron & Steel).

Dalmia Bharat

52January 2013

Net debt (pro-rata) to peak in FY14 at INR27b

We expect the company to incur capex of ~INR26b (DBEL’s effective economic interest

of ~INR19b) across all entities over FY13-15. The funding will be done through a mix of

internal accruals and debt, with debt contributing ~70% of the capex. This, along with

~INR8b of recent acquisitions, is expected to increase effective net debt to INR27b by

FY14 v/s INR8.7b in FY12.

Expect effective net debt to increase by ~INR18b over FY13-14

Net Debt Eff. Stake (%) FY12 FY13E FY14E FY15E

DBCL 85 8,233 16,102 18,705 17,589

OCL 38.6 4,295 3,394 4,757 1,667

Adhunik 85.0 0 5,250 4,511 3,610

Calcom 64.6 0 5,000 8,000 8,250

Total Net Debt 12,528 29,746 35,974 31,116

Net Debt based on Eco. Interest 8,654 22,688 26,737 23,992


Healthy operating cash flow offers strong cushion

DBEL (standalone) is likely to generate ~INR23b of cash flow from operations over

FY13-15, which renders strong cushion to its capex outflow. However, we expect the

company to fund a meaningful portion of the capex through debt, as its inorganic

growth strategy would necessitate surplus funds. Despite its ambitious growth plan,

DBEL has maintained a dividend payout of 18-20% over FY11-12).

DBEL to post 17% revenue and 20% EBITDA CAGR over FY13-15 (ex subsidiaries)


DBEL to generate operating cash flow of INR23b over FY13-15, limiting rise in leverage, despite huge capex

Dalmia Bharat

53January 2013

DBEL: Sum of the Parts valuations

INR m Valuation method Multiple FY13E FY14E FY15E

DBCL EV/EBITDA (x) 5 27,826 33,304 40,011

OCL EV/EBITDA (x) & 40% hold-co discount 5 4,734 5,665 6,573

Adhunik EV/Ton 70 4,871 4,871 4,871

Calcom EV/Ton 70 3,110 3,110 5,232

Total EV 40,540 46,949 56,687

Less: Pro-rata Net Debt 19,688 17,737 21,992

Total Equity Value 20,852 29,212 34,695

Fair value (INR/share) 257 360 427

Upside (%) 33.2 86.5 122.0

Implied EV/Ton (on pro-rata capacity) 63 70 69


Valuation & View Trading at very attractive valuation for fourth largest player

DBEL trades at very attractive valuations for highly efficient player who will evolve to

be fourth largest player by FY15. DBEL trades at an EV/ton of USD49/46 ton (v/s USD64/

56 for our Mid Cap Cement Universe and USD125/115 for our Full Cement Universe)

and 3.4x/4.1x FY14E/FY15E EBITDA (v/s 4.4x/3.5x EBITDA for our Mid Cap Cement

Universe and 7.4x/6.1x EBITDA for our Full Cement Universe).

Our target price implies 122% upside

Our SOTP value stands at INR427/share: (1) DCB and OCL at 5x FY15E EBITDA, and (2)

Adhunik and Calcom at USD70/ton (FY15E capacity; as against acquisition cost of

USD120-130/ton), implying equity value of INR1.8b for Adhunik and a negative

INR100m for Calcom (owing to high debt and lower utilization till FY14). We initiate

coverage with a Buy rating; our target price of INR427 implies 122% upside.

Dalmia Bharat

54January 2013

Dal

mia

Bh

arat

Ltd

- B

usi

nes

s st

ruct

ure

Dalmia Bharat

55January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 21,543 17,459 23,304 26,470 30,673 36,235

Change (%) 22.8 -19.0 33.5 13.6 15.9 18.1


% of Sales 78.7 79.1 76.2 75.3 74.5 74.0

EBITDA 4,596 3,648 5,556 6,547 7,836 9,414

Margin (%) 21.3 20.9 23.8 24.7 25.5 26.0

Depreciation 1,320 1,753 1,817 1,817 1,901 2,605

EBIT 3,276 1,895 3,739 4,730 5,936 6,809

Int. and Finance Charges 1,757 1,724 1,513 1,709 1,867 2,445

Other Income - Rec. 487 543 874 754 818 799

PBT bef. EO Exp. 2,006 714 3,099 3,775 4,887 5,162

EO Expense/(Income) 53 0 395 0 0 0

PBT after EO Exp. 1,954 714 2,704 3,775 4,887 5,162

Current Tax 77 86 832 1,510 1,955 2,065

Deferred Tax 604 525 396 0 0 0

Tax Rate (%) 34.9 85.5 45.4 40.0 40.0 40.0

Reported PAT 1,273 103 1,476 2,265 2,932 3,097

PAT Adj for EO items 1,307 103 1,691 2,265 2,932 3,097

Change (%) -2.2 -92.1 1,538.8 33.9 29.4 5.6

Margin (%) 6.1 0.6 7.3 8.6 9.6 8.5


Y/E March 2010 2011 2012 2013E 2014E 2015E


Total Reserves 14,098 27,615 28,746 30,965 33,893 37,049

Net Worth 14,260 27,777 28,908 31,127 34,056 37,212

Deferred Liabilities 3,074 715 989 989 989 989

Total Loans 28,961 18,890 16,008 22,608 29,608 26,608


Gross Block 34,587 37,765 38,208 40,373 41,373 53,373

Less: Accum. Deprn. 7,896 1,846 3,659 5,476 7,377 9,982

Net Fixed Assets 26,691 35,919 34,549 34,896 33,996 43,390

Capital WIP 3,846 1,167 1,165 3,000 9,000 2,000

Total Investments 7,248 6,592 11,935 21,077 21,077 21,077

Curr. Assets, Loans&Adv. 13,404 10,179 6,925 7,448 13,123 12,932

Inventory 7,074 2,976 2,615 3,321 3,848 4,546


Cash and Bank Balance 2,203 4,543 664 -605 3,792 1,907




Provisions 153 191 328 2,265 1,955 2,065

Net Current Assets 8,327 6,214 597 -1,459 3,953 2,343

Appl. of Funds 46,295 51,467 50,177 59,445 69,957 70,741

E: MOSL Estimates; * Adjusted for treasury stocks

Dalmia Bharat

56January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

EPS 16.1 1.3 20.8 27.9 36.1 38.1

Cash EPS 32.3 22.9 43.2 50.3 59.5 70.2

BV/Share 175.6 342.1 356.0 383.3 419.4 458.3

DPS 2.0 1.3 3.2 3.5 4.0 4.3

Payout (%) 14.9 114.3 20.5 14.6 12.9 12.9

Valuation (x) *

P/E 9.3 6.9 5.3 5.1

Cash P/E 4.5 3.8 3.2 2.7

P/BV 0.5 0.5 0.5 0.4

EV/Sales 1.0 1.1 0.8 0.9

EV/EBITDA 4.2 4.6 3.4 3.1

EV/Ton (US$) 44 55 50 46

Dividend Yield (%) 1.7 1.8 2.1 2.2

Return Ratios (%)

RoE 3.2 2.4 5.8 8.5 10.1 10.0

RoCE 9.5 5.4 10.1 11.1 11.5 11.9


Asset Turnover (x) 0.5 0.3 0.5 0.4 0.4 0.5

Inventory (Days) 119.9 62.2 41.0 45.8 45.8 45.8

Debtor (Days) 33 19 19 25 25 25

Leverage Ratio (x)

Current Ratio 2.6 2.6 1.1 0.8 1.4 1.2

Debt/Equity 2.0 0.7 0.6 0.7 0.9 0.7

* Adjusted for treasury stocks


Y/E March 2010 2011 2012 2013E 2014E 2015E


Interest/Dividends Recd. 487 543 874 754 818 799

Depreciation 1,320 1,753 1,817 1,817 1,901 2,605

Direct Taxes Paid -77 -2,971 -832 -1,510 -1,955 -2,065

(Inc)/Dec in WC -3,038 4,454 1,737 787 -1,016 -274


EO expense 455 -53 0 0 0 0

CF from Operating incl EO 2,423 5,622 7,479 7,312 6,641 8,962

(inc)/dec in FA -3,141 -499 -441 -4,000 -7,000 -5,000

(Pur)/Sale of Investments -1,612 656 -5,343 -9,142 0 0

CF from investments -4,752 157 -5,784 -13,142 -7,000 -5,000

Issue of Shares -19 8,475 -877 0 0 0

(Inc)/Dec in Debt 5,572 -10,072 -2,882 6,600 7,000 -3,000

Interest Paid -1,757 -1,724 -1,513 -1,709 -1,867 -2,445

Dividend Paid -189 -118 -303 -330 -377 -401

CF from Fin. Activity 3,607 -3,439 -5,575 4,561 4,756 -5,846

Inc/Dec of Cash 1,278 2,340 -3,880 -1,269 4,397 -1,884

Add: Beginning Balance 925 2,203 4,543 664 -605 3,792

Closing Balance 2,203 4,542 663 -605 3,792 1,907

India CementsCMP: INR88 TP: INR119 Buy


Cost saving triggers to enhance profitabilityTrading at steep discount; maintain Buy

India Cements (ICEM) is poised to benefit from multiple cost saving triggers, resulting

in an improvement in EBITDA/ton from INR948 in FY12 to INR1,078 by FY15.

It is likely to witness meaningful balance deleveraging - from net debt/equity of 0.8x in

FY13 to 0.5x in FY15. We expect net debt to decline from INR31.3b in FY13 to INR21.6b

in FY15.

ICEM trades at an EV of USD56/ton v/s USD64/ton for MOSL Mid Cap Cement Universe.

Maintain Buy; our target price of INR119 implies 35% upside.

Volume growth hinges on market recoveryWhile there are concerns of oversupply in the South, capacity addition is slowing

down significantly. We expect ICEM to post volume CAGR of 8% over FY12-15,

driven by pick-up in demand in the South (especially in Andhra Pradesh, which

accounts for 18% of its sales) and in the North (Trinetra Cement). Given the weak

market dynamics and lower prevailing utilization level (~68%), however, the

southern region will remain susceptible to pricing volatility. We have assumed

INR13/12 per bag increase in realizations in FY14/15.

Multiple cost saving triggers to enhance profitabilityICEM has the highest cost structure in our Mid Cap Cement Universe due to (1)

higher energy cost (high dependence on grid power which has been unreliable

off-late), (2) rise in freight cost (increase in lead distance), and (3) negative

operating leverage (low utilization). However, from FY14, we expect it to derive

meaningful benefits from multiple cost saving triggers such as (1) commencement

of the Andhra Pradesh CPP (48MW) by March 2013, coupled with ramp-up in TN

CPP (captive power plants to account for ~80% of power requirement, and help

save INR1/unit), (2) stabilization of the recently commenced Indonesian coal

mine (to help save USD10-15/ton on cost of imported coal), and (3) softening of

imported coal prices (60% of fuel mix). We expect ICEM's EBITDA/ton to improve

from INR948 in FY12 to INR1,078 by FY15.

IPL offers option value; yet, non-core capital allocation a concernWhile we do not assign any value to its IPL team, based on the floor valuation of

USD225m for the auction of the last two IPL teams, ICEM's IPL team can be valued

at INR38/share (~43% of the CMP). However, its investments in non-core activities

- capital allocation to shipping for ferrying own coal, investment in IPL, significant

inter-group company loans, and potential diversification into the infrastructure

business raise concerns of suboptimal capital efficiency.

Moderating capex, strong CFO to result in deleveragingICEM is likely to witness meaningful balance deleveraging - from net debt/equity

of 0.8x in FY13 to 0.5x in FY15, driven by no meaningful capex (INR11b over FY13-

15) and strong cash flow from operations (INR28.6b). We expect net debt to

decline from INR31.3b in FY13 to INR21.6b in FY15.


Promoter 28.2 25.8 25.8

Dom. Inst 19.8 19.1 16.7

Foreign 32.9 36.4 35.4

Others 19.1 18.7 22.2


Sa les 45.3 52.4 60.9

EBITDA 8.8 10.8 12.9

NP 2.1 3.4 5.0

Adj. EPS (INR) 7.7 12.6 18.1

EPS Gr. (%) 231.3 31.5 137.0

BV/Sh (INR) 145.3 153.3 166.8

RoE (%) 5.1 7.8 10.8

RoCE (%) 8.5 10.3 12.7

Payout (%) 45.7 32.1 21.8

Valuations

P/E (x) 11.5 7.0 4.9

P/BV (x) 0.6 0.6 0.5

EV/EBITDA (x) 6.1 4.6 3.4

EV/Ton (USD) 68 65 57

Stock Info

Bloomberg ICEM IN



1,6,12 Rel. Perf. (%) -3/-8/0

M.Cap. (INR b) / (USD b) 27/0.5

BSE SENSEX S&P CNX

19,987 6,057

5-S framework5-S score, Rank 58 8


Target price & upsideBase case INR119 35%


57January 2013

Update | Sector: Cement

India Cements

58January 2013

Trading at steep discount; maintain BuyICEM trades at an FY15E EV of USD56/ton (v/s USD64/ton for MOSL Mid Cap Cement

Universe and USD111/ton for overall Cement Universe) and 3.9x FY15E EBITDA (v/s


overall Cement Universe). We expect cost saving catalysts and steady demand

recovery to drive revenue/EBITDA/PAT CAGR of 16%/21%/54% over FY13-15. We value

ICEM at INR119/share (4x FY15E consolidated cement EBITDA). Maintain Buy; our

target price implies 35% upside.

About India Cements (ICEM)

India Cements (ICEM) is India's fifth largest cement company in terms of existing capacity.

It has 14.1mtpa in the South and owns 61% stake in Trinetra Cement (INR7b investment

in June 2011), which has a 1.5mtpa plant in the North (Rajasthan).

The South accounts for ~80% of its dispatches (ICEM is the dominant player in the South,

with ~12% volume share), with the West and the East accounting for the balance.

ICEM also owns Chennai Super Kings, a cricket team in the Indian Premier League (IPL).

ICEM: 5-S Analysis5-S Score Rank Average


2. Sales Mix [20] 12 9 15




5-S Score 58 8 65


India Cements has the potential to multiply 2.5x in 2-3 years, driven by:

Savings of ~INR850m (@ USD30/ton for 0.5m tons) from captive coal block in

Indonesia.

Valuing IPL @ USD200m, if monetized.

Re-rating, led by improvement in core profitability and monetization of IPL.

ICEM: Blue Sky Scenario (FY15)Parameter INR m Remark

S/A EBITDA 13,750 Assuming savings of ~INR850m from captive coal mine

from Indonesia

Trinetra EBITDA (pro-rata) 839

EV @ 4x EBITDA 72,944

Value for IPL 11,023 Valuing IPL at USD200m


Equity value 62,323

Target Price (INR) 217

Upside (%) 146

Implied EV/Ton (USD) 87

Blue Sky Scenario India Cements

India Cements

59January 2013


Size & Scalability [23 / 30] ICEM has existing capacity of 14.1mtpa across 7 plants

in Tamil Nadu and Andhra Pradesh.

It owns 61% stake in Trinetra Cement, which has a

1.5mtpa plant in the North (Rajasthan).

It is operating at lower utilization of 67% owing to

weak market dynamics.

While there are concerns of oversupply in the South,

capacity addition is slowing down significantly. We

expect ICEM to post moderate volume CAGR of 8%

over FY12-15.

Strategic & Other Issues [3 / 10] While we do not assign any value to its IPL team,

based on the floor valuation of USD225m for the

auction of the last two IPL teams, ICEM's IPL team

can be valued at INR38/share (~43% of the CMP).

However, its investments in non-core activities -

capital allocation to shipping for ferrying own coal,

investment in IPL, significant inter-group company

loans, unutilized treasury stocks, and potential

diversification into the infrastructure business raise

concerns of suboptimal capital efficiency.

CCI has levied a penalty of INR1.9b on ICEM along

with other cement companies on alleged

cartelization.

Sales Mix [12 / 20] The South accounts for ~80% of its dispatches (ICEM

is the dominant player in the South, with ~12%

volume share), with the West and the East

accounting for the balance. Andhra Pradesh accounts

for 18% of its sales.

Given the weak market dynamics and lower

prevailing utilization level (~68%), the southern

region will remain susceptible to pricing volatility.

We have assumed INR13/12 per bag increase in

realizations in FY14/15.

Strength of Financials [10 / 20] EBITDA/ton should improve from INR948 in FY12 to

INR1,078 by FY15.

Expect cost saving catalysts and steady demand

recovery to drive revenue/EBITDA/PAT CAGR of 16%/

21%/54% over FY13-15.

Net debt/equity likely to decline from 0.8x in FY13

to 0.5x in FY15, driven by no meaningful capex

(INR11b over FY13-15) and strong cash flow from

operations (INR29b).

Expect ~570bp uptick in RoE to 10.8% over FY13-15.

Supply Chain Efficiencies [10 / 20] ICEM has the highest cost structure in our Mid Cap

Cement Universe due to (1) higher energy cost (high

dependence on grid power which has been

unreliable off-late), (2) rise in freight cost (increase

in lead distance), and (3) negative operating

leverage (low utilization).

However, from FY14, we expect it to derive benefits

from multiple cost saving triggers such as (1)

commencement of the Andhra Pradesh CPP (48MW)

by March 2013 (CPP to account for ~80% of power

requirement v/s ~40% in FY12, and help save INR1/

unit), (2) stabilization of the recently commenced

Indonesian coal mine (to help save USD10-15/ton

on cost of imported coal), and (3) softening of

imported coal prices (60% of fuel mix).

Valuation & View [89 / 100] ICEM trades at an EV of USD56/ton (v/s USD64/ton

for MOSL Mid Cap Cement Universe and USD111/

ton for overall Cement Universe) and 3.9x FY15E

EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap

Cement Universe and 5.9x FY15E EBITDA for our Full

Cement Universe).

We value ICEM at INR119/share (4x FY15E

consolidated cement EBITDA). Maintain Buy; our

target price implies 35% upside.

We do not ascribe any value to the IPL team and

Indonesian captive coal mine.

Our Blue Sky scenario analysis indiactes for potential

2.5x in 2-3 years time with target price of INR217.

