Thematic | March 2016 Cement › AnalystVideo › Pdf › ... · Ultratech Cement 52 Shree Cement...

CementThematic | March 2016

At the break of a new dawnSandipan Pal ([email protected]); +91 22 3982 5436Aashumi Mehta ([email protected]); +91 22 3010 2397

Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

March 2016 2

Cement | At the break of a new dawn

Contents At the break of a new dawn .................................................................................................. 3

Story in charts ....................................................................................................................... 5

Emerging from multi-decadal low growth period .................................................................. 8

Strategic investments of past key to competitive resilience................................................ 17

ID-IS positive after a decade; pricing power over FY18-19 .................................................. 21

North to deliver 1.5-2x higher expansion in return ratios ................................................... 30

Subsiding downgrade risk to aid 30%+ EBITDA CAGR .......................................................... 34

Companies .................................................................................................................. 41-99

ACC ................................................................................................................... 42

Ambuja Cement ................................................................................................ 47

Ultratech Cement .............................................................................................. 52

Shree Cement ................................................................................................... 59

Dalmia Bharat .................................................................................................. 64

India Cement .................................................................................................... 70

JK Cement ......................................................................................................... 75

JK Lakshmi Cement ........................................................................................... 80

Orient Cement .................................................................................................. 85

Prism Cement ................................................................................................... 90

Ramco Cement .................................................................................................. 95

March 2016 3


At the break of a new dawn Confluence of multiple drivers after decade-long hiatus

The cement sector is emerging from a period of multi-decadal low growth (3% CAGR over FY13-16). Credible signs of infra pick-up should boost growth to 6% in FY17.

‘Incremental Demand – Incremental Supply’ (ID-IS) is returning to positive zone after a decade with capex cycle getting over, making a case for pricing power over FY18-19.

Early cycle of growth could be competitive with surplus capacity at 3.5x incremental demand. Strong growth headroom and access to critical resources would be the sources of competitive advantage.

Prefer cost leaders (to price-leverage stories) with higher operating flexibility and lower vintage risk. Logistics and regulatory hurdles key to incremental cost leadership.

North players to deliver 1.5-2x higher expansion in return ratios and earnings. Weakened B/S, credible recovery and better ID-IS aid stronger pricing outlook there.

Subsiding downgrade risk to aid 30%+ EBITDA CAGR over FY16-18. Play on quality, but keep an eye on entry valuations. Prefer UTCEM and SRCM in large caps, and JKCE and JKLC (North-centric) in midcaps.

Emerging from multi-decadal low growth; northern half to lead: The weakest phase of growth sub-normalcy (FY13-16, with 3% CAGR) seems behind, with credible signs of pick-up in infrastructure. Acceleration in 1/3rd of demand drivers (roads, rail, irrigation and low cost housing) should boost growth to 6% in FY17. We find stronger immediate growth drivers in place for North-Central-East India, followed by the West. Southern recovery should be gradual over 12-18 months.

Strategic investments during downturn key to competitive resilience ahead: The early phase of growth could turn out to be competitive, as surplus capacity stood at 3.5x incremental demand in FY17. Expanding players in MOSL coverage universe gained 6pp market share in the past 18 months. Market share gains would be contingent on (a) high utilization headroom created, (b) better reach led by low cost structure, and (c) strong institutional client mix to garner infra demand. With mounting entry barriers, long-term scalability and sustainability hinge on the level of preparedness (access to critical resources and funding), and ability to acquire costly resources. On growth visibility, we rate UTCEM, SRCM, JKLC, JKCE and DBEL higher.

Positive ID-IS makes a case for pricing power over FY18-19: ‘Incremental Demand – Incremental Supply’ (ID-IS) is returning to positive zone after a decade, as the capex cycle is nearing a pause. It makes a case for strong pricing power over FY18-19 after a modest trajectory in FY17. Cement companies gained on scale (3x) and strength (net worth, EBITDA up 5-10x) over the previous peak and ex-South utilizations are approaching the sweet zone of 85-90% (FY18). Yet, the presence of counter-balancing forces (consumption pattern, utilization disparity, de-consolidating M&A) may keep pricing trajectory less superlative to the previous up-cycle.