India Cements

60January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 37,711 35,007 42,034 45,343 52,448 60,863

Change (%) 10.0 -7.2 20.1 7.9 15.7 16.0


% of Sales 78.1 87.6 78.5 80.6 79.3 78.8

EBITDA 8,265 4,337 9,034 8,775 10,831 12,900

Margin (%) 21.9 12.4 21.5 19.4 20.7 21.2

Depreciation 2,331 2,440 2,513 2,847 3,156 3,245

EBIT 5,934 1,897 6,521 5,928 7,675 9,655


Other Income - Rec. 370 396 193 225 350 650

PBT bef. EO Exp. 4,877 876 3,846 3,182 4,871 7,184

EO Expense/(Income) -436 -23 36 200 0 0

PBT after EO Exp. 5,313 899 3,810 2,982 4,871 7,184

Current Tax 1,633 168 378 894 1,364 2,012

Deferred Tax 137 50 502 119 146 216

Tax Rate (%) 33.3 24.2 23.1 34.0 31.0 31.0


Change (%) -32.9 -79.6 345.8 -29.0 60.1 47.5

Margin (%) 8.6 1.9 7.0 4.6 6.4 8.1


Y/E March 2010 2011 2012 2013E 2014E 2015E

Equity Share Capital 3,072 3,072 3,072 3,072 3,072 3,072

Fully Diluted excl Treasury stock 2,872 2,872 2,872 2,872 2,872 2,872

Total Reserves 38,286 37,826 37,604 38,674 40,957 44,836

Net Worth 41,358 40,898 40,676 41,746 44,029 47,907


Total Loans 21,327 24,561 27,010 35,429 35,279 35,129


Gross Block 57,102 59,277 65,019 68,970 74,470 76,470

Less: Accum. Deprn. 17,916 20,932 23,690 26,537 29,693 32,938

Net Fixed Assets 39,186 38,345 41,329 42,433 44,777 43,532

Capital WIP 7,029 3,088 1,451 2,000 1,000 1,000



Inventory 4,478 4,973 5,258 5,901 6,610 7,670


Cash and Bank Balance 538 331 29 4,170 7,094 13,485


Real Estate Projects WIP 204 204 204 204 204 204



Other Current Liabilities 2,028 4,493 3,916 4,969 5,748 6,670

Provisions 1,099 1,265 1,325 1,793 2,442 3,090


Appl. of Funds 65,378 68,201 70,931 80,538 82,818 86,762


India Cements

61January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

Consol EPS 11.3 2.3 9.6 7.7 12.6 18.1

Cash EPS 19.4 10.8 19.0 17.2 22.7 28.6

BV/Share 144.0 142.4 141.6 145.3 153.3 166.8

DPS 2.0 1.5 2.0 2.5 3.0 3.0

Payout (%) 20.3 79.2 24.5 45.7 32.1 21.8

Valuation (x) *

P/E 9.2 11.5 7.0 4.9

Cash P/E 4.6 5.1 3.9 3.1

P/BV 0.6 0.6 0.6 0.5

EV/Sales 1.2 1.2 1.0 0.7

EV/EBITDA 5.7 6.1 4.6 3.4

EV/Ton (US$) 63 68 65 57

Dividend Yield (%) 2.3 2.8 3.4 3.4

Return Ratios (%)

RoE 8.4 1.6 7.3 5.1 7.8 10.8

RoCE 10.6 3.6 10.1 8.5 10.3 12.7


Asset Turnover (x) 0.6 0.5 0.6 0.6 0.6 0.7

Inventory (Days) 43.3 51.9 45.7 47.5 46.0 46.0

Debtor (Days) 22 27 18 28 26 26

Leverage Ratio (x)

Current Ratio 2.5 3.3 2.7 3.0 2.8 2.8

Debt/Equity 0.5 0.6 0.7 0.8 0.8 0.7



Y/E March 2010 2011 2012 2013E 2014E 2015E



Direct Taxes Paid -1,443 -168 -378 -894 -1,364 -2,012

(Inc)/Dec in WC -4,867 -9,349 5,232 -3,813 1,989 1,201

CF from Operations 2,422 -4,783 14,080 4,292 11,806 12,739

EO expense 0 23 -36 -200 0 0

CF from Operating incl EO 2,422 -4,760 14,044 4,092 11,806 12,739

(inc)/dec in FA -2,961 2,342 -3,860 -4,500 -4,500 -2,000

(Pur)/Sale of Investments -1,990 1,537 -6,917 0 0 0

CF from investments -4,952 3,878 -10,777 -4,500 -4,500 -2,000

Issue of Shares 2,831 -603 -2,432 0 0 0

(Inc)/Dec in Debt 1,878 3,233 2,449 8,419 -150 -150

Interest Paid -1,833 -1,417 -2,867 -2,971 -3,154 -3,121

Dividend Paid -661 -539 -719 -898 -1,078 -1,078

CF from Fin. Activity 2,215 675 -3,570 4,549 -4,382 -4,349

Inc/Dec of Cash -314 -207 -302 4,142 2,924 6,390

Add: Beginning Balance 852 538 331 29 4,170 7,094

Closing Balance 538 331 29 4,170 7,094 13,485

JK Cement

62January 2013




Sa les 30.6 37.5 48.3

EBITDA 5.9 8.1 11.0

NP 2.1 3.0 4.1

Adj EPS (INR) 30.6 42.8 60.3

EPS Gr. (%) 19.2 40.0 40.8

BV/Sh. (INR) 241.9 277.7 329.8

RoE (%) 13.3 16.5 19.4

RoCE (%) 16.1 17.2 19.1

Payout (%) 20.9 16.3 11.6

Valuation

P/E (x) 11.0 7.9 5.6

P/BV (x) 1.4 1.2 1.0

EV/EBITDA (x) 5.1 4.5 4.4

EV/Ton (USD) 69 77 76

Stock Info

Bloomberg JKCE IN



1,6,12 Rel. Perf. (%) 13/28/-7

M.Cap. (INR b) / (USD b) 24/0.4

BSE SENSEX S&P CNX

19,987 6,057

Expansion to aid volume growth; white cement a cash cowSOTP-based target price of INR554 implies 64% upside; Buy

JK Cement (JKCE) has a favorable market mix, with North and West India accounting for

~70% of dispatches. It has no exposure to the underperforming Andhra Pradesh market.

Its North India plants are operating at over 90% capacity and ongoing brownfield capacity

expansion, which is likely to be completed by 2Q/3QFY15, would aid volume growth.

Its white cement business is a cash cow. The stable operating income of INR2.5b-3b per

year from white cement would render meaningful cushion to JKCE's debt servicing

during the capex cycle.

We estimate 26% revenue CAGR over FY13-15 and expect an uptick in gray cement

profitability with (1) increasing contribution from new plants, and (2) improving

operating leverage.

JKCE currently trades at 4.3x FY15E EBITDA. Our SOTP-based target price is INR554 -

64% upside. We initiate coverage with a Buy rating.

Ongoing expansion, operating leverage to drive up volumes, profitabilityJKCE has a favorable market mix, with North and West India accounting for ~70%

of its dispatches. Its Karnataka plant also supplies mainly to the West

(Maharashtra) and to relatively better placed states (Karnataka) in the South. It

has no exposure to the underperforming Andhra Pradesh market. The company's

North India (Rajasthan) plants are operating at over 90% capacity and there is

limited scope for production growth until the commissioning of the ongoing

brownfield expansion in 2Q/3QFY15. However, ramp up in the Karnataka plant

(operating at 52%/67% in FY12/2QFY13) renders meaningful cushion to volume

growth till FY14. We estimate 26% revenue CAGR over FY13-15 and expect an

uptick in gray cement profitability with (1) increasing contribution from the more

efficient new plants, and (2) improving operating leverage. We model ~24% CAGR

in EBITDA/ton to INR1,134/1,395 (INR813/896 for gray cement) in FY14/15E as

against INR914 (INR653 for gray cement) in FY13E.

White cement business a cash cowJKCE is the second largest player in the duopolistic white cement industry in

India, with 40% market share. It has a production capacity of 0.4mtpa in India,

which will increase to 0.6mtpa by FY14. It is also adding a 0.6mtpa white cement

plant in UAE by December 2014 to address huge international demand. We expect

JKCE's white cement volumes to grow at 20% CAGR over FY13-15. We estimate

25% revenue/EBITDA CAGR for its white cement division over FY13-15, taking

EBITDA to INR3.2b in FY15 (v/s INR1.6b/INR2.1 in FY12/13E). The stable operating

income of INR2.5b-3b per year from white cement would render meaningful

cushion to JKCE's debt servicing during the capex cycle.

Expect de-leveraging from FY15We expect JKCE's net debt to increase from INR8.5b (net debt-equity of 0.6x) in

FY12 to ~INR25.7b (net debt-equity of 1.1x) by FY15 on the back of ~INR27.6b

capex over FY13-15. However, FCF generation from FY15 should trigger de-

leveraging. Currently, there are no meaningful capex plans beyond FY15.


Promoter 66.6 66.6 66.2

Dom. Inst 9.1 7.2 7.1

Foreign 12.4 12.1 12.9

Others 11.9 14.2 13.8






JK Cement

63January 2013

Capital efficiency to improveJKCE's capital efficiency is superior compared to its mid-cap peers, largely due to (1)

old plants, (2) high utilization, and (3) robust profitability of its white cement

business. We expect its capital efficiency to improve by 3-6pp over FY13-15 to ~19%.

Full benefit of new capacities would drive further capital efficiency improvement.

SOTP-based target price of INR554 implies 64% upside; BuyJKCE currently trades at 4.3x FY15E EBITDA. We value its gray cement business at 5x

FY15E EBITDA and white cement business (both domestic and UAE) at 7x FY15E

EBITDA. Our SOTP-based target price is INR554 - 64% upside. At our SOTP-based

target price, the stock would trade at an EV of USD57/ton on gray cement capacity

and USD100/ton on blended capacity. We initiate coverage with a Buy rating.

About JK Cement

JKCE is one of India's leading cement producers, with 7.5mtpa of gray cement capacity -

4.5mtpa in the North (Rajasthan) and 3mtpa in the South (Karnataka). It is the second largest

white cement manufacturer in India, with a capacity of 0.4mtpa (0.6mtpa by FY14).

Its ongoing 3mtpa split grinding expansion in the North would take its gray cement

capacity to 10.5mtpa by FY15. JKCE is also expanding its international footprint through

a 0.6mtpa Greenfield white cement plant in UAE to address rising international demand.

JKCE: 5-S Analysis5-S Score Rank Average


2. Sales Mix [20] 16 4 15




5-S Score 69 2 65


Blue Sky Scenario JK CementJK Cement can multiply 2.2x in two years, driven by:

Commissioning of white cement plant at UAE and be-bottlenecking.

Improving efficiency, driven by new gray cement plant in Karnataka and

commissioning of new capacities in Rajasthan (including split grinding units).

Deleveraging, driven by completion of capex and increase in cash flow from

operations due to higher utilization during the upturn in the cement cycle.

Improvement in capital efficiency, as capex starts contributing fully from FY15.

JKCE: Blue Sky ScenarioEV/EBITDA FY14E FY15E





EV (INR m) 54,419 74,543







JK Cement

64January 2013

Size & Scalability [23 / 30] Gray cement capacity of 7.5mtpa: (1) 4.5mtpa in the

Rajasthan, and (2) 3mtpa in the Karnataka.

Adding two split grinding units of 1.5mtpa each in

Jhajjar, Haryana (by September 2014) and Mangrol,

Rajasthan (by December 2014).

North-based capacity is operating at 90%+ utilization.

Ongoing brownfield capacity addition of 3mtpa kicks

in over 2Q/3QFY15. The South plant, which has seen

utilization increasing from ~52% in FY12 to 67% in

2QFY13, would aid volume growth till FY14.

Volumes grew 17.6% YoY in 1HFY13. We have

modeled 10% CAGR over FY13-15; the full impact of

planned addition would be evident in FY16.

Strategic & Other Issues [10 / 10] Second-largest white cement player, with ~0.4mtpa

capacity (0.6mtpa by FY14) and ~40% market share.

It also manufacturers putty (0.3mtpa capacity).

Access to high quality limestone reserves gives a

strong competitive edge.

It is installing 0.6mtpa of white cement capacity in

UAE to cater to the rising export demand.

Volume growth has been strong - 17.5%/11% for

white cement and 39%/28% for putty in 1HFY13/FY12.

We model 20% CAGR for white cement over FY13-15

(ex UAE plant), taking EBITDA to INR3.2b in FY15.

CCI has levied a penalty of INR1.3b on JKCE along with

other cement companies on alleged cartelization.

Sales Mix [16 / 20] Dispatch mix: North (~49%), Central (18%), West

(~18%) and South (15%).

Due to the proximity of its southern plant to the

relatively superior West India market, 55-60% of its

dispatches are to this region - mainly Maharashtra.

It has no exposure to the underperforming Andhra

Pradesh market.

JKCE witnessed weak realization growth over

1HFY13. We model in INR9/13/10 per bag increase in

average realizations over FY13/14/15.

The rising proportion of dispatches to South and

West India markets from the Karnataka plant would

also have a positive impact on overall realizations.

Strength of Financials [10 / 20] We expect 26%/37%/40% CAGR in JKCE's revenue/

EBITDA/PAT over FY13-15. We model ~24% CAGR in

EBITDA/ton to INR1,134/1,395 (INR813/896 for gray

cement) in FY14/15E as against INR914 (INR653 for

gray cement) in FY13E.

Net debt would increase to ~INR25.7b (net debt-

equity of 1.1x) by FY15 on the back of ~INR27.6b

capex over FY13-15.

FCF generation from FY15 should trigger de-

leveraging.

JKCE's capital efficiency is superior compared to its

mid-cap peers. We estimate further expansion of 3-

6pp over FY13-15.

Supply Chain Efficiencies [10 / 20] Sub-par cost structure due to old plants (lower

operating efficiency) and higher lead distance/

freight cost (absence of split grinding).

Has captive power capacity of 106MW, addressing

~80% of its total requirement. Fuel mix is skewed

towards pet coke and imported coal (~60%).

Freight mix is skewed towards road transport

(~80%), though the company is focusing on

increasing the share of rail transport.

We model a modest ~3% cost CAGR in gray cement

over FY13-15, led by (1) better operating efficiency

in new plants, and (2) lower lead distance.

Valuation & View [81 / 100] JKCE currently trades at 4.3x FY15E EBITDA and USD76/

ton.

We value its gray cement business at 5x FY15E EBITDA

and white cement business at 7x FY15E EBITDA. Our

SOTP-based target price is INR554 - 64% upside.

Our blue sky scenario suggests that JKCE can deliver

over 100% returns in two years, led by (a)

commissioning of its white cement plant at UAE, (b)

improving efficiency, driven by new plant in

Rajasthan, (c) balance sheet deleveraging, driven

by completion of ongoing capex and significant

increase in cash flows from operations due to higher

utilization during the upturn in the cement cycle,

and (d) improvement in capital efficiency, as capex

incurred starts contributing fully to P&L from FY15.


JK Cement

65January 2013

Size & Scalability: Expansion in the North to boost volumes from FY15E Currently has gray cement capacity of 7.5mtpa

JKCE has existing gray cement capacity of 7.5mtpa across (1) three integrated cement

plants with an aggregate capacity of 4.5mtpa in the North (Rajasthan) - 3.3mtpa in

Nimbahera, 0.75mtpa in Mangrol, and 0.47mtpa in Gotan, and (2) a 3mtpa plant in the

South (Mudhol, Karnataka). JKCE has 5.6mtpa of clinker capacity - 2.2mtpa in the South

and the balance in the North.

Limited scope to enhance production in the North until brownfield expansion

Its North-based capacity is operating at 90%+ utilization. The scope to enhance

production is limited until the ongoing brownfield capacity addition of 3mtpa kicks in

over 2Q/3QFY15. The capacity addition will be distributed between two split grinding

units of 1.5mtpa each in Jhajjar, Haryana (to be operational by September 2014) and

Mangrol, Rajasthan (to be operational by December 2014).

Immediate volume growth hinges on ramp-up of production in the South

JKCE's Karnataka plant is currently operating at ~65%, in line with the industry capacity

utilization in South India. It has scaled up from ~52% utilization in FY12 to 67% in

2QFY13. We expect the utilization of JKCE's Karnataka plant to increase further, as 55-

60% of its dispatches cater to the superior western markets like Maharashtra. The

company has no exposure to Andhra Pradesh.

Utilization of northern plants at over 90%;Volume growth to be driven by ramp-up in southern plant southern plant operating at ~65%


Expect 10% CAGR in gray cement volumes over FY13-15

JKCE posted strong volume growth of 17.6% YoY in 1HFY13, led by steady demand in

the North and ramp-up of its Karnataka plant. We have modeled 10% volume CAGR

over FY13-15. We expect the full impact of the ongoing capacity addition to benefit

volume growth in FY16.

JK Cement

66January 2013

Sales Mix: Market mix favorable with 70% from North and West India Market mix favorable; no exposure to Andhra Pradesh

JKCE has a favorable market mix, with North and West India accounting for ~70% of its

dispatches. The break-up of its dispatches is as follows: North (~49%), Central (~18%),

West (~18%) and South (~15%). The key contributing states are Rajasthan (21%), Haryana

(17%), Maharashtra (16%), Karnataka (13%), Madhya Pradesh (9%) and Uttar Pradesh

(9%). It has no exposure to the underperforming Andhra Pradesh market.

To benefit from better demand-supply outlook in the North

JKCE should benefit from better demand-supply outlook in the North over the next 2-

3 years. Due to the proximity of its southern plant to the relatively superior West

India market, 55-60% of its dispatches are to this region - mainly Maharashtra and

Gujarat. Its dispatches within South India are to better performing states like Karnataka

and it has no exposure to the subdued Andhra Pradesh market.

Sustenance of pricing discipline a key factor in the South

Sustenance of pricing discipline would be a key factor in South India, especially given

the (1) low utilization, and (2) depressed outlook for the largest cement consuming

state, Andhra Pradesh. Any negative cascading effect could disturb the stability of

the West and Central India markets.

Expect INR9/13/10 per bag increase in average realizations over FY13/14/15

JKCE witnessed weak realization growth over 1HFY13, with moderate rise of INR222/

bag since March 2012, followed by a sharp INR10-15/bag price drop in the North in

3QFY13. However, ex-Andhra Pradesh, the price decline in the southern states has

been relatively moderate. We expect cement prices to recover in the North in 4QFY13

along with volume uptick. We model in INR9/13/10 per bag increase in average

realizations over FY13/14/15. The rising proportion of dispatches to South and West

India markets from the Karnataka plant would also have a positive impact on overall

realizations.

Rising proportion of dispatches to West and SouthIndia to improve realizations Market mix evenly distributed; no exposure to Andhra Pradesh


JK Cement

67January 2013

Supply Chain Efficiencies: High cost structure; new plants to enhance efficiency Sub-par cost structure due to old plants

JKCE operates at sub-industry level cost structure, disadvantaged by (1) older plants,

with inferior operating efficiency, and (2) absence of split grinding units, which

augments freight cost, given high lead distance of 625-700km. Weaker operating

efficiencies are signified by (1) JKCE's electricity consumption of ~90Kwh/ton v/s 77-

85Kwh/ton for its midcap peers, and (2) fuel consumption of ~900Kcal/kg v/s ~750Kcal/

kg for efficient peers.

Realizations historically lower than peers' average Better demand dynamics in North and West India (utilization; %)



JKCE has captive power capacity of 106MW (thermal: 93MW; waste heat recovery:

13MW) across four locations, addressing ~80% of its total requirement. Almost 60% of

fuel requirement is met with pet coke and imported coal. Its southern plant's proximity

to ports gives it easy access to imported coal. Its current freight mix is skewed towards

road transport (80%), though the management is focusing on increasing the share of

rail transport.

High lead distance, weak energy efficiency results in highJKCE's cost of production higher than MOSL average (INR/ton) freight and energy costs

JK Cement

68January 2013

Limited strategic cost triggers

JKCE's total cost per ton escalated ~7% YoY in 1HFY13 and increased at a similar CAGR

over FY10-12, led by industry-wide escalation across cost factors. Given the continued

operating overhangs for its older plants, we do not see any major cost saving catalysts

in the near term.

However, new plants and split grinding units to enhance efficiency

As the contribution of its 3mtpa southern plant (commissioned in FY10) and two

upcoming split grinding facilities (total capacity of 3mtpa) in Rajasthan increases,

overall operating efficiencies should improve. Currently, JKCE's lead distance is 650km

in the North and 450km in the South. With split grinding units in Rajasthan, its average

lead distance and resultantly, freight cost should moderate. It should also benefit

from the declining trend in imported coal / pet coke parity prices (down ~13% YTD

FY13 in INR terms).

Expect moderate growth in cost of gray cement production

We model a moderate ~3% CAGR in cost of gray cement production over FY13-15,

which is attributable to (1) moderation in cost inflation, (2) benefit of new plants as

discussed above, and (3) operating leverage in the southern plant, which is ramping

up.

Fuel mix skewed towards pet coke Energy efficiency lower than peers (Kwh/ton)


Captive power plants

Location Capacity (MW) Type

Gotan 7.5 Thermal

Nimbhera 20 Thermal

Bamania 15 Thermal

Muddapur 50 Thermal

Nimbahera 13 Waste Heat recovery

Total 105.5


JK Cement

69January 2013

Strategic & Other Issues: Number 2 in duopolistic white cement market Leadership in high potential white cement market

JKCE is the second-largest player in the domestic white cement market, which is a

duopoly, with UltraTech (0.55mtpa capacity) being the leader. JKCE enjoys ~40% market

share in this segment, with 0.4mtpa of existing capacity at Gotan (Rajasthan). Ongoing

brownfield expansion of 0.2mtpa will take its total white cement capacity to 0.6mtpa

by FY14. While access to high quality limestone reserves gives JKCE a strong

competitive edge, the prevailing strong demand (both domestic and export markets)

renders huge growth visibility. It also manufacturers putty and has an installed capacity

of 0.3mtpa.

White cement offers strong demand potential

Market Size & Supply

Installed capacity: 1mtpa

Only two major producers: UltraTech Cement

and JK Cement

Domestic sales: 0.8mtpa

Export quantity: 0.15mtpa

Export markets: South Asia, Middle East and

Africa

Entry of new players remote as:

Special quality limestone required

High investment costs

Problems in mine allocation

Growth Drivers

White cement demand growing at 10% per year;

growth drivers:

Higher per-capita consumption

Demand from wall putty, which is

growing at 30% per year

Higher demand from infrastructure development

in Qatar and the Middle East

JK Cements

Current market share: 40%

Pan-India reach with established brand

White cement contributes 20-25% of sales

and 30-35% of profitability

White cement contribution sufficient to

service JKCE's overall interest liability and

dividend payout


Capacity expansion to aid strong growth

JKCE's white cement business has posted strong growth over the last five years (FY07-

10 CAGR of 4% improving to 15% over FY10-13). White cement volumes grew 17.5%/

11% while putty volumes grew 39%/28% in 1HFY13/FY12. Currently, JKCE is operating

at 94%/60% capacity utilization in white cement/putty. We expect JKCE's white cement

business to continue registering strong growth on the back of (1) steady domestic

demand growth of 10%+, (2) ongoing capacity expansion of 0.1mtpa in each of FY13

and FY14, taking its total white cement capacity to 0.6mtpa and putty capacity to

0.5mtpa, (3) higher export market boost, and (4) strong brand equity and distribution

network.

We model 20% CAGR for white cement and 25% CAGR for putty over FY13-15 (ex UAE

plant). The segment enjoys ~30% EBITDA margin (white cement and putty combined).

We expect JKCE's white cement division to post 25% revenue/EBITDA CAGR over FY13-

15, taking EBITDA to INR3.2b in FY15 (v/s INR1.6b/INR2.1 in FY12/13E), which would

render meaningful cushion to its debt servicing during the capex cycle.

JK Cement

70January 2013

Expanding overseas footprint to augment export market pie

Strong demand for white cement in both the domestic and overseas markets

(especially SAARC countries, Middle East, South Africa, Kenya, Tanzania, etc) has been

the key driver for JKCE's overseas greenfield project at Fujaira (UAE) in a 90:10 JV with

the Government of Fujaira. It is installing 0.6mtpa of white cement capacity (flexible

dual process, with potential 0.9mtpa of gray cement capacity) to equip itself to cater

to the rising export demand. The management's strategy would be to keep existing

capacity in India to entirely focus on domestic demand. The UAE plant is likely to

commence operations by December 2013. Assuming 50% utilization in FY15 and

investment of USD147m, we estimate ~17% RoCE and ~30%+ RoE for the UAE venture

(we have assumed zero income tax and ~7% cost of USD-denominated loan of

USD97m).

Strength of Financials: Net debt to peak at ~INR25b over capex cycle Ongoing expansion to help scale up growth

We expect 26%/37%/40% CAGR in JKCE's revenue/EBITDA/PAT over FY13-15 as against

19%/10%/-1.6% CAGR over FY10-13. The healthy scale up would largely be attributable

to sustained volume growth, driven by added capacity and growing contribution from

white cement. Moreover, the full impact of upcoming gray cement capacity would aid

further growth in FY16; we model only partial benefit of spilt grinding expansion in

FY15.

Profitability to witness steady improvement

JKCE is witnessing steady growth in profitability after bottoming out in FY11, with

blended EBITDA/ton of INR511 (INR306 in gray cement). Its white cement business,

with steady sales growth and robust margins, adds meaningful resilience to

profitability. The segment contributes 20-25% of overall sales and 30-35% of EBITDA.

In the gray cement segment, despite no major cost saving trigger, we expect an uptick

in profitability on account of (1) rising sales contribution from the Karnataka plant,

with higher realizations and profitability, (2) improving operating leverage through

scale-up in utilization, (3) higher operating efficiency in newer plants, and (4) expected

moderation in variable cost inflation. We model ~24% CAGR in EBITDA/ton to INR1,134/

1,395 (INR813/896 for gray cement) in FY14/15E as against INR914 (INR653 for gray

cement) in FY13E.

Strong historical growth to continue in white cement Expect 25% EBITDA CAGR over FY13-15


JK Cement

71January 2013

Ongoing capex to drive peak net debt to ~INR26b

JKCE's split grinding units of 1.5mtpa each in Jhajjar (to be operational by September

2014) and Mangrol (to be operational by December 2014) involve a capex of ~INR17.3b

(~USD105/ton) over FY13-15. The project would also include 25MW coal-based thermal

power plant, 9MW waste heat recovery-based power plant and railway siding at each

unit. JKCE is also undertaking brownfield expansion of 0.2mtpa in white cement, with

total capex of ~INR2.5b (~INR1.5b already incurred; balance to be incurred in FY14).

Both the expansions would reduce lead distance while catering to northern states.

The company has acquired land, obtained mining leases, and placed orders for the

plant and equipment. 60-70% of the capex would be debt-funded.

JKCE's UAE expansion would involve a capital expenditure of ~USD147m by December

2014, and it has already tied up for 2/3rd of the funding through debt (~USD97m). Till

date, it has incurred ~USD30m of total equity contribution of USD49m. EPC contract

has been awarded and civil and mechanical work is progressing on schedule. The

expansion will be key to cater to the Middle East and North African white cement

demand and infrastructure development projects.

EBITDA/ton to increase with cost moderation, profitable sales mix and higher utilization

Capex schedule over FY13-15 (INR b)… …to augment net debt significantly

JK Cement

72January 2013

Expect deleveraging from 2HFY15

We model capex of ~INR17.8b over FY14-15, following ~INR9.8b in FY13, which would

augment JKCE's net debt to ~INR25.7b (net debt-equity of 1.1x) by FY15 v/s INR8.5b

(net debt-equity of 0.6x) in FY12. The company is likely to generate FCF from FY15,

once the current capex cycle gets completed and operations at new plants begin,

triggering de-leveraging. Currently, there are no meaningful capex plans beyond FY15.

Expect JKCE to generate FCF from FY15 (INR b) Payout ratio healthy, with 1.9% yield (%)


Capital efficiency to improve 3-6pp over FY13-15

JKCE's capital efficiency is superior compared to its mid-cap peers, largely due to (1)

old plants, (2) high utilization, and (3) robust profitability of its white cement business.

We expect its capital efficiency to improve by 3-6pp over FY13-15 to ~19% on the back

of a steady volume growth driven by ongoing expansion. Full benefit of expanded

capacities could result in further improvement in capital efficiency in FY16. We have

modeled only a partial benefit of upcoming capacity in FY15.

Superior RoCE among mid-cap peers (%) Capital efficiency to improve 3-6pp over FY13-15


JK Cement

73January 2013

Valuation & View SOTP-based target price of INR554 implies 64% upside

JKCE currently trades at 4.3x FY15E EBITDA. We value its gray cement business at 5x

FY15E EBITDA and white cement business (both domestic and UAE) at 7x FY15E EBITDA.

Our SOTP-based target price is INR554 - 64% upside. At our SOTP-based target price,

the stock would trade at an EV of USD57/ton on gray cement capacity and USD100/ton

on blended capacity.

JK Cement: SOTPEV/EBITDA FY14E FY15E





EV (INR m) 46,273 63,596








JK Cement

74January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 18,268 20,831 25,379 30,648 37,534 48,300

Change (%) 22.0 14.0 21.8 20.8 22.5 28.7


% of Sales 76.0 87.3 80.1 80.8 78.5 77.3

EBITDA 4,377 2,651 5,050 5,874 8,068 10,983

Margin (%) 24.0 12.7 19.9 19.2 21.5 22.7

Depreciation 855 1,128 1,256 1,328 1,583 2,196

EBIT 3,522 1,523 3,794 4,546 6,484 8,787

Int. and Finance Charges 616 1,185 1,443 1,966 2,611 3,269

Other Income - Rec. 193 412 558 565 531 685

PBT bef. EO Exp. 3,098 750 2,908 3,146 4,404 6,202

EO Expense/(Income) 0 -72 78 0 0 0

PBT after EO Exp. 3,098 822 2,830 3,146 4,404 6,202

Current Tax 1 -55 902 1,007 1,409 1,985

Deferred Tax 852 251 182 0 0 0

Tax Rate (%) 27.5 23.9 38.3 32.0 32.0 32.0

Reported PAT 2,246 626 1,746 2,139 2,995 4,218


Change (%) 58.8 -74.6 214.2 19.2 40.0 40.8

Margin (%) 12.3 2.7 7.1 7.0 8.0 8.7

Less: Mionrity Interest -0.5 0 0 0 2 87

Net Profit 2,246 571 1,794 2,139 2,993 4,131


Y/E March 2010 2011 2012 2013E 2014E 2015E


Total Reserves 12,813 13,250 14,522 16,214 18,719 22,363

Net Worth 13,513 13,949 15,221 16,913 19,419 23,062


Total Loans 10,737 13,808 12,963 18,488 26,928 29,928


Gross Block 23,772 27,450 29,013 30,667 40,502 58,202

Less: Accum. Deprn. 3,245 4,481 5,845 7,173 8,756 10,952

Net Fixed Assets 20,526 22,969 23,167 23,494 31,745 47,249

Capital WIP 2,296 1,028 904 8,800 12,500 800

Total Investments 48 42 92 92 92 92


Inventory 2,376 3,210 3,628 4,469 5,334 6,784

Account Receivables 819 608 837 1,030 1,185 1,508

Cash and Bank Balance 1,318 3,215 4,332 2,941 1,849 4,157




Provisions 285 435 630 705 986 1,389


Appl. of Funds 26,418 31,799 32,844 40,607 52,194 59,804


JK Cement

75January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

Consol EPS 32.1 8.2 25.7 30.6 42.8 60.3

Cash EPS 44.3 24.3 43.6 49.6 65.5 91.7

BV/Share 193.2 199.5 217.7 241.9 277.7 329.8

DPS 6.0 2.0 5.0 5.5 6.0 6.0

Payout (%) 21.8 26.0 23.3 20.9 16.3 11.6

Valuation (x) *

P/E 13.1 11.0 7.9 5.6

Cash P/E 7.7 6.8 5.1 3.7

P/BV 1.5 1.4 1.2 1.0

EV/Sales 1.2 1.0 1.0 1.0

EV/EBITDA 6.2 5.1 4.5 4.4

EV/Ton (US$) 73 69 77 76

Dividend Yield (%) 1.5 1.6 1.8 1.8

Return Ratios (%)

RoE 17.7 4.2 12.3 13.3 16.5 19.4

RoCE 15.9 7.4 15.6 16.1 17.2 19.1


Asset Turnover (x) 0.7 0.7 0.8 0.8 0.7 0.8

Inventory (Days) 47.5 56.2 52.2 53.2 51.9 51.3

Debtor (Days) 13 9 11 11 10 10

Leverage Ratio (x)

Current Ratio 1.9 4.5 4.0 3.4 2.8 3.0

Debt/Equity 0.8 1.0 0.9 1.1 1.4 1.3



Y/E March 2010 2011 2012 2013E 2014E 2015E



Depreciation 855 1,128 1,256 1,328 1,583 2,196

Direct Taxes Paid -1 55 -902 -1,007 -1,409 -1,985

(Inc)/Dec in WC -1,377 -719 633 -385 -86 -532


EO expense 199 208 29 -1 4 -81


(inc)/dec in FA -2,329 -2,411 -1,439 -9,550 -13,535 -6,000

(Pur)/Sale of Investments -5 5 -50 0 0 0

CF from investments -2,334 -2,405 -1,489 -9,550 -13,535 -6,000

Issue of Shares -96 -27 -68 0 0 0

(Inc)/Dec in Debt 7 3,071 -845 5,525 8,440 3,000

Interest Paid -616 -1,185 -1,443 -1,966 -2,611 -3,269

Dividend Paid -490 -163 -406 -447 -488 -488

CF from Fin. Activity -1,196 1,695 -2,761 3,112 5,341 -757

Inc/Dec of Cash -139 1,896 1,117 -1,391 -1,086 2,313

Add: Beginning Balance 1,457 1,318 3,215 4,332 2,941 1,849

Closing Balance 1,318 3,214 4,332 2,941 1,855 4,163

JK Lakshmi Cement

76January 2013




Promoter 46.0 46.0 44.2

Dom. Inst 12.5 12.4 15.1

Foreign 7.4 6.7 7.5

Others 34.2 35.0 33.2

Favorable market mix, expansion to drive volumesTo outperform peers on profitability growth; Buy

JK Lakshmi Cement (JKLC) has no exposure to the South Indian market and has been

operating at 100% capacity utilization.

We expect 12% volume CAGR over FY13-15, on the back of debottlenecking of clinker

capacity, expansion of cement capacity and favorable market mix.

Superior cost structure coupled with 7% CAGR in realizations over FY13-15 will drive

14% CAGR in cement EBITDA/ton. We believe JKLC will outperform peers on profitability

growth.

JKLC trades at an FY15E EV of USD50/ton v/s USD64/ton for MOSL Mid Cap Cement

Universe. We initiate coverage with Buy, with target price of INR249 (upside 76%)

Sailing on favorable market mixJKLC's dispatch mix is skewed towards the North (~65%) and the West (~35%).

Commencement of the greenfield plant at Durg in Chhattisgarh and two split

grinding units in Bengal and Orissa by 4QFY14 would help it to diversify into the

better performing markets of East and Central India. Due to no exposure to the

under-performing South India market and healthy demand-supply equation in

other regions, JKLC has been operating at 100% utilization. Favorable market mix

renders stronger visibility of realization growth and profitability. We model INR15/

bag increase in realizations in FY14 and INR12 per bag in FY15.

Ongoing expansion and de-bottlenecking to scale up volume growthJKLC is operating at maximum utilization. It has posted muted volume CAGR of

5% over FY10-13 due to limited scope to improve production. We expect

meaningful scale up in volume growth (modeling 12% CAGR over FY13-15) on the

back of (a) debottlenecking of clinker capacity by 0.33mtpa in exiting plant by

4QFY13, (b) expansion of cement capacity by 3.2mtpa by 4QFY14 (2.7mtpa of

greenfield at Durg and 0.5mtpa grinding unit at Surat), and (c) favorable market

mix. JKLC also plans to revive the defunct 1.2mtpa plant at Udaipur by FY15.

Self-sufficiency in power, softening imported coal prices to driveprofitabilityWe expect JKLC to maintain superior cost structure owing to (a) higher fuel

efficiency, (b) 100% self-sufficiency in power (lower generation cost of INR3.4/

unit; ~15% discount to MOSL Cement Universe average), and (c) softening pet

coke prices (85% of fuel mix). This, coupled with healthy uptick in realizations

(expect 7% CAGR over FY13-15) is likely to drive 14% CAGR in cement EBITDA/ton

over FY13-15 (model overall EBITDA margin of 20.4-23.4% over FY13-15 v/s 18.8%

in FY12). Potential sale of surplus power would be additional driver. JKLC will

outperform peers on profitability growth here on, leading to narrowing of

existing discount on EBITDA/ton with MOSL average over FY13-15 (15% v/s 22% in

FY12).


Sa les 21.2 25.0 30.3

EBITDA 4.3 5.7 7.1

NP 1.9 2.4 3.0

Adj EPS (INR) 15.9 20.3 25.1

EPS Gr. (%) 40.7 27.1 23.8

BV/Sh. (INR) 112.7 129.5 150.5

RoE (%) 15.0 16.7 17.9

RoCE (%) 15.6 17.1 18.5

Payout (%) 18.2 17.2 16.2

Valuations

P/E (x) 8.9 7.0 5.6

P/BV (x) 1.3 1.1 0.9

EV/EBITDA (x) 4.1 4.4 3.3

EV/Ton (USD) 62 57 51

Stock Info

Bloomberg JKLC IN



1,6,12 Rel. Perf. (%) 2/60/205

M.Cap. (INR b) / (USD b)17.3/0.3

BSE SENSEX S&P CNX

19,987 6,057

5-S framework







JK Lakshmi Cement

77January 2013

Steady OCF to limit leverage despite high capex requirementWe expect steady operating cash flow (INR4-6 annually over FY13-15) to restrict

JKLC's leverage despite high capex requirement of ~INR12b over FY13-15. Net debt

is estimated to peak out at INR10.6b (net debt-equity of 0.7x) in mid-FY14, before

the Durg plant commences and JKLC begins generating free cash flow.

Initiating coverage with a Buy ratingJKLC trades at FY15E EV of USD50/ton (v/s USD64/ton for MOSL Mid Cap Cement



overall Cement Universe). We value JKLC at INR249/share (5x FY15E EBITDA),

implying an EV of USD76/ton of cement. We initiate coverage with Buy (76% upside).

About JK Lakshmi Cement

JK Lakshmi Cement (JKLC), promoted by the HS Singhania group, is a North India-based

cement company. It has a cement capacity of 5.3mtpa and a CPP capacity of 66MW,

which makes it self-sufficient in energy.

While the North and the West account for 90-95% of its current dispatch mix, ongoing

greenfield expansion of 2.7mtpa at Durg in Chhattisgarh would enhance its presence in

the central and eastern markets, raising total capacity to 8.5mtpa by FY14.

JKLC: 5-S Analysis



2. Sales Mix [20] 15 6 15




5-S Score 66 6 65


JK Lakshmi can potentially double in 2-3 years, driven by:

Ramp-up at its new plant at Durg, which will commission by March 2014, marking

JKLC's entry into East India.

Durg plant will be more efficient and profitable, boosting overall profitability.

Deleveraging, driven by completion ofcapex and significant improvement in

cash flow from operations during the upturn in the cement cycle.

Improvement in capital efficiency, as ongoing capex starts contributing.

JKLC: Blue Sky Scenario

FY15E Remarks

EBITDA (INR m) 8,595 Factoring for scale-up of Durg plant, will boost its

overall profitability

Target EV/EBITDA (x) 5

Target EV(INR m) 42,977

Net debt (INR m) 3,014

Target Equity value (INR m) 39,964

No of share (m) 118

Target Price (INR) 340 Doesn’t include any value from UCW subsidiary

Upside (%) 140

EV/Ton (USD) at TP 92

Blue Sky Scenario JK Lakshmi

JK Lakshmi Cement

78January 2013


Size & Scalability [17 / 30] North India based cement company, with a capacity

of 5.3mt: (1) 4.2mt in Rajasthan, (2) 0.55mt in Gujarat,

and (3) 0.55mt in Haryana. Is enhancing clinker

capacity in Rajasthan by 0.33mt to 4.29mt.

2.7mtpa greenfield expansion at Durg (Chhattisgarh)

and 0.5mt grinding unit at Surat (Gujarat) to enhance

cement/clinker capacity to 8.5mt/5.8mt by 4QFY14.

Planning to revive group company, Udaipur Cement

Works' 1.2mt plant by June 2014.

Currently operating at 100%+ utilization. Expect 12%

volume CAGR over FY13-15 (v/s 15% growth in

1HFY13).

Strategic & Other Issues [9 / 10] Has diversified into RMC, with total capacity of 0.7m

cubic meters across 14 plants. RMC business

accounts for ~7% of JKLC's revenue and enjoys

operating margin of 4.5-5%.

Plans to increase presence in value-added products

like Aerated Autoclaved Concrete (AAC) - first plant

in Haryana by mid-FY14.

Monetization of surplus power of 20MW offers

additional revenue stream potential.