Logistics and regulatory hurdles key to incremental cost leadership: The period of hyperinflation in FY10-15 is behind, with (a) input commodities in deflationary zone, and (b) cement manufacturers already capturing production efficiencies significantly in the last 5-6 years. Going forward, incremental cost advantage would hinge on (a)

Cement

Companies Covered

ACC 42

Ambuja Cement 47

Ultratech Cement 52

Shree Cement 59

Dalmia Bharat 64

India Cement 70

JK Cement 75

JK Lakshmi Cement 80

Orient Cement 85

Prism Cement 90

Ramco Cement 95 *Prices as on 22 March 2016

Cement At the break of a new

dawn

Please click here for Video Link

http://www.motilaloswal.com/Videos17.html

March 2016 4


focus on logistics, material handling, and distribution management, (b) ability to combat regulatory risk (auction of critical resources like linkage coal, limestone, etc), and (c) lower vintage risk in plants with more operational flexibility (viz. fuel mix). We would prefer cost leaders over price-leveraged bets.

North to deliver 1.5-2x higher expansion in return ratios: Tangible signs of growth sustenance and favorable ID-IS render better pricing trajectory in North-Central, followed by West. Debt servicing ability of North-based players waned significantly in FY16. While not necessarily sufficient, this is a strong reason for better pricing rationality. North-Central players in MOSL universe should deliver 1.5-2x higher expansion in return ratios and earnings growth over FY16-18 v/s southern peers.

Subsiding downgrade risk to aid 30%+ EBITDA CAGR: Downgrades risk is waning with strengthening demand and price outlook. MOSL cement universe is poised for 30%+ EBITDA CAGR over FY16-18. However, valuations are back to premium zone, with rising credentials on (a) earnings inflection, and (b) upswing in FCFE and return ratios almost after a decade. Focus on quality (Sustainable, Profitable and Predictable growth), but keep an eye on entry valuations. Prefer UTCEM, SRCM and northern stocks (JKCE, JKLC). RAMCO, though expensive, is best bet for south.

Exhibit 1: Financial Matrix

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

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E ACC 32.0 48.4 75.0 7.2 10.6 15.7 9.8 14.0 20.7 -0.2 -0.2 -0.3 ACEM 5.5 8.1 11.4 8.2 8.2 11.2 12.3 14.5 20.9 -0.5 -0.1 -0.2 UTCEM 76.2 109.1 161.6 10.6 13.7 17.7 13.2 17.2 22.1 0.1 0.0 -0.1 SRCM 169.1 328.1 496.5 10.8 18.7 23.4 11.4 19.0 27.8 -0.3 -0.4 -0.6 Large Cap

11.4 14.8 18.0 12.0 16.3 22.7 -0.2 -0.1 -0.2

DBEL 11.5 41.1 70.0 3.0 9.2 14.0 8.9 11.6 15.2 1.7 1.5 1.3 ICEM 4.8 6.8 10.4 3.2 5.1 6.9 7.8 8.5 9.9 0.9 0.9 0.8 JKCE 3.5 23.7 50.6 1.9 9.9 18.6 7.7 10.8 15.3 1.6 1.5 1.1 JKLC -2.4 8.4 26.1 -2.2 7.7 21.6 4.7 9.7 17.2 1.4 1.3 1.0 RAMCO 18.4 21.7 27.4 15.4 15.9 17.5 14.6 16.4 19.6 0.7 0.5 0.3 ORCMNT 1.3 4.3 10.3 2.8 9.1 19.6 3.7 9.4 15.0 1.6 1.6 1.4 PRISM -0.4 3.2 6.9 -1.8 15.0 26.3 7.6 15.5 22.5 1.9 1.4 1.0 Mid-caps 5.0 10.4 16.5 7.7 11.0 15.3

Source: Company, MOSL Exhibit 2: Valuation table

Reco

CMP INR

TP INR

PE (x) EV/EBITDA (x) EV/Ton (USD) at CMP Imp. TP EV/EBITDA

FY18E

Imp. TP EV/ton FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

ACC Neutral 1,365 1,500 42.7 28.2 18.2 19.5 14.4 10 111 106 103 11 120 Ambuja Buy 230 263 42 28.5 20.1 20.9 15.4 10.9 152 148 140 12 150 Ultratech Buy 3,202 3,800 42 29.4 19.8 20.4 15 10.6 197 190 181 13 220 Shree Cement Buy 12,598 14,435 74.5 38.4 25.4 24.7 18.5 12.8 239 216 193 15 220 Large Cap 41.4 28.6 20 21.1 15.6 11 178 169 159 Dalmia Bharat Buy 800 960 69.5 19.5 11.4 11 8.3 6.2 92 90 85 7 95 India Cements Neutral 86 90 18 12.6 8.3 7.8 6.7 5.6 60 59 58 6 60 JK Cement Buy 640 757 180.6 27 12.7 14 10.2 6.9 90 87 80 8 90 JK Lakshmi Buy 330 410 -138.2 39.8 12.9 19.5 11.7 7 89 86 74 8 85 RAMCO Buy 405 470 22 18.6 14.8 12 10.1 8.1 114 104 97 9.5 110 Orient Cement Buy 147 170 114.8 35 14.5 29.3 12.7 7.3 82 84 79 8 90 Prism Cement Buy 81 95 -221.7 25.5 11.9 18 10.4 7 134 108 95 8 90 Mid-caps 47.6 21.4 12.2 12.3 9.1 6.5 76 65 58

March 2016 5


Story in charts

Exhibit 3: Emerging from low growth phase; sector now scouting for sustainable recovery

Source: IIP, MOSL

Exhibit 4: We expect 6%+ growth in FY17, and further normalization as other drivers contribute (%)

Source: Company, MOSL

Exhibit 5: Growth convergence gradual – East, North and Central to lead in near term (%)


Exhibit 6: Utilization levers key to growth outperformance (FY16 volume/FY18E capacity)

North & Central East West & South Overall

Cos Region Cos Region Cos Region Utilization ACC 90 80 64 80-85 60 70 90 ACEM 73 80 70 80-85 74 70 73 UTCEM 73 80 75 80-85 69 70 73 SRCM 63 80 57 80-85 63 JKLC 70 80 44 80-85 70 JKCE 65 80 60 65 65 DBEL 60 80-85 55 64 ICEM 62 60 Ramco 58 60 ORCMNT 51 70 PRSC 85 85-90 85 BCORP 88 80-85 70 80-85 88

Note: Utilization (%) Source: Company, MOSL

Exhibit 7: Higher institutional client mix key to garner infrastructure demand (%)

Exhibit 8: Stronger investments (FY13-15) in land & limestone key for sustainable scalability ahead


5.6

5.6

4.1 4.3

3.7 4.0

3.8

3.4

4.9

6.5

5.6 6.

4 6.

3 4.

8 3.

4 1.

9 2.5

1.5 2.

6 3.7

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep-

13N

ov-1

3Ja

n-14

Mar

-14

May

-14

Jul-1

4Se

p-14

Nov

-14

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15N

ov-1

5Ja

n-16

Mar

-16

Growth TTM (%)

4 6 7 5 7 4 10 5 3 7 12 15 4 10-12

15 8 12

-24

8

FY00-05 FY05-10 FY10-15 FY15-17E FY17-20E

Rural Housing Urban HousingInfrastructure Commercial & ind. capexPan India

-10%

-3%

5%

13%

20%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

North East West South Central

80 80 72 60 67 75 70 55 60 55 65

20 20 28 40 33 25 30 45 40 45 35

ACC

Ambu

ja

ICEM

SRCM

UTC

EM

Orie

nt

RAM

CO JKLC

DBEL

JKCE

Indu

stry

Trade Non-Trade

11 11

2

16 17 9

5 1 1 0

4

15 18

10 6 4 6

22

5

36 44

34

UTC

EM

SRCM AC

C

ACEM

ICEM

Bcor

p

JKCE

Ram

co

Dalm

ia

JKLC

Orie

nt

Land as % of capexCapex as % of gross block

6 10

5 5

9

March 2016 6


Story in charts

Exhibit 9: Strong phase of capex cycle is largely behind


Exhibit 10: Strong correlation between “Incremental demand over supply” (ID-IS) and price power