Bought back shares; Acquiring defunct Udaipur

Cement Works from the promoter group

Sales Mix [15 / 20] JKLC's dispatch mix is skewed towards the North

(~65%) and the West (~35%), with (1) Rajasthan

(30%), (2) Gujarat (30%), and (3) other northern

states being the key contributors.

Ongoing expansion to help diversify into better

performing East and Central India markets.

Market mix favorable due to no exposure to the

South and healthy utilization (75-85%) in other

regions.

Model INR15/bag increase in realizations in FY14 and

INR12/bag in FY15 (7% CAGR over FY13-15).

Strength of Financials [13 / 20] Profitability bottomed out in 2QFY12; expect 14%

CAGR in cement EBITDA/ton over FY13-15 to INR1,034

in FY15.

Expect revenue/EBITDA/PAT CAGR of 20%/28%/26%

over FY13-15 (v/s 7%/-13%/-24% over FY10-12).

To outperform peers on profitability, with discount

vis-à-vis MOSL Cement Universe narrowing over

FY13-15 (15% v/s 22% in FY12).

Steady operating cash flow (INR4-6b annually over

FY13-15) to restrict leverage, despite heavy capex

need of ~INR12b over FY13-14. Net debt to peak out

at INR10.6b (net debt-equity at 0.7x) in mid-FY14.

Supply Chain Efficiencies [12 / 20] Superior cost structure, with total cost at 10-15%

lower than MOSL Cement Universe.

Expect cost advantage to sustain, owing to (a) higher

fuel efficiency, (b) 100% CPP-based power self-

sufficiency, and (c) softening pet coke prices (85%

of fuel mix).

Freight cost to inch up due to (a) increase in rail

freight and diesel price, and (b) increase in lead

distance to 500-550km.

Model 4% CAGR in cost of production per ton over

FY13-15.

Valuation & View [85 / 100] JKLC trades at an EV of USD50/ton (v/s USD64/ton

for MOSL Mid Cap Cement Universe and USD111/

ton for overall Cement Universe) and 3.3x FY15E

EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap

Cement Universe and 5.9x FY15E EBITDA for overall

Cement Universe).

We value JKLC at INR249/share (5x FY15E EBITDA),

implying an EV of USD76/ton of cement. We initiate

coverage with Buy. Our target price implies 76%

upside.

Our Blue Sky scenario analysis indiactes for potential

140% return over 2-3 years time with target price of

INR340.

JK Lakshmi Cement

79January 2013

Size & Scalability: Expansion and de-bottlenecking to drive volume Ongoing capacity expansion…

JKLC has existing capacity of 5.3mtpa across three integrated cement plants: (1) 4.2mtpa

at Sirohi (Rajasthan), (2) 0.55mtpa at Kalol (Gujarat), and (3) 0.55mtpa at Jhajjar

(Haryana). It is increasing clinker capacity at Jaykaypuram (Rajasthan) by 0.33mtpa

(0.165mtpa already commissioned, rest by 4QFY13) from 3.96mtpa to 4.29mtpa,

enhancing cement capacity by 0.5mtpa. Besides this, it is currently putting up a 2.7mtpa

greenfield capacity at Durg (Chhattisgarh) and 0.5mtpa of grinding units at Surat

(Gujarat). The ongoing expansion will take its cement/clinker capacity to 8.5mtpa/

5.8mtpa by 4QFY14. JKLC is also planning to revive its group company, Udaipur Cement

Works' 1.2mtpa cement plant by June 2014, in which it plans to take up majority stake

(not yet factored in our model).

…to help drive volume growth

JKLC is operating at maximum capacity utilization. It posted muted volume CAGR of

3% over FY10-12 due to limited scope to improve operating leverage. Nonetheless,

on the back of debottlenecking of its clinker capacity by 0.33mtpa and expansion of

cement capacity by 3.2mtpa (Durg and Surat), we expect it witness meaningful uptick

in volume growth (modeling 12% CAGR over FY13-15).

JKLC is operating at 100%+ utilization Expect capacity addition to drive volume growth


Sales Mix: North and West account for 90-95% of dispatches Market mix offers favorable outlook

JKLC's dispatch mix is skewed towards the North (~65%) and the West (~35%). Its key

markets are (1) Rajasthan (30%), (2) Gujarat (30%), (3) other northern states - Jammu

& Kashmir, Himachal Pradesh, Punjab, Haryana, Delhi and western Uttar Pradesh (35%),

and (4) Maharashtra (5%). We expect favorable demand-supply dynamics in the North

and West regions to render resilience to JKLC's capacity utilization and realizations.

Cement demand in the northern and western regions grew by 10% each in FY12,

compared to the Pan-India demand growth of 6.9%. With the commencement of

greenfield plant at Durg (Chhattisgarh) and two split grinding units (Bengal and Orissa)

by 4QFY14, JKLC would diversify into the even better performing markets of East and

Central India.

Debottlenecking of

clinker capacity and

expansion of cement

capacity to aid

meaningful uptick in

volume growth

Favorable demand-

supply dynamics in the

North and West regions

to render resilience to

JKLC's capacity utilization

and realizations

JK Lakshmi Cement

80January 2013

Better demand dynamics in the North and the West(utilization; %) Demand growth in the North and the West v/s Pan India (%)

The North and the West account for 90-95% dispatches Realizations historically lower than MOSL Cement Universe

Maharashtra,

5%

JKLC's average realizations have been lower than our Cement Universe largely owing

to market mix. It has witnessed encouraging uptick over 1HFY13 (up INR28/bag over

FY12 average). We model INR23/15/12 per bag increase in FY13/14/15 and 7% CAGR

over FY13-15E.


Supply Chain Efficiencies: Energy efficiency, 100% CPP Superior cost structure

JKLC enjoys superior cost structure, with cost of production at 10-15% lower than

MOSL Cement Universe average. The cost advantage is primarily attributable to lower

energy cost and fuel efficiency. Going ahead, we expect further cost savings on account

of 100% self-sufficiency in power and softening pet coke prices. However, freight

cost is likely to inch up, following the full impact of the hike in diesel prices and rail

freights. We model 4% CAGR in cost of production per ton over FY13-15E.

The cost advantage is

primarily attributable to

lower energy cost and

fuel efficiency

JK Lakshmi Cement

81January 2013

Cost of production lower than MOSL Cement Universe (INR/ton) Energy cost escalation to soften, freight cost to inch up


100% captive power to translate into further savings in energy cost

JKLC's energy cost stood at INR3.4/unit in FY12, which is almost ~15% lower than MOSL

Cement Universe. This is attributable to its 100% self-sufficiency in power (Durg

expansion will also have a CPP). The company added 30MW of power capacity in FY11,

by setting up (1) a waste heat recovery plant (12MW), and (2) a thermal power plant

(18MW), taking total CPP capacity to self-sufficient level of 66MW (v/s total power

requirement of 67MW). JKLC also has a tie-up with VS Lignite to source 21MW power

at INR3.94/unit. The combined supply leaves ~20MW of surplus power available for

merchant sales. JKLC enjoys efficient energy utilization (78units/ton of cement v/s

79-93units/ton for our Cement Universe).

Cost of power (INR/unit) at discount to industry average… …largely attributable to 100% captive power (%)


Softening of pet coke prices a key positive

Almost 85% of JKLC's fuel requirement is addressed by pet coke, while the balance is

through a mix of biomass (9-12% in 1HFY13) and domestic coal. Imported coal price

has declined ~13% in YTDFY13 (in INR terms), which led to a moderation in pet coke

prices as well. Softening of pet coke prices is expected to benefit JKLC's fuel cost.

JK Lakshmi Cement

82January 2013

Imported coal prices moderated by 13% in YTD FY13 (INR/ton) Trend in pet coke prices (INR/ton)

Source: Industry, MOSL

Freight cost impacted by higher lead distance

JKLC's freight cost increased by 11% annually over FY10-12, which is largely attributable

to (a) increase in rail freight, and (b) rise in lead distance to 500-550km owing to entry

into new markers. Its logistics mix is almost evenly distributed between rail (45%)

and road (55%). After the recent hike in diesel prices by INR5/liter (+12.5%), we factor

in 21% growth in freight cost in FY13 followed by 5% CAGR over FY13-15E.

Strategic & Other Issues: Surplus power to offer additional earning stream Minimal contribution from allied businesses (RMC, AAC blocks)

JKLC has diversified into RMC, with total capacity of 0.7m cubic meters across 14

plants. Revenue from the RMC business is ~INR1.3b, ~7% of JKLC's overall revenue (v/

s ~2% in FY08) and enjoys operating margin of 4.5-5%. It also plans to increase presence

in value-added products like Aerated Autoclaved Concrete (AAC) - the first plant is

likely to commence by mid-FY14 in Haryana. This product will help the construction

industry to save on labor cost and reduce construction time, thus bringing down overall

cost.

Segmental revenue mix trend (%)


Revenue from RMC

business accounts for 7%

of revenue at present

JK Lakshmi Cement

83January 2013

Monetization of surplus power offers upside to EBITDA

JKLC added 30MW of captive power (CPP) in FY11: (1) 12MW waste heat recovery

plant, and (2) 18MW thermal power plant, taking its total CPP capacity to 66MW. It also

has a long-term agreement with VS Lignite for souring 21MW of power annually at a

fixed cost of INR3.9/unit for a period of 20 years. Combining both sources (87MW

against annual requirement of 67MW), JKLC will be left with 20MW of surplus power

capacity (upcoming Durg plant will have captive power), which can be sold in the

market at attractive rates. Assuming a selling price of INR4/unit (v/s cost of production

of INR3/unit), we estimate ~3% potential upside to our FY14E EBITDA.

Strength of Financials: Capex to drive peak debt to INR15b-16b Profitability has bottomed out in 2QFY12

JKLC's profitability was severely impacted over FY10-12 due to (1) weak realization

growth (3% CAGR), and (2) sustained input cost pressure - particularly coal and power

- (12% CAGR in variable cost). EBITDA margin declined from 28.5% (EBITDA/ton of

INR915, 14% discount to MOSL average) in FY10 to 18.8% (EBITDA/ton of INR643, 23%

discount to MOSL average) in FY12. We believe profitability has bottomed out in

2QFY12 and a steady recovery in realization, coupled with moderation in cost factors

and better utilization has resulted in an encouraging revival in EBITDA/ton in 1HFY13

to INR900/ton. JKLC will outperform peers on profitability growth here on, leading to

narrowing of existing discount on EBITDA/ton with MOSL average over FY13-15 (9-

10% v/s 22% in FY12).

EBITDA/ton witnessing steady revival since 2QFY12 Revenue to post 20% CAGR over FY12-15

Expect steady recovery in margins PAT to post 26% CAGR over FY12-15


JK Lakshmi Cement

84January 2013

Expect 14% CAGR in cement EBITDA/ton over FY12-15

We model 14% CAGR in cement EBITDA/ton over FY13-15E to INR1,034 (v/s INR643/

790 in FY1213E). Revenue/EBITDA/PAT are likely to post 20%/28%/26% CAGR over FY13-

15 (v/s 7%/-13%/-24% over FY10-12), while EBITDA margin is likely to expand by 3.1pp

over FY13-15E.

Significant capex plan till FY14...

JKLC has almost ~INR16b of investment plan over FY11-15 to (a) augment clinker

capacity by 1.8mtpa to 5.8mtpa, and (b) cement capacity by 3.2mtpa to 8.5mtpa by

FY14. It has already incurred ~INR6b, and we expect the annual capex over FY13-14 of

INR5-7b. the company is also planning to revive its group company Udaipur Cement

Works' 1.2mtpa cement plant at an estimated capex of INR5.5b. JKLC will take majority

stake, with ~INR1.5b equity contribution. This plant is expected to start operations by

June 2014, albeit we are yet to factor in any contribution from it.

Key capex plans

Capex Plan Plant type Capacity Capex Commissioning

(mt) (INR m) by

Jaykaypuram, Rajasthan Clinker 0.33 1,000 4QFY13

Durg, Chattishgarh Greenfield Cement 2.7 12,500 3QFY14

with CPP (includes 2

split grinding units

at WB and Orissa).

Clinker capcity of 1.5mt

Surat/Jajjar Grinding unit 0.5 NA 4QFY14

RMC 3 plants 500 FY14

Haryana AAC Block 1.32 Lac Cub mt 500 4QFY13

Udaipur * Renovating old 1.2 1,500 FY15

cement plant

Total 16,000 FY12-15

* Total capex of ~INR5.5b, with JKLC's equity contribution of INR1.5b

Leverage to increase with

ongoing capex cycle, but

steady OCF aid

meaningful cushion

...but steady OCF offers cushion to leverage growth

On the back of scale up in capacity and profitability, we expect JKLC to witness uptick

in its operating cash flow (OCF) here on. We estimate annual OCF of INR4-6b over

FY13-15E (v/s INR3-3.5b at present), which should restrict any sharp increase in

leverage during capex cycle. JKLC's net debt is likely to peak out at INR10.6b (net

debt-equity of 0.7x) in FY14 on the back of estimated capex of ~INR12b over FY13-14.

Post FY14, we expect moderation in leverage, with free cash flow generation following

the commencement of the Durg plant.

Payout ratio healthy despite capex cycle

JKLC has maintained healthy payout of 15-25% (dividend yield of 1.5%) in the recent

past despite steady capex cycle. It has also made a buy-back offer to acquire shares up

to INR975m (13.9m equity shares), which is equivalent to 8.3% of net worth at the end

of 31 March 2012, at a price not exceeding INR70/share. It bought back 4.7m (3.8%)

equity shares. However, with the current market price being higher than the offer

price, JKLC may not be able to buy back more shares in the near future.

JK Lakshmi Cement

85January 2013

Leverage to peak out in 1HFY15 (INR m) Steady OCF to limit leverage despite significant capex

RoCE/RoE to improve from 13% in FY12 to 18% in FY15 Has maintained a payout of 15-30% despite capex (yield 1.5%)


Valuation & View To outperform peers on profitability

We expect JKLC to outperform peers on profitability, with discount vis-à-vis MOSL

Cement Universe narrowing over FY13-15 (15% v/s 22% in FY12). We estimate revenue/

EBITDA/PAT CAGR of 20%/28%/26% over FY13-15E (v/s 7%/-13%/-24% over FY10-12).

Initiating coverage with a Buy rating

JKLC trades at FY15E EV of USD50/ton (v/s USD64/ton for MOSL Mid Cap Cement



oevrall Cement Universe). We value JKLC at INR249/share (5x FY15E EBITDA), implying

an EV of USD76/ton of cement. We initiate coverage with Buy (upside of 76%)

JK Lakshmi Cement

86January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 14,905 13,168 17,111 21,191 25,022 30,344

Change (%) 21.7 -11.7 29.9 23.8 18.1 21.3


% of Sales 71.5 85.9 81.2 79.6 77.4 76.6

EBITDA 4,246 1,854 3,209 4,321 5,663 7,115

Margin (%) 28.5 14.1 18.8 20.4 22.6 23.4

Depreciation 800 846 1,297 1,325 1,586 2,095

EBIT 3,446 1,008 1,912 2,996 4,077 5,020

Int. and Finance Charges 230 605 797 863 1,233 1,378

Other Income - Rec. 93 385 704 586 600 620

PBT bef. EO Exp. 3,309 788 1,820 2,720 3,445 4,262


PBT after EO Exp. 3,309 788 1,427 2,720 3,445 4,262

Current Tax 327 45 179 789 999 1,236

Deferred Tax 570 151 161 54 69 85

Tax Rate (%) 27.1 25.0 23.8 31.0 31.0 31.0

Reported PAT 2,411 591 1,088 1,877 2,377 2,941


Change (%) 35.0 -75.5 134.5 35.3 26.6 23.7

Margin (%) 16.2 4.5 8.1 8.9 9.5 9.7


Y/E March 2010 2011 2012 2013E 2014E 2015E


Total Reserves 9,595 9,851 11,140 12,675 14,641 17,104

Net Worth 10,207 10,463 11,752 13,263 15,230 17,692


Total Loans 9,217 8,483 9,429 11,429 15,229 13,029


Gross Block 19,036 23,186 24,500 25,500 35,500 38,000

Less: Accum. Deprn. 8,407 9,376 11,207 12,531 14,117 16,212

Net Fixed Assets 10,630 13,810 13,293 12,968 21,382 21,788

Capital WIP 1,820 409 2,941 5,941 2,941 1,941



Inventory 748 1,199 1,201 1,433 1,692 2,145

Account Receivables 290 280 382 475 561 680

Cash and Bank Balance 2,204 888 890 415 124 342




Provisions 1,364 232 316 789 999 1,236

Net Current Assets 3,091 521 1,642 1,533 1,455 2,397

Appl. of Funds 20,536 20,404 22,692 26,258 32,093 32,441


JK Lakshmi Cement

87January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

EPS 19.7 4.8 11.3 15.9 20.2 25.0

Cash EPS 26.2 11.7 21.9 27.2 33.7 42.8

BV/Share 83.4 85.5 96.0 112.7 129.4 150.3

DPS 2.5 1.2 1.9 2.5 3.0 3.5

Payout (%) 14.8 30.1 25.3 18.2 17.3 16.3

Valuation (x)*

P/E 12.5 8.9 7.0 5.7

Cash P/E 6.4 5.2 4.2 3.3

P/BV 1.5 1.3 1.1 0.9

EV/Sales 1.1 0.8 1.0 0.8

EV/EBITDA 5.7 4.1 4.4 3.3

EV/Ton (USD) 71 62 57 51

Dividend Yield (%) 1.4 1.8 2.1 2.5

Return Ratios (%)

RoE 26.0 5.7 12.5 15.0 16.7 17.9

RoCE 20.4 7.3 13.0 15.6 17.0 18.4


Asset Turnover (x) 0.7 0.6 0.8 0.8 0.8 0.9

Inventory (Days) 18.3 33.2 25.6 24.7 24.7 25.8

Debtor (Days) 6 7 7 7 7 7

Leverage Ratio (x)

Current Ratio 1.9 1.1 1.3 1.2 1.2 1.3

Debt/Equity 0.9 0.8 0.8 0.9 1.0 0.7



Y/E March 2010 2011 2012 2013E 2014E 2015E



Depreciation 0 0 0 0 0 0

Direct Taxes Paid -327 -45 -179 -789 -999 -1,236

(Inc)/Dec in WC -454 1,253 -1,118 -366 -212 -724


EO expense 132 123 141 0 0 0


(inc)/dec in FA -2,281 -2,739 -3,845 -4,000 -7,000 -1,500

(Pur)/Sale of Investments -3,916 -472 740 -1,000 -500 0


Issue of Shares -159 -157 476 -23 0 0

(Inc)/Dec in Debt 2,191 -734 946 2,000 3,800 -2,200

Interest Paid -230 -605 -797 -863 -1,233 -1,378

Dividend Paid -358 -178 -275 -342 -410 -479

CF from Fin. Activity 1,444 -1,674 350 772 2,157 -4,056

Inc/Dec of Cash -1,063 -1,317 3 -475 -290 218

Add: Beginning Balance 3,267 2,204 888 890 415 124

Closing Balance 2,204 887 890 415 124 342

Madras CementsCMP: INR233 TP: INR374 Buy


Best in class, with superior profitabilityModerating capex, strong operations to aid healthy FCF visibility; Buy

Madras Cements (MC) is likely to post ~10% volume CAGR over FY12-15 on the back of

steady uptick in utilization of newly added capacities.

It enjoys premium profitability (cement EBITDA/ton was INR1,125/1,251 v/s INR850/

1,010 for our Cement Universe in FY12/13E) due to superior realizations and

operational efficiencies.

MC is likely to generate ~INR26b of FCF over FY13-15, which should lead to meaningful

reduction in net debt by FY14/15 - we model net debt-equity of 0.2x by FY15.