Exhibit 11: However regional utilization disparity one of factor against superlative pricing trajectory (%)


Exhibit 12: Till visibility on quantum of price trajectory, we stick to cost leaders with lesser exposure to regulatory and vintage risk. Comparative total cost and inflation


Exhibit 13: Regional net debt/ EBITDA (x): Along with better demand and ID-IS, weakened B/S would aid further rationality to north pricing


Exhibit 14: Trend in EV/EBITDA (x): Valuations are back in premium zone with credible greenshoots


5 7 8 4 8 23

29

32

40

25

22

17

21

17

16

13

5% 5% 6%3%

5%

14% 16% 16%

19%

11% 9%

7% 8%6% 6%

4% (1

%)

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Effective Cap. addition (MT) % of demand

-10 -6

4 -1

0 13 5

-10

-15

-13

-30

-10 -8 -13

-12 -7 -1

10

-19

3

-22

7 16

57

15

-13

18

-29

17 15

-26

0 -1

20 28

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

EFY

17E

FY18

E

ID - IS in mt (LHS) Change in EBITDA/t (%)

40%

60%

80%

100%

120%

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

EFY

17E

FY18

EFY

19E

FY20

E

South Ex-south

1% 0% -1% -2%

-4%

-1%-2% -3%

-7%

-3%

-6%

2%

0

1,200

2,400

3,600

4,800

ACC

ACEM

UTC

EM

SHRE

E

JKCE

JKLC

BCO

RP

PRIS

M

DALM

IA

ICEM

RAM

CO

ORI

ENT

Direct Cost (INR/t) Indirect cost (INR/t)Inflation (FY16) RHS

0.3 0.2

1.0 0.6 0.8

2.3 2.1 2.0 1.9

0.3 0.4

1.1 1.2 1.3

3.7 4.1

4.8 4.3

2.1

3.1 3.8

3.2 3.4

4.9 5.4

4.2

2.8

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

North Ex-SRCM South

0

6

12

18

24

Jan-

04

Mar

-05

Apr-

06

May

-07

Jun-

08

Aug-

09

Sep-

10

Oct

-11

Nov

-12

Jan-

14

Feb-

15

Mar

-16

Large cap (Ex SRCM) MidCap

March 2016 7


Story in charts

Exhibit 15: As capex cycle ends, return ratio and margins to recover from low – a positive trajectory after a decade


Exhibit 16: FCFE to improve meaningfully as capex cycle is largely over, barring select M&As (INR b)


Exhibit 17: Weighted average ratings for cement companies under coverage based on 5-parameters framework ACC ACEM UTCEM SHREE BCORP DALMIA ICEM JKCE JKLC Ramco ORIENT PRISM

Growth & Scalability (25%) 2 3 5 5 2 4 2 4 4 3 3 2 Market Mix And Size (20%) 4 4 5 4 4 3 3 4 4 3 3 4 Cost Leadership (25%) 2 3 4 5 2 4 2 3 4 4 4 3 Liquidity Comfort (15%) 5 5 4 5 2 3 3 3 3 4 3 3 Capital Efficiency, Strategy (15%) 5 4 4 5 2 3 2 3 3 4 4 3

Qualitative Score 3.3 3.7 4.5 4.8 2.4 3.5 2.4 3.5 3.7 3.5 3.4 2.8

Exhibit 18: Quadrants of quality versus valuation comfort

60

72

84

96

108

0.0

15.0

30.0

45.0

60.0

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

EFY

17E

FY18

E

EBITDA Margins (%)RoCE (%)Utilization (%) RHSEx-South Utilization (%) RHS

0

60

120

180

240

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Interest Capex OCF

UTCEM SHREE

BCORP ICEM

JKCE JKLC

RAMCO

ORIENT PRISM

ACEM

DALMIA

ACC

Intersection of Quality and Comfort quadrant offer

ideal entry avenues

Qualitative parameters

Valu

atio

n pa

ram

eter

s

VALUE QUADRANT

QUALITY QUADRANT

COMFORT QUADRANT

March 2016 8


Emerging from multi-decadal low growth period Credible signs of revival; Northern half to lead demand acceleration

Weakest period of growth (FY13-16 with CAGR of 3%) seems behind, with crediblesigns of pick-up in infrastructure.

Tangible acceleration in 1/3rd of demand drivers should boost growth to 6% in FY17. We find stronger immediate growth drivers in place for North-Central-East, followed

by West. Southern recovery should be gradual over 12-18 months.

Emerging out of weakest phase; conviction on sustenance of recovery The cement sector is emerging from a period of multi-decadal low growth (3% CAGR over FY13-16 versus long-term average of ~8%). In past two years, there were instances of intermittent positive signs of recovery which failed to sustain albeit. However our conviction on sustenance of recovery hereon stems from (a) credible pick-up in infrastructure spending since December 2015 (especially in roads and low cost housing), (b) stabilization of rural/housing crackdown, (c) imminent recovery in Andhra Pradesh (AP), and (d) low base effect.

Exhibit 19: Growth is bottoming out; sector now scouting for sustainable recovery

Source: IIP, MOSL

Growth trajectory hard to predict, but ~6% likely in FY17 There is rising momentum in roads (8-9% mix), irrigation, railways and low cost housing (12-15%). Therefore, initial recovery is likely to be driven by 1/3rd of drivers (Exhibit 21), which should boost growth to ~6% in FY17. It is improbable that growth picks up to near double digit without improvement or stabilization in larger drivers – rural (30-35%) and urban housing (15-20%). We anticipate return of 8-9% normalcy in FY18 (Exhibit 20) once non-infra legs start contributing positively.

6.2

5.6

5.7

5.6

4.7

4.1

3.9 4.3

4.2

3.7 4.

3 4.

0 3.

9 3.

8 3.

3 3.

4 4.0 4.

9 6.1 6.5

5.8

5.6 6.

2 6.4

6.3

6.3

5.6

4.8

4.3

3.4

2.2

1.9

1.5 2.

5 1.

6 1.

5 2.2 2.6 3.

7

Jan-

13Fe

b-13

Mar

-13

Apr-

13M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

3De

c-13

Jan-

14Fe

b-14

Mar

-14

Apr-

14M

ay-1

4Ju

n-14

Jul-1

4Au

g-14

Sep-

14O

ct-1

4N

ov-1

4De

c-14

Jan-

15Fe

b-15

Mar

-15

Apr-

15M

ay-1

5Ju

n-15

Jul-1

5Au

g-15

Sep-

15O

ct-1

5N

ov-1

5De

c-15

Jan-

16Fe

b-16

Mar

-16

Growth TTM (%) Growth bottoming out at 2% in 3QFY16; multiple signs for sustenance of

recovery

Bigger cogs of wheel need to stabilize for infra-led

growth sustainability

Exhibit 20: Broad based support key to demand normalization

Source: MOSL

4 6 7 5 7 4 10 5 3 7 12 15 4 10-12 15 8 12

-24

8

FY00-05 FY05-10 FY10-15 FY15-17E FY17-20E

Rural Housing Urban Housing InfrastructureCommercial & ind. capex Pan India

6 10

5 5

9

March 2016 9


A

Exhibit 21: Growth acceleration to come from infra-led demand drivers

Greenshoots of stabilization in weak links The negativity of rural and urban housing crackdown is yet to assuage. However, there are some factors that could make the pain easing off.

Rural: Benefits of populist budget, pay commission and La Nina Decline in rural spending was due to a confluence of multiple adversities: (a) deceleration of wage growth, (b) low (or no) hike in MSP, and (c) consecutive years of weak monsoon. The following support expectation of stabilization: (a) Populist fiscal boost to rural demand: In its latest union budget, the government hasannounced several measures aimed at rural India (Exhibit 23). Cabinet had givenapproval for the implementation of the rural housing scheme of PMAY with capitaloutlay of INR820b over FY17-19 for 10m rural households.(b) Pay commission: The latest pay commission would benefit over 5m employees,driving up housing demand, and boosting savings and discretionary consumption.(c) Probability of better monsoon in FY17: There is no instance of three consecutivedroughts in 100 years (La Nina phenomenon could emerge in 2016).