MC offers an attractive play on superior operating efficiency, premium profitability

and strong FCF visibility. We initiate coverage with Buy with target price of INR374

(upside of 61%).

Stabilizing capacity to aid industry leading volume growthMC has expanded its cement capacity by 6.5mtpa over the past five years. Despite

unfavorable dynamics in the southern market, we expect it to post ~10% volume

CAGR over FY13-15E, led by (1) stabilization of added capacity, (2) healthy growth

in south (ex-AP), and (3) ramp-up in dealer network in east coupled with increase

in capacity utilization at the West Bengal plant (improved to 55% from 30-35% in

FY12). We model improvement in total utilization from 61% in 1HFY13 to 76% in

FY15.

Operational efficiency, captive power drives superior profitabilityMC enjoys premium profitability (cement EBITDA/ton was INR1,125/1,251 v/s

INR8501,010 for our Cement Universe in FY12/13E) due to superior realizations

and operational efficiencies. With the recent addition of captive power plants of

45MW in 1HFY13, and softening of imported coal (~75% of its fuel mix) prices, we

expect savings in energy cost. However, overall margin is likely to remain stable

at 29-30% (v/s 28-29% in FY12/13E), due to expectation of a moderate uptick in

realizations in south, which would be just enough to compensate for the cost

push from increase in rail freight, diesel price and lead distance. We model

EBITDA/ton of INR1,557 (cement EBITDA/ton of INR1,461) in FY15 v/s INR1,357

(cement EBITDA/ton of INR1,251) in FY13. MC has shown encouraging trend in

realizations and profitability over 1HFY13, which offers limited downside risks

to our estimates.

Moderating capex, FCF visibility to trigger de-leveragingMC underwent huge capex of ~INR44b over the last five years as a result of which

net debt spiraled to INR26.6b (net debt-equity of 1.3x). Given the lower prevailing

capacity utilization, we do not expect any major expansion in the near term,

barring the grinding capacity at Salem (0.4mtpa) and RR Nagar (1.1mtpa), which

are expected to be operational by March 2013 (INR1.7b). MC is likely to generate

~INR26b of FCF over FY13-15, which should lead to meaningful reduction in net

debt by FY14/15 (modeling net debt of INR18.9b (net debt-equity of 0.6x) in FY14

and INR8.8b (0.2x) in FY15).


Promoter 42.3 42.3 42.3

Dom. Inst 23.8 21.3 21.3

Foreign 5.0 6.7 6.5

Others 28.8 29.7 29.8

88January 2013


Sa les 40.4 46.7 53.9

EBITDA 11.6 13.7 16.1

NP 4.7 6.1 7.9

Adj EPS (INR) 19.7 25.6 33.1

EPS Gr. (%) 21.7 30.3 29.1

BV/Sh. (INR) 103.3 126.0 155.6

RoE (%) 20.8 22.4 23.5

RoCE (%) 18.2 21.0 24.8

Payout (%) 12.7 11.7 10.6

Valuations

P/E (x) 11.8 9.1 7.0

P/BV (x) 2.3 1.8 1.5

EV/EBITDA (x) 6.8 5.3 3.9

EV/Ton (USD) 106 98 84

Stock Info

Bloomberg MC IN



1,6,12 Rel. Perf. (%) 5/32/99

M.Cap. (INR b) / (USD b) 55/1

BSE SENSEX S&P CNX

19,987 6,057

5-S framework







Madras Cements

89January 2013

Superior profitability justifies premium; initiating with Buy ratingMC has maintained a relatively low dividend payout (13-16%), which should improve

with the capex cycle nearing completion. The stock trades at FY15E EV of USD84/ton

(v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall

Cement Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap

Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We value

MC at INR374/share (6x FY15E EBITDA) owing to its superior profitability and size.

We initiate coverage with a Buy rating; our target price implies 61% upside.

About Madras Cements

Madras Cements (MC) is one of the top three cement producers in South India with

total nameplate capacity of 12.5mtpa (0.95mtpa in West Bengal and the balance in the

South).

It also has operational wind farm capacity of 159MW and 157MW of CPP capacity.

Despite the unfavorable southern market, MC offers an attractive play due to superior

operating efficiency, premium profitability and strong FCF visibility.

MC: 5-S Analysis



2. Sales Mix [20] 13 8 15




5-S Score 68 3 65


Madras Cements has the potential to double in 2-3 years, driven by:

Benefit of operating leverage, as it improves utilization from ~63% in FY13 to

~82% in FY16E.

As a result, its balance sheet will turn net cash (~INR3b) by FY16 from current

net debt (~INR25.3b).

Likely improvement in RoE from 18% to 27%.

MC: Blue Sky Scenario

FY15E FY16E

EBITDA (INR m) 16,062 18,119

Target EV/EBITDA (x) 6 6

Target EV(INR m) 96,372 108,714

Net debt (INR m) 7,284 -4,560

Target Equity value (INR m) 89,088 113,274

No of share (m) 238 238

Target Price (INR) 374 476

Upside (%) 60.9 104.6

EV/Ton at TP (USD) 130 147

Blue Sky Scenario Madras Cements

Madras Cements

90January 2013


Size & Scalability [24 / 30] MC has expanded its cement capacity by 6.5mtpa

(in June 2012, it added 2mtpa at Ariyalur) over the

last five years.

Along with grinding capacity at Salem (0.4mtpa) and

RR Nagar (1.1mtpa), this will augment MC's overall

cement capacity by 13.6mtpa by FY13.

No major expansion in the near term, as current

utilization is 61% (as at 1HFY13).

MC to post ~10% volume CAGR over FY13-15 (13%

growth in FY13), on the back of stabilization of

added capacities (17% YoY in 1HFY13).

Strategic & Other Issues [9 / 10] Windmill segment (15% of capital allocation) has

posted ~6% revenue CAGR over FY09-12 and

accounts for 2-3% of overall net revenue.

The sgement has seen steady margin deterioration

from 91% in FY10 to 76% in FY12, with high

receivables from TNEB (INR980m).

Power RoCE at 4.2% (FY12) remains a drag on overall

capital efficiency (v/s cement RoCE of 22.4% and

overall RoCE of 15.4%).

CCI has levied a penalty of INR2.6b on MC along with

other cement companies on charges of alleged

cartelization.

Sales Mix [13 / 20] Market mix broadly tilted towards South accounting

for 90% of total dispatches. However, market mix is

skewed towards better performing states - Tamil

Nadu, Karnataka and Kerala (~10% in Andhra

Pradesh).

The recent shift towards east market, driven by split

grinding unit at West Bengal would be favorable.

Lower utilization (65%) in the South will keep near-

term pricing trend volatile.

Expect realizations to increase by INR21/bag in FY13

and INR12 per bag each in FY14/15 (5.3% CAGR over

FY13-15). In 1HFY13, it posted a strong INR26/bag

increase.

Strength of Financials [14 / 20] Superior realizations and operating efficiencies to

continue to aid premium profitability (25-20%

premium to MOSL Cement Universe average).

EBITDA/ton to witness 8% CAGR over FY13-15 to

INR1,461/1,557 (cement EBITDA/ton: INR1,360/

1,461) in FY14/15.

Revenue/EBITDA/PAT to post CAGR of 16%/18%/29%

over FY13-15, amidst stable margin of 29-30%.

Moderating capex and strong OCF to help generate

~IN26b of FCF over FY13-15, which should lead to

meaningful reduction in net debt by FY14/15

(modeling in net debt of INR18.9b (0.6x) in FY14 and

INR8.8b (0.2x) in FY15).

Supply Chain Efficiencies [8 / 20] Softening pet coke prices (75% of fuel mix) and

recently commissioned power plants of 45MW

(taking CPP capacity to 157MW) will reduce grid

power dependence to negligible levels.

Energy efficient operations : (1) power consumption

to 78KWH/ton (v/s 83KWH/ton in FY11), and (2) coal

usage to 12% (v/s 14% in FY11).

Other expenses to remain high due to spending on

branding, dealer network and advertisement in the

newly entered eastern region, albeit benefit of

operating leverage will dilute impact.

Rise in capacity utilization to lend positive operating

leverage hereon. We model 4% CAGR in total cost

over FY13-15.

Valuation & View [65 / 100] MC has maintained a relatively low dividend payout

(13-16%), which should improve with the capex cycle

nearing completion.

The stock trades at FY15E EV of USD84/ton (v/s

USD64/ton for MOSL Mid Cap Cement Universe and

USD111/ton for overall Cement Universe) and 3.9x

FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid

Cap Cement Universe and 5.9x FY15E EBITDA for

overall Cement Universe).

We value MC at INR374/share (6x FY15E EBITDA)

owing to its superior profitability and size. We

initiate coverage with a Buy rating; our target price

implies 61% upside. Our Blue Sky valuation indiactes

for potential 105% return in 2-3 years time.

Madras Cements

91January 2013

Grinding

units at

TN and

WB

AriyalurUnit I

AriyalurUnit II

RR Nagarupgradation

Size & Scalability: Stabilization of added capacity to aid volume growth Enjoys 10% capacity market share in South India

Madras Cements (MC) is one of the top three cement producers in South India, with

total nameplate capacity of 12.5mtpa (0.95mtpa in West Bengal and the balance in the

South), implying ~10% capacity market share in South India. It has five manufacturing

units along with three grinding units and has almost ~61% capacity located in Tamil

Nadu. It has operational wind farm capacity of 159MW and 157MW of CPP capacity.

Despite mix tilted towards southern market, MC offers an attractive play on superior

volume growth, operating efficiency, premium profitability and strong FCF visibility.


Utilization ramp-up in recently added capacity…

MC has expanded its cement capacity by 6.5mtpa over the last five years, with a

recent addition being 2mtpa at Ariyalur (June 2012). Given the unfavorable demand-

supply dynamics in the southern market, the company is operating at subdued

utilization 65-70%, with its Andhra Pradesh plant being the worst affected (44%

capacity utilization).

Leading cement producer in the South with largest exposure to Tamil Nadu

Strong ramp-up in capacity over the last five years Utilization muted due to demand-supply imbalance in south


Madras Cements

92January 2013

…to aid industry leading volume growth

South India has been the worst performing cement market in the recent past, largely

due to sustained de-growth in the largest consuming Andhra Pradesh market.

Nonetheless, we expect MC to post ~10% volume CAGR over FY13-15 (15% in FY13) on

the back of (1) uptick in utilization of new capacities, (2) steady demand improvement

in Andhra Pradesh, and (3) ramp-up in dealer network in east and increase in capacity

utilization at the West Bengal plant (improved to 55% from 30-35% in FY12). We model

improvement in total utilization from 61% in 1HFY13 to 76% in FY15.


Recovery in demand, stabilizing utilization to strengthenvolume growth Volume pick-up since 3QFY13 has been encouraging

Sales Mix: Pricing outlook hinges on market recovery Southern market plagued with overcapacity

The southern market witnessed overcapacity coupled with muted demand growth

over FY10-12. Slowdown in demand was largely due to political turmoil in the major

consuming state, Andhra Pradesh. MC's market mix in the South (90% of total

dispatches) is skewed towards better performing states like Tamil Nadu, Karnataka

and Kerala, with only ~10% exposure to Andhra Pradesh. While Andhra Pradesh has

posted demand de-growth of 9%/5% in FY12/YTDFY13, the growth has been largely

stable (5-10%) in other southern states. Yet, we believe excess supply from Andhra

Pradesh would keep overall utilization of south-dependent players under pressure

in the near term. Going forward, demand recovery in Andhra Pradesh ahead of the

state elections will be a key factor to watch.

We model improvement

in total utilization

from 61% in 1HFY13

to 76% in FY15.

MC's market mix in the

South (90% of total

dispatches) is skewed

towards better

performing states with

~10% exposure to AP

Madras Cements

93January 2013


MC's sales mix skewed towards states other Expect realizations to strengthen amidst demand uptickthan Andhra Pradesh (%) (INR/ton)

Healthy realization growth in 1HFY13, albeit subdued utilization may induce

volatility

In 1HFY13, MC posted a strong INR26/bag increase in cement realizations compared to

the FY12 average. However, we expect cement prices in the southern market to remain

volatile on the back of subdued utilization (expect ~65% over FY13-14). We expect

realizations to increase by INR21/bag in FY13 and by INR12/bag each in FY14/15 (5.3%

CAGR over FY13-15) on the back of slowing capacity addition and demand

improvement.

Supply Chain Efficiencies: Added CPP to aid energy cost savings CPP capacity addition, favorable fuel cost trend…

MC has witnessed substantial increase in energy cost/ton over FY11-12 (CAGR of 14%)

due to sharp jump in the prices of imported coal and pet coke, which constitute ~75%

of its fuel mix. Going forward, we expect savings in fuel cost, led by (a) softening of

imported coal price (declined ~13% in YTDFY13 in INR terms), and (b) further CPP

contribtuion from its recently commissioned power plants of 45MW (25MW in RR

Nagar in 1QFY13 and 20MW in Ariyalur), which makes CPP capacity to 157MW, besides

its operational wind farm capacity of 159MW. This will reduce dependence on grid

power to negligible levels.

…coupled with operating efficiency to aid savings in energy cost

MC has posted encouraging improvement in power and fuel consumption over time.

In FY12, it reduced power consumption to 78KWH/ton from 83KWH/ton in FY11. Coal

usage as a percentage of cement production declined from 14% in FY11 to 12% in

FY12. We expect MC to maintain its energy efficiency and CPP contribution would

increase hereon to almost the maximum level (v/s 73% in FY12).

Post Recent expansion

MC's CPP capacity will

educe dependence on

grid power to negligible

levels

Madras Cements

94January 2013

Post expansion CPP capacity distribution MC has posted improvement in operating efficiency


Power Plant Capacity MW

R.R.Nagar, Tamil Nadu 25

Alathiyur, Tamil Nadu 36

Ariyalur, Tamil Nadu 60

Jayanthipuram, AP 36

Total 157

Freight cost to remain an overhang; other expenses high on new market spends

MC's freight mix is skewed towards road transport, which accounts for ~60% of its

volumes. Over 1Q/2QFY13, its freight cost went up by 22-27% YoY on account of (a)

increase in rail freight (by ~22%), (b) hike in diesel price by INR5/liter (~12%), and (c)

jump in lead distance due to higher dispatches outside Andhra Pradesh. We expect

the uptrend in freight cost to remain an overhang in the near term - we model 8%

CAGR in freight cost/ton over FY13-15. However, we expect some transportation cost

savings from new grinding units, which are located close to areas where fly ash is

readily available or in major cement consumption areas. Other expenses also

increased sharply in FY12 and are likely to remain high on account of higher spending

on branding, dealer network creation and advertisement in the eastern region, and

increase in packaging expenses.

Cost escalation to moderate; positive operating leverage to render support

We expect moderation in total variable cost escalation on the back of savings in energy

cost and softening of input costs, though freight cost would remain under pressure in

the near term. We model in 4% CAGR in total cost over FY13-15 as against 12% over

FY10-12. With the increase in capacity utilization, we expect favorable impact of

positive operating leverage.


Expect moderation in cost factors over FY12-15 (INR/ton)

Freight cost to remain

high over near-term ,

albeit new grinding units

may reduce lead distance

Madras Cements

95January 2013

Strategic & Other Issues: Windmill business offers additional revenue stream Wind power - additional revenue stream, but drag on overall RoCE

MC has operational wind farm capacity of 159.2MW and 157MW of CPP capacity. Its

power capacity has not only reduced dependence on grid power for cement

operations, but has also become an additional source of revenue. Its windmill segment

has posted ~6% revenue CAGR over FY09-12 and accounts for 2-3% of overall net

revenue. However, MC has witnessed steady margin deterioration from 91% in FY10

to 76% in FY12. Tamil Nadu Electricity Board (TNEB) is the primarily consumer

(accounting for ~75% of units generated). Total receivables from TNEB stand at

INR980m, with collection cycle of 12-15 months. Margin pressure and high receivables

have resulted in deterioration in power RoCE to 4.2% in FY12. Our current valuation

does not capture any contribution from the power segment.

Capital allocation mix (%) Inferior power RoCE a drag on overall capital efficiency


CCI penalty an overhang

CCI has levied a penalty of INR2.6b on MC along with other cement companies on

charges of alleged cartelization. Any adverse outcome of the case could impact MC's

cash flows. However, MC believes it has a strong case and has not made any provision

for this.

Strength of Financials: Profit leadership, moderating capex Sustained profit leadership…

MC has enjoyed superior realizations on account of its market/product mix. This

coupled with operational efficiencies has resulted in superior profitability, with

EBITDA/ton at INR1,125 (v/s INR850/ton for our Cement Universe). It has maintained

EBITDA margin at 24-38% over the last six years. We believe its operating efficienies

renders strong resilience against potential pricing volatility in southern region.

Margin pressure and high

receivables have resulted

in deterioration in power

RoCE to 4.2% in FY12.

Madras Cements

96January 2013

… to drive 18% EBITDA CAGR over FY13-15

On the back the industry-leading volume growth outlook and discipline in realization

trend, we estimate revenue/EBITDA CAGR of 16%/18% over FY13-15, amidst stable

margins of 29-30% (v/s 28/29% in FY12/13E). We assume only a moderate margin

expansion, which captures our belief that higher realizations would largely be diluted

by cost push. This implies cement EBITDA/ton of INR1,360/1,461 in FY14/15E v/s

INR1,125/1,251 in FY12/13E. Given the encouraging trend in realizations and

profitability over 1HFY13, we see limited downside risks to our estimates.

Expect MC to post 16% revenue and 18% EBITDA CAGR over FY13-15E


PAT to grow at 30% CAGR owing to moderating interestEstimate 8% CAGR in EBITDA/ton over FY12-15 expense

Prevailing weakness in

southern market offers

potential pricing

volatility, and curbs any

major margin expansion

Moderating capex to trigger de-leveraging

MC underwent huge capex of ~INR44b over the last five years to augment its capacity

by 6.5mtpa, as a result of which, net debt spiraled to INR26.6b (net debt-equity of

1.3x). Given the lower prevailing capacity utilization, we do not expect any major

expansion in the near term, barring the grinding capacity at Salem (0.4mtpa) and RR

Nagar (1.1mtpa), which are expected to be operational by March 2013 (INR1.7b). We

believe leverage has peaked out in 2HFY12. MC is likely to generate ~INR26b of FCF

over FY13-15, which should lead to meaningful reduction in net debt by FY14/15

(modeling net debt of INR18.9b (net debt-equity of 0.6x) in FY14 and INR8.8b (0.2x) in

FY15).

FCF visibility offers

strong potential to

reduce debt

Madras Cements

97January 2013

Strong FCF potential (due to lower capex) to cut down debt significantly over FY13-15

Dividend payout to increase with FCF (%) RoCE and RoE to improve on the back of higher utilization (%)


Valuation & View Superior profitability justifies premium; initiating with Buy rating

MC has maintained a relatively low dividend payout (13-16%), which should improve

with the capex cycle nearing completion. The stock trades at FY15E EV of USD84/ton

(v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement

Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement

Universe and 5.9x FY15E EBITDA for our Full Cement Universe). We value MC at INR374/

share (6x FY15E EBITDA) owing to its superior profitability and size. We initiate

coverage with a Buy rating; our target price implies 61% upside.

Madras Cements

98January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 28,009 26,049 32,361 40,353 46,677 53,864

Change (%) 14.0 -7.0 24.2 24.7 15.7 15.4


% of Sales 69.4 76.3 71.6 71.3 70.7 70.2

EBITDA 8,576 6,181 9,188 11,564 13,698 16,062

Margin (%) 30.6 23.7 28.4 28.7 29.3 29.8

Depreciation 1,961 2,208 2,539 3,115 3,447 3,569

EBIT 6,615 3,973 6,649 8,449 10,251 12,493


Other Income - Rec. 205 399 517 555 806 1,087

PBT bef. EO Exp. 5,305 2,973 5,574 6,939 9,041 11,676


PBT after EO Exp. 5,304 2,957 5,569 6,939 9,041 11,676

Current Tax 816 824 1,121 1,700 2,260 2,919

Deferred Tax 952 39 602 555 678 876

Tax Rate (%) 33.3 29.2 30.9 32.5 32.5 32.5

Reported PAT 3,536 2,094 3,846 4,684 6,103 7,882

PAT Adj for EO items 3,537 2,105 3,850 4,684 6,103 7,882

Change (%) -3.1 -40.5 82.9 21.7 30.3 29.1

Margin (%) 12.6 8.1 11.9 11.6 13.1 14.6


Y/E March 2010 2011 2012 2013E 2014E 2015E


Total Reserves 15,344 17,107 20,266 24,354 29,743 36,792

Net Worth 15,582 17,345 20,504 24,592 29,981 37,030


Total Loans 25,665 27,912 27,104 26,604 24,104 18,604


Gross Block 48,111 51,105 56,704 65,680 69,480 70,480

Less: Accum. Deprn. 11,186 13,175 15,553 18,668 22,115 25,684

Net Fixed Assets 36,925 37,930 41,152 47,012 47,365 44,796

Capital WIP 3,177 5,457 5,276 2,300 1,500 1,500

Total Investments 887 2,673 2,665 2,665 2,665 2,665


Inventory 4,125 3,923 4,911 6,065 7,015 8,095


Cash and Bank Balance 356 400 475 1,316 5,214 9,815




Provisions 1,198 1,335 1,591 2,125 2,825 3,649


Appl. of Funds 47,164 51,147 54,100 58,243 61,810 64,235


Madras Cements

99January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

Consol EPS 15 9 16 20 26 33

Cash EPS 23 18 27 33 40 48

BV/Share 65 73 86 103 126 156

DPS 2.0 2.5 2.5 2.5 3.0 3.5

Payout (%) 13.5 28.4 15.5 12.7 11.7 10.6

Valuation (x)

P/E 14.4 11.8 9.1 7.0

Cash P/E 8.7 7.1 5.8 4.8

P/BV 2.7 2.3 1.8 1.5

EV/Sales 2.4 1.9 1.6 1.2

EV/EBITDA 8.4 6.8 5.3 3.9

EV/Ton (US$) 134 106 98 84

Dividend Yield (%) 1.1 1.1 1.3 1.5

Return Ratios (%)

RoE 25.1 12.8 20.3 20.8 22.4 23.5

RoCE 17.4 10.1 15.4 18.2 21.0 24.8


Asset Turnover (x) 0.6 0.5 0.6 0.7 0.8 0.8

Inventory (Days) 53.8 55.0 55.4 54.9 54.9 54.9

Debtor (Days) 18 22 21 21 21 21

Leverage Ratio (x)

Current Ratio 2.1 1.9 1.8 1.7 2.0 2.3

Debt/Equity 1.6 1.6 1.3 1.1 0.8 0.5



Y/E March 2010 2011 2012 2013E 2014E 2015E


Interest/Dividends Recd. 205 399 517 555 806 1,087

Depreciation 1,961 2,208 2,539 3,115 3,447 3,569

Direct Taxes Paid -816 -824 -1,121 -1,700 -2,260 -2,919

(Inc)/Dec in WC -1,190 850 155 -418 -116 -392


EO expense -4 -21 -166 0 0 0


(inc)/dec in FA -5,759 -5,273 -5,419 -6,000 -3,000 -1,000

(Pur)/Sale of Investments -1 -1,785 8 0 0 0


Issue of Shares -80 265 -93 0 0 0

(Inc)/Dec in Debt 1,031 2,247 -808 -500 -2,500 -5,500

Interest Paid -1,515 -1,399 -1,592 -2,065 -2,016 -1,903

Dividend Paid -477 -595 -595 -595 -714 -833

CF from Fin. Activity -1,042 517 -3,087 -3,160 -5,230 -8,236

Inc/Dec of Cash -30 44 75 842 3,897 4,602

Add: Beginning Balance 386 356 400 475 1,316 5,214

Closing Balance 356 400 475 1,317 5,214 9,815

Orient Paper IndustriesCMP: INR79 TP: INR115 Buy


Demerger of cement business to unlock valueSOTP-based target price of INR115 implies 45% upside; Buy

Orient Paper Industries (OPI) is poised for meaningful value unlocking through the

ongoing demerger of the cement business into Orient Cement.

Though its paper business is loss-making, we expect steady product diversification to

propel robust growth in its electrical goods business.

We expect OPI's cement business to witness 11% volume CAGR and 19%/28% revenue/

EBITDA CAGR over FY13-15.

We initiate coverage with Buy; our SOTP-based target price of INR115 implies 45%

upside.

Cost leadership in cement eclipsed by rise in energy costOPI is one of the lowest cost cement manufacturers in India. Its cost of production

is ~15% lower than peers (INR2,538/ton v/s INR2,959/ton for our Cement Universe

in FY12), enabling it to achieve superior profitability (EBITDA/ton of INR1,092 v/

s INR850 for our Cement Universe in FY12). We expect a dilution in OPI’s historical

energy cost advantage impacted by shrinkage in linkage coal from Singareni Mines

(65% of its coal requirement). We model 15% CAGR in cement EBITDA/ton over

FY13-15 to INR1,007 in FY15 despite (a) elevated cost structure, and (b) volatile

prices in Andhra Pradesh (~24% of dispatches). Revival of demand in the core

market and commencement of 3mtpa greenfield capacity in Karnataka by early

FY15 would drive volume growth. We expect OPI’s cement business to witness

11% volume CAGR and 19%/28% revenue/EBITDA CAGR over FY13-15.

Steady product diversification to propel robust growth in electrical goodsOPI has posted healthy growth in the electrical goods segment (28% revenue

CAGR over FY09-12 and 22% YoY in 1HFY13) on the back of strong outlook for CFLs

and luminaires (growing at 20%+ per annum), and its superior brand recall. We

expect the trend to continue (model 23% revenue CAGR over FY13-15), as the

company has recently diversified into higher margin home appliances, which are

likely to witness robust growth from FY14. Nonetheless, we expect segment

EBIDT margins to remain under pressure (8.5-9.5% over FY13-15 v/s 10%+ pre-

FY11) owing to higher cost of raw material such as copper, zinc and aluminum,

increasing fuel prices and higher marketing expenses for new product categories.

Paper business unlikely to break even in near termDespite steady sales growth (revenue CAGR of 15.6% over FY09-12), we expect

OPI’s paper business to continue witnessing losses in the near term owing to (1)

declining realization, and (2) unprecedented escalation in pulp and coal prices.

However, its recently added (a) water reservoir, and (b) 55MW CPP at Amlai are

likely to resolve certain operational bottlenecks and enable cost savings

(INR300m-350m savings at stabilization), helping to reduce EBITDA loss.


Promoter 90.0 90.0 90.0

Dom. Inst 1.8 1.7 1.6

Foreign 5.5 5.6 6.4

Others 2.7 2.7 2.1


Sa les 28.1 33.6 40.3

EBITDA 2.4 4.2 5.5

NP 1.2 2.2 2.6

Adj EPS (INR) 6.0 10.6 12.7

EPS Gr. (%) -41.7 75.8 19.2

BV/Sh. (INR) 58.3 66.0 75.5

RoE (%) 10.7 17.1 17.9

RoCE (%) 12.6 18.3 17.4

Payout (%) 38.5 27.3 25.2

Valuations

P/E (x) 13.1 7.5 6.2

P/BV (x) 1.4 1.2 1.0

EV/EBITDA (x) 8.4 4.3 5.7

EV/Ton (USD) 52 29 43

Stock Info

Bloomberg OPI IN



1,6,12 Rel. Perf. (%) -9/10/32

M.Cap. (INR b) / (USD b) 16/0.3

BSE SENSEX S&P CNX

19,987 6,057





100January 2013


Orient Paper Industries

101January 2013

De-merger to trigger value unlocking; initiate with BuyImpending demerger and subsequent listing of the cement business is a key near-

term value unlocking trigger. We expect the de-merged cement business to witness

re-rating owing to its superior cost efficiency and greater efficiency in capital

allocation. OPI trades at 5.5x FY14E EBITDA (implied EV of USD53/ton and 3.3x FY14E

EBITDA for cement business). Our SOTP valuation stands at INR115/share: (1) cement

(5x FY15E EBITDA), (2) electrical goods (6x FY15E EBITDA), and (3) paper (1x FY15E

sales). We initiate coverage with a Buy rating; our target price implies 45% upside.

About Orient Paper

Orient Paper Industries (OPI) is part of the CK Birla Group company and is engaged in

diversified businesses including cement, paper and electrical goods.

It has cement capacity of 5mtpa in Andhra Pradesh and Maharashtra, along with captive

power plants of 50MW. It has the largest tissue paper capacity in India and enjoys strong

brand recall in the electrical goods (fans and lighting) business.

OPI is poised for meaningful value unlocking through the ongoing demerger of the

cement business into Orient Cement, which is expected to conclude in 2HFY13.

OPI: 5-S Analysis



2. Sales Mix [20] 15 5 15




5-S Score 66 5 65


Orient Paper has the potential to be a 3-bagger in 2-3 years, driven by:

Demerger of cement business (by March 2013).

Scale-up of cement business to 8mtpa amidst the cement upcycle (by 2HFY15).

Ramp-up in Electrical business, driven by continued strong growth in Fans and

CFL business, and scale-up in nascent (started in 2HFY12) Home Appliances

business (by FY15-16).

Potential hive-off of Paper business to focus on Cement and Electrical Appliances.

OPI: Blue Sky Scenario (FY15)Parameter Multiple INR m Catalyst

Cement EV/Ton (USD) 100 43,676 Scale-up of capacity to 8mt during cement

upcycle

Electrical PE 20 14,990 Scale-up in home appliance business,

with continous strong growth in fans and

CFL business

Paper EV/Sales 1.6 8,182 Hive-off of Paper business at 40% discount

to AP Paper-International Paper deal

valuations of 2.65x EV/Sales

Total EV 66,848


Equity Value 51,992

Equity Value (INR/sh) 254

Upside (%) 221

Blue Sky Scenario Orient Paper


102January 2013


Size & Scalability [22 / 30] Existing cement capacity of 5mtpa across two plants

in Maharashtra (2mtpa) and Andhra Pradesh (3mtpa)

along with 50MW of captive power plant (CPP)

capacity.

Ongoing expansion to add 3mtpa in Karnataka (capex

of INR16b) by end-FY14/early-FY15.

Operating at higher than industry average utilization

- 76% v/s 65% for peers in South India.

Expect volume CAGR of 11% over FY13-15 (v/s 11.5%

over FY10-12 and 16% YoY in 1HFY13).

Strategic & Other Issues [8 / 10] Besides cement, OPI is exposed to (a) electrical

goods (~30% of FY12 revenue), and (b) paper (~14%

of FY12 revenue).

Its electrical goods business has historically posted

above average RoCE (25-35%). However, sustained

EBITDA loss in its paper business remains a drag on

overall capital efficiency (-16% RoCE in FY12).

OPI awaits final approval for the demerger of its

cement business into Orient Cement.

We expect this to aid value unlocking, better capital

efficiency and re-rating for the cement business.

Sales Mix [15 / 20] Maharashtra (65%) and Andhra Pradesh (24%)

account for ~90% of its dispatches. Lower utilization

in core markets may induce pricing volatility.

Has historically posted 10-15% lower realizations

than peers (MC, ICEM and DBEL).

Expected price recovery in Andhra Pradesh from

4QFY13 should improve realizations.

We factor in comparatively lower YoY uptick in

realizations (INR15/INR12 per bag in FY14/15),

implying 7% CAGR over FY13-15.

Strength of Financials [9 / 20] Owing to cost leadership, OPI commands superior

EBITDA/ton in cement (INR1,092 in FY12 v/s INR894

for MOSL Cement Universe).

We expect profitability to decline 30% YoY to

INR893/ton in FY13 due to elevated cost structure,

before posting 153% CAGR over FY13-15.

Cost saving measures in non-cement businesses

(new CPP, water reservoir, etc) are likely to render

resilience. We expect overall revenue /EBITDA/PAT

to witness 20%/51%/45% CAGR over FY13-15.

Ongoing capex towards Karnataka plant to augment

net debt to INR15.7b by FY15

Supply Chain Efficiencies [12 / 20] Lowest cost cement manufacturer, with total cost

of production 15-20% lower than our Cement

Universe (INR2,538/ton in FY12).

Cost advantage emerges from energy cost efficiency

due to higher proportion of (60-65%) low cost

linkage coal from Singareni Mines, and power and

fuel consumption efficiency.

Increasing possibility of shrinkage in linkage coal

supply would reduce cost advantage, going ahead.

However, stabilization of 50MW CPP (meet 60% of

power requirement) may aid some cost savings.

We model in ~10% CAGR in energy cost and 5% CAGR

in total cost per ton over FY13-15.

Valuation & View [79 / 100] OPI trades at 5.7x FY15E EBITDA. Cement business

implied valuations are EV of USD43/ton (v/s USD64/

ton for our Mid Cap Cement Universe and USD111/

ton for our entire Cement Universe) and 3.6x FY15E

EBITDA (v/s 3.9x FY15E EBITDA for our Mid Cap

Cement Universe and 5.9x FY15E EBITDA for our

entire Cement Universe).

Our SOTP valuation stands at INR115/share: (1)

cement (5x FY15E EBITDA), (2) electrical goods (6x

FY15E EBITDA), and (3) paper (1x FY15E sales).

Cement, electrical goods and paper respectively

account for 68%, 18% and 13% of the SOTP value.

We initiate coverage with a Buy rating; our target

price implies 45% upside. Blue-sky scenario analysis

indicates fair value of ~INR254.


103January 2013

Size & Scalability: Strong dispatch growth to continue Superior dispatch growth to continue on the back of market recovery

Cement accounts for ~56% of OPI’s revenue and 90%+ of EBITDA. It has 5mtpa of

cement capacity at Devapur, Andhra Pradesh (3mtpa) and Jalgaon, Maharashtra

(2mtpa), along with 50MW of captive power plant (CPP) capacity. It sells cement

under two brands, Orient Gold and Birla A1 Premium. The company is in the process of

adding 3mtpa capacity (clinker capacity of 2mtpa) at Gulburga, Karnataka (total capex

of INR16b) by FY15. Currently, OPI is operating at higher than industry average utilization

of 76% (v/s 65% in South India), despite severe underperformance in its key Andhra

Pradesh market. It has posted superior dispatch growth of 11.5% CAGR over FY10-12

and we expect the trend to continue, led by demand recovery in Andhra Pradesh and

Maharashtra, and upcoming greenfield capacity in Karnataka (by FY15). We model in

volume CAGR of 11% over FY13-15 (v/s 9.5% for our Cement Universe).

Expect OPI to continue witnessing steady volume growth over FY12-15


Sales Mix: Historically lower realization than market peers Market mix unfavorable in recent past

Our channel checks suggest that OPI’s key markets, Maharashtra (65%) and Andhra

Pradesh (24%), which account for ~90% of its dispatches, are plagued with overcapacity

and muted demand recovery. Political turmoil has impacted cement demand in Andhra

Pradesh – de-growth of 9%/5% in FY12/YTDFY13. However, OPI has posted encouraging

dispatch growth of ~16% YoY in 1HFY13, which strengthens near-term volume growth

outlook. We believe recovery in demand in the South and the West from 4QFY13

would be a key upside for OPI.

Realizations lower than southern peers

Historically, OPI’s realizations have been 10-15% lower than its major regional peers

(MC, ICEM and DBEL). While the significant correction in cement prices in Andhra

Pradesh (INR65-70/bag) resulted in a QoQ decline of ~INR14/bag in OPI’s realizations

in 2QFY13, expected recovery from 3QFY13 should improve its blended realizations.

Nonetheless, cement prices in the southern market are likely to remain volatile in

the near-term on the back of subdued utilization (~65% over FY13-14). We expect

realizations to increase by INR2/bag in FY13 and by INR15/INR12 per bag in FY14/FY15

(7.2% CAGR over FY13-15).

OPI is operating at higher

than industry average

utilization of 76% (v/s 65%

in South India)

Market Mix is skewed

towards west - aiding

resilience to better

volume growth


104January 2013

Supply Chain Efficiencies: Cost leadership owing to linkage coal advantage Energy cost advantage enables cost leadership…

OPI is one of the lowest cost cement manufacturers in India. Its cost of production is

~15% lower than peers (INR2,538/ton v/s INR2,959/ton for our Cement Universe in

FY12), enabling it to achieve superior profitability (EBITDA/ton of INR1,092 v/s INR850

for our Cement Universe in FY12). Its cost advantage largely emerges from the edge

that it enjoys in energy cost efficiency. OPI is one of the few cement companies

enjoying the advantage of high proportion of low cost linkage coal, which it receives

primarily from Sigareni Coal Mines. Linkage coal accounts for 60-65% of its fuel mix as

compared to 30-60% for some of the energy efficient players. This not only shields

OPI against the energy price volatility in the Andhra Pradesh market, but also positions

it as the lowest energy cost player in our Cement Universe (INR784/ton in FY12; ~20%

discount to MOSL Cement Universe). OPI has also maintained efficiency in power and

fuel consumption. It has reduced power consumption to 78kwh/ton from 81kwh/ton

in FY11, and has maintained coal usage as a percentage of cement production at 14%

v/s 12-16% for peers.

Maharashtra and Andhra Pradesh account for ~90% of OCI’s volumes

Fuel mix skewed towards linkage coal Proportion of linkage coal highest among peers


Higher proportion of

linkage coal renders cost

leadership and superior

profitability despite

lower realization



105January 2013

…but eclipsed by deterioration in linkage coal availability

Lately, availability of linkage coal from Singareni Coal Mines has been constrained.

This has increased OPI’s reliance on high cost imported coal and open market coal

purchases, in turn leading to an escalation in its energy cost by 20-25% YoY in 1HFY13

to INR942/ton. We believe availability of linkage coal would shrink and at expanded

capacity, the proportion of linkage coal would be even lower, elevating its overall

production cost. However, stabilization of the 50MW CPP in Andhra Pradesh should

trigger some cost savings, as its generation cost is INR1.5/unit lower than the price it

has to pay for power purchases. At full capacity, the CPP would be able to meet ~60%

of its power requirement. We model ~10% CAGR in energy cost over FY13-15.

Low cost linkage coal availability key to energy cost advantage; makes OPI cost leader (INR/ton)


Expect dilution in OPI’s energy cost advantage, leading to ~8% CAGR in total cost over FY12-15

Expect moderate escalation in freight cost

OPI’s fright mix is skewed towards road transport, which accounts for ~75% of its

volumes. In 1HFY13, its freight cost posted increase of 7.8% YoY on account of (a)

increase in rail freight (by ~22%), (b) INR5/liter hike (up ~12%) in diesel prices, and (c)

jump in lead distance due to higher dispatches outside Andhra Pradesh. We model

7.5% CAGR in freight cost over FY13-15.

OPI’s recently commissioned 12ktpa artificial gypsum plant would offer uninterrupted

supply, though we do not expect any major cost savings.

Linakage coal availability

issue may dilute cost

advantage here on



106January 2013

Strategic & Other Issues: Electrical division steady, paper remains a drag Diversification aimed at de-risking business model

Besides cement, OPI has (a) electrical goods business (~30% of FY12 revenue), and (b)

paper business (~14% of FY12 revenue). The electrical goods division (15% capital

allocation) has historically posted above average RoCE (25-35%). However, the paper

division (26% capital allocation) has been making losses at the EBITDA level since

FY10 and remains a drag on overall capital efficiency (RoCE of -16% in FY12).