Exhibit 22: No instances of three consecutive years of deficit monsoon; La Nina could emerge in CY16

Source: MET, MOSL

Exhibit 23: Flagship rural schemes to receive higher budgetary allocation

Source: Budget data, MOSL

Rural Housing Urban housing

Industrial capex

Power Irrigation

Commercial RE

Railways and Metros

Road

0

10

20

30

40

0 4 8 12 16

-25

-11

3

17

31

1901

1907

1913

1919

1925

1931

1937

1943

1949

1955

1961

1967

1973

1979

1985

1991

1997

2003

2009

2015

Rainfall (% Departure) Deficient Excess

51 151 53

337

136 54 190

57

385

197

RKVY + Soilhealth card

PMGSY PMKSY MNREGA IAY

FY16 Budget (INR b) FY17 Budget(INR b)

Initial growth to come from 1/3rdof the drivers, others

to post gradual support

Better monsoon, populist budget and pay commission

support expectation of stabilization

Growth Outlook (%)

Dem

and

cont

ribut

ion

(%)

March 2016 10


B

East and Central India offer better rural resilience: Present monsoon adversity is lower in the East, parts of North and Central India, and Gujarat. The East and the South have posted the highest rural wage growth (firm and non-firm) over the past five years. In agriculture GSDP, East, Central and South India scored better over the same period (Exhibit 25). East and Central India account for ~61% of rural housing shortage (Exhibit 29) and 65% of kutcha-to-pucca house conversion need (Exhibit 24), and thus, render visibility of higher government scheme-related demand. Eastern India has been major a beneficiary (~50% of the total) of housing construction under Indira Awas Yojana (IAY) over the past 4-5 years, which is likely to continue. Government allocated INR82b for next 3 years for rural housing.

Exhibit 24: Regional contribution to pukka conversion

Source: Planning commission, MOSL

Exhibit 25: Agri GSDP & wage CAGR in past five years (%)

Source: State Budget, MOSL

Urban housing: Government impetus to low cost key In urban housing (25-30% contribution), private real estate, which accounts for half of cement demand, is reeling under multiple challenges – poor demand and affordability, liquidity stress, unsold inventories, etc – as evident in declining loan growth (Exhibit 26 and 27). Government efforts to curb black money and real estate bill could cut down transactions further over near-term. However, the government’s target to reduce housing shortage is gaining traction (East and Central India now, and AP/Telangana, Maharashtra and North India in coming days). Growing use of precast technology would be beneficial, as it increases cement intensity in housing.

Exhibit 26: Home loan growth of key lenders: Quantum of growth declined significantly (%)

Source: HFC, MOSL

Exhibit 27: Bank credit to developers has been underperforming overall credit growth (%)

Source: RBI, MOSL

East 45%

South 17%

Central 20%

West 11%

North 7%

4.6

3.1 3.4

6.8

0.5

4.6 4.0

1.2 1.9

8.6

6.3

4.8 3.8

1.4

5.7

Firm Non-firm CAGR Agr-GSDP


0

10

20

30

40

50

Q1

2008

Q3

2008

Q1

2009

Q3

2009

Q1

2010

Q3

2010

Q1

2011

Q3

2011

Q1

2012

Q3

2012

Q1

2013

Q3

2013

Q1

2014

Q3

2014

Q1

2015

Q3

2015

Q1

2016

Q3

2016

-8

0

8

16

24

Jan-

12M

ar-1

2M

ay-1

2Au

g-12

Oct

-12

Jan-

13M

ar-1

3Ju

n-13

Aug-

13N

ov-1

3Ja

n-14

Apr-

14Ju

n-14

Sep-

14N

ov-1

4Ja

n-15

Apr-

15Ju

n-15

Sep-

15

RE loans growth Gross credit growth

Traditional real estate reeling under pressure; low

cost housing gaining sporadic momentum

Regional growth of rural development budget (INR b)

179 299

238 493 90 205

346 695

229 213

XI plan XII plan

CentralSouthWestEastNorth

March 2016 11


Government spending under ‘Housing for All by 2022’ could create strong cement demand (estimated at 278mt, >1x annual demand) over its execution horizon (Exhibit 28). The East and Central states account for 51% of the total housing shortage in India. While we understand that implementation of this project would carry challenges viz. land acquisition & approvals, lack of private participation, and needs 8-10x scale-up in execution, it could contribute 5-10pp of incremental growth in the East and Central markets, assuming 10-15years of horizon (Exhibit 30).

Exhibit 28: Cement demand potential from ‘Housing For All’ initiative Urban

Housing shortage (m)

Rural Housing

shortage (m)

Total shortage

(m)

House area (500sf/ house)

Cement usage

0.1bag/sf

Cement required

(mt)

Annual demand

(mt)

North 8 9 17 8,500 850 43 54

East 10 20 29 14,650 1,465 73 51

South 13 9 22 11,050 1,105 55 56

West 8 8 16 7,750 775 39 55

Central 8 20 27 13,650 1,365 68 46

India 46 65 111 55,600 5,560 278 262

Exhibit 29: Housing shortage – East and Central India stand out with maximum contribution to shortage (%)

Source: Industry, MOSL

Exhibit 30: Sensitivity of incremental regional demand growth from ‘Housing For All’ initiative (%)

Source:Industry, MOSL

Roads: Visibility for double-digit growth; North-Central-West at forefront Strongest momentum is visible on the ground, with investment plan of ~USD78b (INR5t) for the next five years. The segment is poised for 3-5x scale-up in investment (INR700b-750b v/s INR250b now) and execution (from 5-6km/day now to 30km/day – already reached 10-12km/day) over the next three years. It implies ~20% CAGR(inflation-adjusted) even at ~70% of planned budget. After 3x (YoY) pick-up inproject award in FY15, momentum was largely flattish in FY16. In the Union Budget,road capex for FY17 has been planned at INR1.03t (49% growth over FY16RE).10,000km of national highways would be awarded in FY17 and 50,000km of statehighways would be taken up for upgradation to national highways.

Seamless execution pick-up is probable, given (a) EPC contract is the preferred way to kick-start execution, (b) land acquisition risk is largely mitigated at the initial stage itself, and (c) various policy incentives (faster clearance, hybrid model, better financial exits) to entice private participation. The northern, central and western

17 21

29

17 16 14

31

14 12

30

14

26 24

14

22

North East South West Central

Urban Housing shortage (%)Rural Housing shortage (%)Population share (%)

4 5

2 3

7

10

3 5 5

7

2 3 4

5

2 3

7

10

3 5

50% incremtal 70% incremetal 30% incremtal 50% incremetal

10-years execution 15-years execution

North East South West CentralIncremental growth in

demand (%) based on 10/15 years of execution period

“Housing for All” aids demand potential of>1x present annual cement

demand

East and Central India account for 51% of the total

housing shortage in India

Traction and policy initiatives likely to drive

double-digit growth sustainability and gradual

private participation in roads

C

March 2016 12


states account for 70-75% of the ongoing execution under NHAI. The East has the lowest proportion of roads surfaced (Exhibit 31) and is catching up gradually, with ~34% of total non-NHAI projects to be awarded at this moment. Government spending would see a significant rise in North-Eastern states, with ~INR30b likely to be allocated to provide road connectivity of 6,000km+ over medium-term.

Concretization a game changer: 75-80% of NHAI’s recent road contracts are concrete-based. The recent release of almost 4,000km of stalled projects (of 8,600km) is also aimed for concretization. Cement intensity for concrete roads is almost 4x that of bitumen roads (400-500 tons per km per lane). Though concrete roads involve high initial capex (recent road orders cost at 1.5-1.6x earlier orders), they enjoy the benefits of lower maintenance and longevity.