Capital allocation across segments (%) Paper business a drag on overall RoCE (%)


Electrical goods business to continue witnessing robust growth

OPI has established strong brand equity and is a leading player in the fans business

(under the brand, Orient PSPO), with an annual capacity of 8m units. In the lighting

division, it enjoys 4.2% market share and has entered into CFLs and several new SKUs

over the past few years. The segment has consistently augmented its revenue

contribution from 23% in FY09 to 30% in FY12. OPIL has posted 23%/39% volume CAGR

over FY09-12 in fans/CFLs, leading to 28% revenue CAGR over FY09-12 and 22% YoY

growth in 1HFY13. We expect the robust growth trend to continue on the back of (a)

strong outlook in CFLs and luminaires (20-22% industry growth), and (b) recent

diversification into home electrical appliances. We model 23% revenue CAGR over

FY12-15. Nonetheless, the segment EBIDT margin will remain under pressure (8.5-

9.5% over FY13-15 v/s 10%+ pre-FY11) owing to higher cost of raw materials such as

copper, zinc and aluminum, increasing fuel prices, and higher marketing expenses.

Electrical goods division to post 22% revenue CAGR amidst near-term margin pressure


Robust growth trend to

continue in electrical

segment with strong

outlook in CFLs and

recent diversification

into home electrical

appliances


107January 2013

Paper business unlikely to break even in near future

OPI’s paper division has an installed capacity of 186ktpa (tissue paper: 25ktpa; writing

paper: the balance 161ktpa), with two paper manufacturing plants at Amlai in Madhya

Pradesh and Brajrajnagar in Orissa. While operations at the Brajrajnagar plant (capacity:

76ktpa) have been suspended since 1999, the Amlai plant (capacity: 110ktpa) is

running. OPI sells paper under the brands, Orient and Peacock. Despite steady sales

growth (15-20% over FY11-12), we expect OPI’s paper business to continue witnessing

losses in the near term owing to (1) declining realizations, and (2) escalation in prices

of pulp and coal. However, its recently added (a) 250m gallon water reservoir (to

address water shortage problem – can sustain till 50 days), and (b) 55MW CPP at Amlai

(to address power requirements of the paper business) are likely to resolve some

operational bottlenecks. The resultant cost savings (INR300m-350m at stabilization)

would help reduce EBITDA loss. The said plant will also be left with ~15MW of surplus

power for expansion or monetization.

Paper segment to post steady revenue growth but unlikely to break even in near future


Demerger to aid value unlocking

OPI’s Board has approved the proposal to demerge the cement business into Orient

Cement. The shareholders will get one new equity share of Orient Cement for each

share held in OPI. The demerger process is currently at an advanced stage; final

approval from Orissa High Court is expected in 2-3 months. Demerger and subsequent

listing of Orient Cement will create a focused cement play. We expect this to aid

meaningful value unlocking, improve capital efficiency and lead to re-rating.

Shareholding – before and after impending demerger

Source: Company

Potential cost saving

triggers are expected to

lower EBITDA loss here on


108January 2013

Strength of Financials: Expect 51% EBITDA CAGR Dilution of cost leadership to impact cement profitability over FY13-15

Though OPI’s cement realizations have been lower than regional peers, its cost

leadership enabled it to enjoy superior profitability. However, given the subdued

price growth due to unfavorable market-mix and dilution of its energy cost advantage,

we expect OPI’s EBITDA/ton to decline 30% to INR759 in FY13, before posting a 15%

CAGR over FY13-15. This would imply deterioration in EBITDA margin of the cement

business from 30% in FY12 to ~23.5% over FY13-15.

Strong realizations and operating efficiencies had helped OPI to maintain superior profitability


Expect 51% EBITDA CAGR amidst margin expansion in non-cement businesses

Though cost structure in the cement business is likely to deteriorate over FY12-15,

cost saving measures in non-cement businesses (CPP, water reservoir, etc) would

render resilience. We estimate OPI’s overall revenue/EBITDA to witness 20%/51%

CAGR over FY13-15. EBITDA margin would expand 5.1pp over FY13-15, after declining

6.6pp over FY12-13. PAT is likely to register 45% CAGR over FY13-15 despite higher

depreciation and interest.

Expect revenue CAGR of 18.6% over FY12-15 Expect EBITDA margin expansion post FY13


With dilution of energy

cost advantage, EBITDA/

ton to decline 30% to

INR759 in FY13, before

posting a 15% CAGR

over FY13-15


109January 2013

Leverage to increase on the back of ongoing expansion

OPI has already acquired land for its planned 3mtpa greenfield cement capacity (clinker

capacity of 2mtpa) at Gulburga, Karnataka. The project requires ~INR16b of capex and

is likely to be completed by early-FY15. OPI expects to receive MoEF approval soon,

post which it will start ordering plant and machinery, and start construction work,

which should take 2.5 years thereon. The capex would be funded by mix of debt and

internal accruals, which is expected to augment net debt to INR14.8b by FY15 as against

INR3.8b in FY12.

Despite steady uptick in OCF, FCF negative on the back of ~INR16b capex over FY13-15

High cost structure to impact capital efficiency moderately PAT to post 45% CAGR over FY13-15


Net debt to witness sharp upswing owing to negative FCF Healthy dividend payout (%)



110January 2013

Orient Papers: SOTP valuationParameter Multiple FY13E FY14E FY15E

Cement EV/EBITDA 5 15,931 20,959 26,033

Paper EV/Sales 1 3,785 4,352 5,114

Electrical EV/EBITDA 6 2,245 5,509 7,166

Total EV 21,961 30,820 38,313

Less: Net Debt 3,953 1,376 14,849

Equity Value 18,008 29,443 23,465

Fair Value (INR/Share) 88 144 115

Upside (%) 10.8 81.1 44.3

CEMENT Implied EV/Ton @ TP 58 76 59


Valuation & View Trading at discount, despite superior profitability

Impending demerger and subsequent listing of the cement business is a key near-

term value unlocking trigger. We expect the de-merged cement business to witness

re-rating owing to its superior cost efficiency and greater efficiency in capital

allocation. OPI trades at 6.2x FY15 PE and 5.7x FY15E EBITDA. This implies an EV of

USD43/ton (v/s USD64/ton for our Mid Cap Cement Universe and USD111/ton for our

Full Cement Universe) and 3.6x FY15E EBITDA (v/s 3.9x FY15E EBITDA for our Mid Cap

Cement Universe and 5.9x FY15E EBITDA for our Full Cement Universe) for the cement

business.

Implied valuation of pure cement at discount despite operational efficienciesFY13E FY14E FY15E

Market Cap (INR m) 16,259 16,259 16,259

Net Debt (NR m) 4,043 1,467 14,939

EV 20,302 17,725 31,198

EV of other businesses 6,030 9,861 12,280

Implied EV of Cement business 14,272 7,864 18,917

Implied EV/Ton 52 29 43

Implied EV/EBITDA 4.5 1.9 3.6


Our target price implies 45% upside

Our SOTP valuation stands at INR115/share: (1) cement (5x FY15E EBITDA), (2) electrical

goods (6x FY15E EBITDA), and (3) paper (1x FY15E Sales). We initiate coverage with a

Buy rating; our target price implies 50% upside.


111January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 16,198 19,279 24,334 28,080 33,586 40,330

Change (%) 7.8 19.0 26.2 15.4 19.6 20.1


% of Sales 81.0 86.2 84.8 91.4 87.6 86.3

EBITDA 3,074 2,662 3,695 2,413 4,153 5,514

Margin (%) 19.0 13.8 15.2 8.6 12.4 13.7

Depreciation 550 815 884 964 1,131 1,653

EBIT 2,523 1,848 2,811 1,449 3,022 3,861

Int. and Finance Charges 345 440 423 383 676 1,042

Other Income - Rec. 163 687 796 739 854 997

PBT bef. EO Exp. 2,341 2,095 3,183 1,805 3,201 3,816

PBT after EO Exp. 2,341 2,095 3,183 1,805 3,201 3,816

Current Tax 147 413 952 541 960 1,145

Deferred Tax 601 251 109 25 64 76

Tax Rate (%) 32.0 31.7 33.3 31.4 32.0 32.0

Reported PAT 1,593 1,431 2,123 1,238 2,177 2,595

PAT Adj for EO items 1,593 1,431 2,123 1,238 2,177 2,595

Change (%) -31.2 -10.2 48.3 -41.7 75.8 19.2

Margin (%) 9.8 7.4 8.7 4.4 6.5 6.4


Y/E March 2010 2011 2012 2013E 2014E 2015E


Total Reserves 7,564 8,823 10,981 11,743 13,324 15,259

Net Worth 7,767 9,026 11,186 11,948 13,529 15,464


Total Loans 5,162 4,891 5,096 6,446 10,446 16,646


Gross Block 16,365 17,919 19,126 22,060 22,560 39,810

Less: Accum. Deprn. 5,206 5,964 6,806 7,771 8,902 10,554

Net Fixed Assets 11,159 11,956 12,319 14,290 13,659 29,256

Capital WIP 568 273 1,735 1,500 8,000 750

Total Investments 471 663 875 875 875 875


Inventory 1,503 1,642 1,964 2,156 2,579 3,097






Provisions 807 683 628 433 768 914


Appl. of Funds 14,243 15,271 17,744 19,882 25,527 33,738



112January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

Consol EPS 8 7 10 6 11 13

Cash EPS 11 11 15 11 16 21

BV/Share 38 44 55 58 66 75

DPS 1.5 1.5 2.0 2.0 2.5 2.8

Payout (%) 21.2 23.5 21.8 38.5 27.3 25.2

Valuation (x)

P/E 7.7 13.1 7.5 6.3

Cash P/E 5.4 7.4 4.9 3.8

P/BV 1.5 1.4 1.2 1.1

EV/Sales 0.8 0.7 0.5 0.8

EV/EBITDA 5.0 8.4 4.3 5.7

EV/Ton (USD) 42 52 29 43

Dividend Yield (%) 2.5 2.5 3.2 3.5

Return Ratios (%)

RoE 22.3 17.0 21.0 10.7 17.1 17.9

RoCE 22.3 18.9 23.9 12.6 18.3 17.4


Asset Turnover (x) 1.1 1.3 1.4 1.4 1.3 1.2

Inventory (Days) 33.9 31.1 29.5 28.0 28.0 28.0

Debtor (Days) 38 41 47 50 45 42

Creditor (Days) 53 64 59 53 53 53

Working Capital Turnover (Days) 31 33 34 39 30 24

Leverage Ratio (x)

Debt/Equity 0.7 0.5 0.5 0.5 0.8 1.1



Y/E March 2010 2011 2012 2013E 2014E 2015E



Depreciation 550 815 884 964 1,131 1,653

Direct Taxes Paid -147 -413 -952 -541 -960 -1,142

(Inc)/Dec in WC 557 387 481 798 -300 -107



(inc)/dec in FA -1,845 -1,316 -2,710 -2,700 -7,000 -10,000

(Pur)/Sale of Investments -379 -192 -211 0 0 0


Issue of Shares -17 165 499 0 0 0

(Inc)/Dec in Debt 503 -271 205 1,350 4,000 6,200

Interest Paid -345 -440 -423 -383 -676 -1,050

Dividend Paid -338 -337 -463 -476 -595 -655

CF from Fin. Activity -198 -883 -181 491 2,729 4,495

Inc/Dec of Cash 111 159 -45 -396 77 -30


Closing Balance 444 626 544 119 195 166

Prism Cement

113January 2013

CMP: INR49 TP: INR57 Neutral


Volume and profitability recovery, as operations normalizeCapital allocation to non-cement businesses key risk; initiate with Neutral

Prism Cement (PRSC) is likely to post strong volume CAGR of 12% over FY13-15 v/s

9.5% for our Cement Universe, driven by replacement of damaged kiln by FY13 end.

Cement profitability has declined sharply over FY11-12, but we expect cost saving

triggers to kick in from late-FY14 and drive up profitability.

We expect PRSC to post 18% revenue CAGR and 59% EBITDA CAGR over FY13-15,

implying margin expansion of ~5.1pp from FY13.

Our SOTP-based target price of INR57 implies very little upside. Moreover, its diversified

business carries the risk of inefficient allocation of capital. Neutral.

Resolution of silo breakdown to drive 12% volume CAGRWhile PRSC has posted strong volume CAGR of 34% over FY10-12, led by

brownfield capacity addition in unit II of its Satna plant, we believe the major

volume thrust is already behind. There was a blip in its cement production in

1QFY13, as the blending silo in clinker unit II was damaged. Going forward, volume

growth hinges on the replacement of the silo which is expected to be resolved

by 4QFY13. We have modeled volume growth of 12% CAGR over FY13-15 for PRSC

v/s 9.5% for our Cement Universe due to lack of visibility on further capacity

expansion till FY15.

Cost saving triggers to kick in from FY14, drive profitabilityPRSC's cement profitability has declined sharply over FY11-12 on account of (a)

subdued realization growth, (b) higher variable cost due to silo damage, (c)

sustained cost pressure, and (d) lower capacity utilization. However, we model

healthy recovery, with ~55% CAGR in EBITDA/ton over FY13-15 to INR853, led by

multiple cost saving triggers such as (1) replacement of the blending silo by the

end of FY13, (2) commencement of captive coal mine (annual savings of ~INR1b;

not factored in our estimates), and (3) encouraging uptick in realizations on the

back of favorable market mix. We expect most of the cost saving triggers to kick

in from FY14.

Expect steady operations in RMC; TBK margins to improvePRSC is India's third-largest RMC player and we expect it to continue growing

steadily (at 15-20%) in this segment, with stable margins. In the TBK business,

we expect margin expansion, led by greater focus on value-added products and

cost savings driven by to switch towards low cost fuel mix. Its 4.8mtpa greenfield

expansion plan in Andhra Pradesh is still under initial evaluation and is unlikely

to commence before FY16. PRSC has generated free cash flow of INR1.1b in FY12

(v/s negative INR2.2b in FY11) on the back of steady uptick in operating cash flow

and moderating capex. We expect the trend to continue, going forward, leading

to decline in net debt to ~INR12b (net debt-equity of 0.8x) by FY15.


Promoter 74.9 74.9 74.9

Dom. Inst 3.4 3.2 1.4

Foreign 1.3 1.7 5.4

Others 20.5 20.3 18.3


Sa les 49.7 58.9 68.9

EBITDA 3.1 6.2 7.8

NP 0.0 2.1 3.3

Adj EPS (INR) -0.1 4.2 6.5

EPS Gr. (%) -88.0-6,311.8 55.0

BV/Sh. (INR) 22.2 25.2 29.9

RoE (%) -0.3 17.6 23.5

RoCE (%) 7.3 19.3 23.6

Payout (%) NA 27.9 27.0

Valuations

P/E (x) -724.4 11.7 7.5

P/BV (x) 2.2 1.9 1.6

EV/EBITDA (x) 12.1 5.9 4.6

EV/Ton (USD) 99.9 77.0 64.3

Stock Info

Bloomberg PRSC IN



1,6,12 Rel. Perf. (%) -12/-22/-3

M.Cap. (INR b) / (USD b) 24/0.4

BSE SENSEX S&P CNX

19,987 6,057

5-S framework




Base case INR57 18%



Prism Cement

114January 2013

Initiating coverage with Neutral ratingWe expect PRSC to post 18% revenue CAGR and 59% EBITDA CAGR over FY13-15,

implying margin expansion of ~5.1pp from FY13. Our SOTP valuation is INR57/share,

which implies an EV of USD80/ton. We initiate coverage with a Neutral rating.

Moreover, its diversified business carries the risk of inefficient allocation of capital.

About Prism Cement

Prism Cement (PRSC), a Rajan Raheja group entity, is an integrated building material

company with presence in cement, ready-mix-concrete (RMC), and tiles and bathroom

& kitchen products (TBK). It merged its RMC and TBK businesses with its cement business

in April 2009.

Its cement business has a capacity of 5.6mtpa, with dispatch mix skewed towards central

India.

PRSC also has 74% stake in Raheja QBE General Insurance Company, a JV with QBE Group

of Australia.

PRSC: 5-S Analysis



2. Sales Mix [20] 17 2 15




5-S Score 54 9 65


Prism Cement has the potential to deliver ~86% returns over the next two years,

driven by:

Savings of INR1b from captive coal block, expected from 2HFY14, which is not

factored in our base assumptions.

Coal gasification at Andhra Pradesh plant and availability of LNG at Karnataka

(in 6-9 month) driving cost savings, which are yet to be factored in.

PRSC: Blue Sky Scenario (FY15)

(INR m) Remarks

Cement EV/EBITDA 5x 32263 To be driven by savings of INR1b from

captive coal block, which is not factored in

our base assumptions

RMC EV/EBITDA 6x 4,232

TBK EV/EBITDA 6.5x 22679 Factoring in for EBITDA margin

improvement to 15% driven by change in

fuel mix

Raheja QBE At BV 1,224

Norcros At BV 1,064

Total EV 61,463


Equity Value 51,076

Value/share (INR) 101

Upside (%) 109

Implied Cement EV/Ton (USD) 101

Blue Sky Scenario Prism Cement

Prism Cement

115January 2013


Size & Scalability [12 / 30] Has 5.6mtpa of cement capacity in Madhya Pradesh

and is one of the largest holders of limestone

reserves in the state.

Posted strong volume CAGR of 34% over FY10-12,

led by recent brownfield addition.

Production witnessed temporary blip in 1QFY13 due

to damage of blending silo.

Going forward, volume growth hinges on the

replacement of the silo and subsequent uptick in

utilization from the current 72%.

Expect volume growth of 12% CAGR over FY13-15,

driven by replacement of damaged blending silo by

FY13 end.

Strategic & Other Issues [3 / 10] Non-cement segments (RMC, TBK) accounted for

60%/57% of revenue/EBITDA in FY12.

While non-cement businesses have posted superior

RoCE than cement in FY12, we expect steady

recovery in cement to reverse the equation, going

ahead.

We expect the RMC business to continue growing

steadily (at 15-20%), with stable margins. In the TBK

business, we expect margin expansion, led by

greater focus on value-added products and cost

savings driven by to switch towards low cost fuel

mix.

Sales Mix [17 / 20] Sales mix concentrated in Central and East India,

with Uttar Pradesh (45%), Madhya Pradesh (32%),

Bihar (16%), and Chhattisgarh (3%) being the key

contributors.

Over FY11-12, realizations have been muted due to

(1) higher clinker sales, (2) new market entry, and

(3) relatively weaker price growth in Central India.

In 1HFY13, pricing outlook was encouraging (INR33/

bag increase over FY12 average), led by stronger

demand-supply dynamics in Central India.

We model INR37/15/12 per bag increase in PRSC's

realizations in FY13/14/15.

Strength of Financials [12 / 20] PRSC's cement profitability has declined sharply

over FY1-12. However, we expect healthy recovery,

with ~55% CAGR in EBITDA/ton over FY13-15 to

INR853, led by multiple cost saving triggers.

Expect 18%/59% CAGR in revenue/EBITDA over FY13-

15.

Greenfield expansion of 4.8mtpa in Andhra Pradesh

is still under initial evaluation and is unlikely to

commence before FY16.

Moderate capex and FCF generation to reduce net

debt to ~INR12b (net debt-equity of 0.8x) by FY15.

Supply Chain Efficiencies [10 / 20] Costly fuel mix (70% open market purchase) and

inefficient fuel and electricity usage a drag on

energy cost.

Increase in lead distance to 425km, with new market

entry, has increased freight cost.

Multiple cost saving triggers: (1) replacement of the

blending silo by the end of FY13, (2) commencement

of captive coal mine (annual savings of ~INR1b, not

factored in our estimates), and (3) encouraging

uptick in realizations on the back of favorable

market mix. Expect most of the triggers to kick in

from FY14.

We model in 2% CAGR in cement cost over FY13-15,

driven by normalization of production and operating

leverage.

Valuation & View [53 / 100] Our SOTP valuation is INR57/share. We value cement

business at 4x FY15E EBITDA, TBK business at 6.5x

FY15E EBITDA (at 25% premium to Kajaria Ceramics)

and the RMC business at 5x FY15E EBITDA.

The implied valuation of the cement business is an

EV of USD64/ton (v/s USD64/ton for our Mid Cap

Cement Universe and USD111/ton for our Full

Cement Universe) and 3.2x FY15E EBITDA (v/s 3.9x

FY15E EBITDA for our Mid Cap Cement Universe and

5.9x FY14E EBITDA for our Full Cement Universe).

We initiate coverage with a Neutral rating.

Moreover, its diversified business carries the risk of

inefficient allocation of capital.

Prism Cement

116January 2013

Size & Scalability: Recovery in utilization to drive dispatches hereon Volume growth hinges on stabilization of recent expansion…

PRSC has 5.6mtpa of cement capacity at Satna in Madhya Pradesh and is one of the

largest holders of limestone reserves in the state. It has posted strong volume CAGR

of 34% over FY10-12, led by brownfield capacity addition in unit II of its Satna plant

(3.6mtpa in December 2010). There was a blip in its cement production in 1QFY13, as

the blending silo in clinker unit II was damaged. While the issue has been fixed with

an intermittent facility, the management has indicated that full resolution would

happen by the end of FY13, increasing utilization to 90% (v/s 85% in FY12 and 72% in

1HFY13). Despite immediate constraints, recovery in utilization would be the key

volume growth driver hereon.

Volume thrust from expansion already behind To post sub-par dispatch growth over FY12-15


…though lack of further expansion would limit growth potential

We have modeled volume growth of 12% CAGR over FY13-15 for PRSC v/s 9.5% for our

Cement Universe, driven by replacement of damaged blending silo by FY13 end. The

growth would be on the back of steady uptick in utilization to >100% by FY14-15. The

lack of visibility on further capacity expansion till FY15 would limit growth potential.

Sales Mix: Expect favorable market to drive 6.6% CAGR in realization Favorable market mix…

PRSC's sales mix is concentrated in Central and East India, with Uttar Pradesh (45%),

Madhya Pradesh (32%), Bihar (16%), and Chhattisgarh (3%) being the key contributors.

With no capacity expansion planned till FY15, we expect near-term market mix to

remain unaltered. Almost 90% of its cement production is skewed towards superior

quality PPC.

Prism Cement

117January 2013


…to drive healthy realization growth after underperformance in FY11-12

Over FY11-12, PRSC's realizations have been 5-15% lower than our Cement Universe,

largely on account of (1) higher clinker sales, (2) entry into new markets (Bihar), with

expanded capacity, and (3) relatively weak price growth in Central India. However,

pricing outlook has been encouraging over 1HFY13 (INR33/bag increase over FY12

average), led by stronger demand-supply dynamics in Central India. We model INR37/

15/12 per bag increase in PRSC's realizations in FY13/14/15. We expect outperformance

in realizations to place PRSC largely at par with our Cement Universe by FY14-15.

Supply Chain Efficiencies: Cost saving triggers kick in from FY14 Costly fuel mix, suboptimal efficiency a drag on energy cost

PRSC procures ~30% of its coal requirement (~1mtpa) through linkage coal and the

balance through open market purchases. The higher proportion of open market coal

(@INR6,200/ton) and escalation in linkage coal prices (landed cost for PRSC at INR5,500/

ton) by Coal India had a severe negative impact on its energy cost. Its average coal

procurement cost has grown 68% over FY10-12 to INR5,400/ton v/s INR4,900/ton for

our Cement Universe. Moreover, sub-optimal fuel efficiency (partly due to lower

utilization) remains a major overhang on energy cost: (a) PRSC's average coal usage

(as % of clinker) is 17-18% v/s 14% for our Cement Universe, (b) electricity/ton of

cement has also grown by 17% over FY10-12, and (c) electricity cost stood at INR5-6/

unit (no captive power plant) v/s INR4-4.5/unit for our Cement Universe.

Coal usage/ton of clinker inferior to industry average (%) Trend in coal usage per ton of clinker (%)

Market mix: High contribution from Uttar Pradesh/Madhya Pradesh (%) Expect 12% CAGR in realization over FY12-15

Prism Cement

118January 2013

Rising trend in power usage (KWH/ton of cement) Electricity cost (INR/unit) above industry average


Freight mix skewed towards railways

PRSC's freight mix is skewed towards railways (60% contribution). Its overall freight

cost was up significantly (~32% on per ton of cement dispatch) over FY10-12, largely

on account of (a) increase in rail freight, and (b) increase in lead distance from 340km

to 425km, with entry into new markets post commencement of new capacity. While

we have assumed healthy uptick in PRSC's realizations over FY13-15, a part of the

increase will be offset by higher lead distance. This, along with increase in diesel

price, would keep fright cost high.

Benefits of cost savings to accrue from FY14

PRSC has three major cost saving triggers:

1. Replacement of blending silo by the end of FY13 would have a positive bearing on

utilization and raw material cost (estimate savings of INR130-150/ton), as it would

reduce clinker purchase.

2. PRSC's captive coal mine (15mtpa reserve at Chhindwara, Madhya Pradesh) is

likely to start operations by 3QFY14 and would fulfill 30%+ of its coal requirement

at an estimated landed cost of INR2,700/ton, leading to annual savings of ~INR1b

(not factored in our estimates). The mining contract for the same has already

been outsourced to Apex Encon.

3. Seven upcoming power plants, with cumulative capacity of 17,000MW, are set to

start operations in Central India over the next couple of years, which should reduce

PRSC's power and fly ash cost.

We model 2% CAGR in cement cost over FY13-15, driven by cost saving triggers.

However, any delay in replacement of blending silo could have a negative bearing on

utilization and raw material cost, as it would necessitate higher clinker purchases.

Prism Cement

119January 2013

We model moderation in cost FY14 onward (INR/ton)


Strategic & Other Issues: High non-cement contribution High non-cement contribution and capital allocation

PRSC has merged its ready mix concrete (RMC) and tiles and bathroom & kitchen

products (TBK) businesses with the cement business in FY10, which resulted in the

emergence of an integrated building materials company. Its non-cement businesses

accounted for 60%/57%/42% of FY12 revenue/EBITDA/Capital Employed.

Almost 10% of PRSC's capital allocation is towards RMC, which earns RoCE of 14-16%.

TBK accounts for ~32% of capital allocation and earned RoCE of 6% in FY12 (18%/12% in

FY10/11) due to intense competition from the unorganized sector and sharp increase

in input and energy costs.

PRSC's cement business has posted inferior capital efficiency over FY11-12 due to

recent capex, cost escalation and operational bottlenecks (damage of blending silo).

We believe that the cement business is at the cusp of recovery and renders strong

visibility of profitability improvement over FY13-15. Going forward, the possibility of

continued capital allocation towards non-cement businesses would be a key concern.

Segmental revenue mix (%) Capital allocation mix (%) RoCE trend (%)


Prism Cement

120January 2013

RMC business to enjoy stable margin and high asset turn

PRSC is India's third-largest RMC player after UltraTech and Lafarge. It has 85 existing

plants, with a total capacity of 6m cubic meters, along with backward integration in

aggregates (9 aggregate plants, manufactured sand, etc; also supplying to third parties).

The backward integration enables PRSC's RMC business to earn relatively stable/high

margins as compared to peers (ACC makes EBITDA loss).

PRSC's RMC business enjoys 5-6% EBITDA margin along with high asset turn of 4-5x,

translating into RoCE of 14%. We expect improvement in utilization (backed by low

penetration of RMC in India; the management expects ~20% volume growth in the

near term) to boost asset turn and capital efficiency. GST implementation would be

favorable for the organized sector, as it would eliminate the tax advantage enjoyed

by the unorganized sector. We model 12% volume and 18% revenue CAGR over FY13-

15, amidst stable EBITDA margin of 5%.

Strong brands in TBK; switch to low cost fuel to aid cost savings

PRSC is India's leading tiles manufacturer, with strong brand equity and one of the

largest distribution networks. It has brands such as (1) Johnson (floor tiles and bathroom

& kitchen products), (2) Marbonite (vitrified tiles), (3) Endura (industrial tiles), etc.

Due to high competition from unorganized players, PRSC follows a JV/outsourcing

model to (a) gain cost advantage in low-end products, and (b) focus on high-end

vitrified/industrial tiles and bathroom & kitchen accessories. South India (especially

Andhra Pradesh) is PRSC's core market due to proximity to plants, while the JV model

offers geographical diversification.

We assume 15% volume CAGR over FY13-15 in TBK business, with no major change in

existing revenue mix between own manufacturing (35%), JV (45%) and outsourcing

(20%). PRSC has converted its fuel source to RNLG from high cost propane gas or LPG

in its three plants (including Pen and Kunigal), covering 40% of capacity. The company

is likely to derive cost benefits, with other plants also set to move towards natural

gas-based fuel over the next few years.

RMC: Expect steady growth amidst stable margins TBK: Profitability to improve due to changing fuel mix


Prism Cement

121January 2013

Related / unrelated investments

PRSC primarily has two investments:

1. 29.9% stake in Norcros for INR1.33b: Norcros is a leading supplier of ceramic tiles,

showers and adhesive products operating in UK, South Africa, Middle East and

Australia. Currently, PRSC is drawing healthy dividend (GBP650k in FY12) from this

investment and expects to enjoy export synergies on the back of Norcros'

distribution network.

2. 74% stake in Raheja QBE General Insurance (JV with QBE Australia) for INR1.53b:

The company focuses on niche segments (liability insurance, marine liability, trade

credit), with a profit sensitive approach. It does not have any plans to scale up in

the near future.

Strength of Financials: Cement business to see revival in profitability Cement profitability to improve with potential cost savings

Sustained input cost pressure (particularly coal and power) and lower capacity

utilization led to a sharp decline in cement profitability over FY10-12. EBITDA/ton

declined from INR1,218 (margin 35%) in FY10 to INR251 (margin 8%) in FY12. This has

resulted in much lower profitability for PRSC than peers.

We expect the gap to reduce on account of higher realization uptick and cost saving

catalysts in FY14. We model ~55% CAGR in EBITDA/ton over FY13-15 (on a low base) to

INR853. On the back of steady revival in the cement segment, coupled with cost

saving triggers in TBK, we expect PRSC to post 15% revenue CAGR and 60% EBITDA

CAGR over FY13-15, implying margin expansion of ~2.3pp. The company expects

reversion to sustainable RoCE of 18-20% in the medium tserm.

Cement profitability to improve from FY14 EBITDA to post 49% CAGR over FY12-15


Cement capex plan tentative; non-cement business to witness steady capex

PRSC plans to set up a greenfield capacity of 4.8mtpa in Kurnool, Andhra Pradesh,

where it has already acquired land (~3,000 acres) and obtained all requisite approvals

including mining lease, environment clearance, etc. However, given unfavorable

demand-supply dynamics in Andhra Pradesh and greater focus on stabilizing the

recently commissioned brownfield capacity at Satna, further clarity on the greenfield

expansion is likely by FY14, followed by 30 months of execution time. The

Prism Cement

122January 2013

management has guided capex of USD90/ton without power plant, though it has not

yet invited letters of intent (LoI). Additionally, PRSC is likely to spend ~INR300m of

maintenance capex per annum.

Coal mine to start production by 2HFY14: PRSC's captive coal block in Madhya Pradesh

is set to commence operations by 2HFY14. The total cost of project execution would

be INR400m, ~75% of which has already been incurred.

RMC - to add 7-8 plants per annum: PRSC has rapidly expanded its RMC plants over the

last four years - from 49 plants in FY08 to 85 plants in FY12. Growth outlook for the RMC

segment remains robust (20% CAGR) due to low penetration in India (10% of total

cement usage v/s 50-70% in developed countries). PRSC plans to set up 7-8 plants

(average cost of INR30m-40m per plant) per annum.

TBK - to witness geographic expansion: PRSC is enhancing its capacity of vitrified/

glazed ceramic tiles at Dewas, Madhya Pradesh by 2m square meters per annum to

54m square meters per annum. The project will get commissioned by FY13 (capex of

INR400m). It also plans to set up its own tile manufacturing unit in East India. It will

continue to follow an asset light model, with production mix remaining stable at

current levels.

FCF generation to moderate leverage till FY15, if cement capex does not

commence

PRSC's leverage grew sharply from net cash in FY09 to INR12.1b in FY12 (1.1x) on the

back of (1) strong cement capex over FY10-11, and (2) merger of TBK and RMC

businesses in FY10. Of the INR12.7b gross debt, ~INR7.5b is in cement, INR1.3b in RMC

and the balance in TBK.

PRSC generated free cash flow of INR1.1b in FY12 (v/s negative INR2.2b in FY11) on

the back of steady uptick in operating cash flow and moderating capex. We expect

FCF generation of INR7.6b over FY13-15, leading to a decline in net debt to ~INR12b by

FY15 (net debt-equity of 0.8x).

Leverage increased on the back of capex (INR m) FY12 FCF turned positive with moderating capex


Prism Cement

123January 2013

Prism Cement: Implied valuations for Cement

INR m Method Multiple (x) FY13E FY14E FY15E

Market Cap 24,488 24,488 24,488

Gross Debt 11,890 12,683 13,683

Cash 885 1,229 648

Investment (incl. Norcros, Raheja QBE) 3,543 3,900 3,900

EV 31,951 32,043 33,624

TBK EV/EBITDA 6.5 5,323 9,861 12,096

RMC EV/EBITDA 5 1,646 3,505 4,232

Implied Cement value 24,981 18,677 17,296

Implied EV/EBITDA (x) 11.1 4.3 3.2

Implied EV/t 82 61 57

Valuation & View Initiating coverage with Neutral rating

Our SOTP valuation is INR57/share. We value the TBK business at 6.5x FY15E EBITDA (at

25% premium to Kajaria Ceramics) and the RMC business at 5x FY15E EBITDA. The

implied valuation of the cement business is an EV of USD64/ton (v/s USD64/ton for

our Mid Cap Cement Universe and USD111/ton for our Full Cement Universe) and 3.2x

FY15E EBITDA (v/s 3.9x FY15E EBITDA for our Mid Cap Cement Universe and 5.9x FY14E

EBITDA for our Full Cement Universe). We initiate coverage with a Neutral rating.

Moreover, its diversified business carries the risk of inefficient allocation of capital.

Prism Cement: SOTP based fair value of INR57/share

INR m Method Multiple (x) FY14E FY15E

Cement EV/EBITDA 4 17,357 21,810

RMC EV/EBITDA 5 3,505 4,232

TBK EV/EBITDA 6.5 9,861 12,096

Raheja QBE At BV 1,224 1,224

Norcros At BV 1,064 1,064

Total EV 33,010 40,426

Less: Net debt 12,417 11,494

Equity Value 20,593 28,933

Value/share (INR) 41 57

Upside (%) -16 18


Prism Cement

124January 2013



Y/E March 2010 2011 2012 2013E 2014E 2015E

Net Sales 28,380 33,606 44,808 49,681 58,890 68,857

Change (%) 338.4 18.4 33.3 10.9 18.5 16.9


% of Sales 82.4 90.7 94.7 93.7 89.4 88.6

EBITDA 4,986 3,115 2,388 3,105 6,233 7,816

Margin (%) 17.6 9.3 5.3 6.3 10.6 11.4

Depreciation 899 1,133 1,473 1,583 1,671 1,725

EBIT 4,087 1,982 915 1,522 4,562 6,090

Int. and Finance Charges 529 997 1,635 1,846 1,847 1,710

Other Income - Rec. 213 312 289 274 373 405

PBT bef. EO Exp. 3,771 1,297 -432 -49 3,088 4,785

EO Expense/(Income) 189 -10 28 -16 0 0

PBT after EO Exp. 3,582 1,307 -460 -33 3,088 4,785

Current Tax 1,250 4 5 -10 988 1,531

Deferred Tax -178 345 -165 0 0 0

Tax Rate (%) 29.9 26.7 34.7 31.5 32.0 32.0

Reported PAT 2,511 958 -300 -23 2,100 3,254

PAT Adj for EO items 2,643 951 -282 -34 2,100 3,254

Change (%) 174.6 -64.0 -129.6 -88.0 -6,311.8 55.0

Margin (%) 9.3 2.8 -0.6 -0.1 3.6 4.7


Y/E March 2010 2011 2012 2013E 2014E 2015E

Equity Share Capital 5,034 5,034 5,034 5,034 5,034 5,034

Total Reserves 6,661 7,045 6,452 6,137 7,652 10,029

Net Worth 11,695 12,078 11,486 11,170 12,686 15,062


Total Loans 8,016 11,890 12,683 13,683 13,683 13,683


Gross Block 17,831 27,858 29,462 30,827 32,827 34,827

Less: Accum. Deprn. 7,920 8,990 10,331 11,913 13,584 15,310

Net Fixed Assets 9,911 18,868 19,132 18,913 19,242 19,517

Capital WIP 6,212 286 664 300 300 300



Inventory 2,742 3,713 4,273 4,737 5,615 6,565


Cash and Bank Balance 525 599 565 348 966 1,890




Provisions 570 77 377 370 966 1,268

Net Current Assets 1,296 1,523 300 1,567 2,753 4,855

Appl. of Funds 20,874 25,938 26,226 26,911 28,426 30,803


Prism Cement

125January 2013


Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR) *

EPS 5.3 1.9 -0.6 -0.1 4.2 6.5

Cash EPS 7.0 4.1 2.4 3.1 7.5 9.9

BV/Share 23.2 24.0 22.8 22.2 25.2 29.9

DPS 2.1 1.0 0.5 0.5 1.0 1.5

Payout (%) 49.1 61.3 -97.5 -1,288.0 27.9 27.0

Valuation (x)

P/E -86.9 -724.4 11.7 7.5

Cash P/E 20.6 15.8 6.5 4.9

P/BV 2.1 2.2 1.9 1.6

EV/Sales 0.8 0.8 0.6 0.5

EV/EBITDA 15.1 12.1 5.9 4.6

EV/Ton (USD) 83 100 77 64

Dividend Yield (%) 1.0 1.0 2.1 3.1

Return Ratios (%)

RoE 28.9 8.0 -2.4 -0.3 17.6 23.5

RoCE 32.7 10.5 5.0 7.3 19.3 23.6


Asset Turnover (x) 2.0 1.4 1.7 1.9 2.1 2.3

Inventory (Days) 57.4 43.7 39.8 36.6 37.8 37.5

Debtor (Days) 41.3 29.5 30.2 27.6 28.4 28.3

Leverage Ratio (x)

Current Ratio 1.2 1.2 1.0 1.1 1.2 1.4

Debt/Equity 0.7 1.0 1.1 1.2 1.1 0.9



Y/E March 2010 2011 2012 2013E 2014E 2015E

Oper. Profit/(Loss) before Tax 4,087 1,982 915 1,522 4,562 6,090


Depreciation 899 1,133 1,473 1,583 1,671 1,725

Direct Taxes Paid -624 -4 -5 10 -988 -1,531

(Inc)/Dec in WC -943 -153 1,190 -1,485 -568 -1,178


EO expense 6,911 -1,871 -604 345 343 388


(inc)/dec in FA -15,618 -4,100 -1,983 -1,000 -2,000 -2,000

(Pur)/Sale of Investments -1,229 -276 -357 0 0 0


Issue of Shares 3,800 12 0 0 0 0

(Inc)/Dec in Debt 8,016 3,875 793 1,000 0 0

Interest Paid -529 -997 -1,635 -1,846 -1,847 -1,710

Dividend Paid -1,232 -587 -293 -293 -585 -877

CF from Fin. Activity 10,055 2,303 -1,135 -1,138 -2,432 -2,588

Inc/Dec of Cash 3,751 -673 -218 112 961 1,311


Closing Balance 4,010 -148 381 677 1,309 2,278

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Disclosure of Interest Statement Companies where there is interest1. Analyst ownership of the stock None2. Group/Directors ownership of the stock Birla Corporation3. Broking relationship with company covered None4. Investment Banking relationship with company covered JK Cement

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