Exhibit 31: Shortage in road surfaced (%)


Exhibit 32: Road project awards – execution trending up

Source: NHAI, MOSL

Exhibit 33: North, central and west aid 70-75% of NHAI projects under execution

Source: NHAI, MOSL

Exhibit 34: Region-wise distribution of non-NHAI road projects awarded (%)

Source: Road Ministry, MOSL

Railways: Planned scale-up of 2-3x; aids mid-teen growth A 2-3x scale-up is planned in investments in rail and metro rail projects over the next five years. Government-planned investment in railways is USD137b (INR9t) over FY15-19 (2.5x actual XIth plan spending, which was 90% of budget). Planned outlay for FY17 is US1.2t (24% higher than in FY16). It signifies mid-teen CAGR over the next five years, though progress has been modest so far. Overall, the northern, central and western regions have larger share of planned investments in rail: a) Dedicated Freight Corridor (DFC)—USD13b capex

78 43 66 85 71 65

53% 51%

95% 96%

76% 71%

North East South West Central India

Road surfaced/total road (%) Surfaced /state size

1305

4663

1735

1234

643

3360

5053

6380

1116

1435

4500

4500

6000

2351

753

635 16

82

2205

2693

1784

2248

1704

1925

2200

2000

3000

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Project awards Completed

35% 22%

18% 20%

18% 24%

6% 16%

22% 18%

EPC PPP

North South East West Central

North, 30%

South, 5%

East, 34%

West, 28%

Central, 3%

D

March 2016 13


b) Connectivity within North-East states—USD5b capexc) High-speed railway corridor—Delhi-Mumbai and Delhi-Kolkatad) Bullet train in Mumbai-Ahmadabad and other GQ route subsequentlye) Coastal connectivityf) 9,400km of 2x-4x line works covering almost all states

The Dedicated Freight Corridor (DFC) is expected to consume total 18-20mt till 2021and would benefit nine states. Total capex stands at USD13b (INR800b), of which 16-17% has been incurred. The target to commission the eastern corridor is FY20-21 and the western corridor is FY18-19. However, progress is stronger in the eastern corridor compared to the western corridor (Rajasthan patch going well, while there is commercial dispute in the Maharashtra patch).

Exhibit 35: State-wise split for proposed DFC network…

Source: DFCC, MOSL

Exhibit 36: …shows highest benefits to North & Central

Source: DFCC, MOSL

Regional blend of metro projects: Investments to start/expand metro networks in Delhi, Jaipur, Lucknow and NCR (North), Nagpur and Ahmedabad and Mumbai (West) account for ~55% of total planned metro investment. The 400km Delhi Metro consumed 8mt cement. The 72km Hyderabad Metro (INR163b) consumed 2.6mt. Therefore, the potential demand from upcoming projects could be 20-25mt over the next 5-7 years. Based on industry interactions and various media updates, ~INR2,640b (USD40b-45b) worth of metro projects are likely to be executed over the next 9-10 years.

Irrigation: Mid-single digit growth; South and West major drivers Irrigation is largely state funded. Spending by states was up 1.8x (INR4,000b) between FY12-17 compared to the XIth plan. Average slippage in budget was ~80% with minimal slippage in west and south and maximum in east and central. Four states in the South and West (AP, Gujarat, Maharashtra and Karnataka) account for ~52% (v/s 66% in 11th plan) of total outlay (Exhibit 37). The Polavaram project in the South (INR160b over four years) would be a near-term contributor. However, the eastern and central states have shown the highest (125-185%) increase in irrigation budget. Assuming similar slippage like the 11th plan (actual was 70-85% of budget), there could be 8-9% irrigation-led consumption growth in East and Central India, and low-single digit growth in the West and South. The East and West have the lowest proportion of agricultural land under irrigation.

PUN, 88 HAR, 264

RAJ, 553

Gujarat, 588

MH, 150

UP, 1049

Bihar, 93

WB/JHK, 538

1.5

2.7

1.7 1.9

East Central West North

Incremental annual demand from DFCC (%)

DFC progress is stronger in eastern corridor compared

to western

While four southern and western states account for

52% of the irrigation budget, the highest

increase in budget is for East and Central India

E

March 2016 14


Power: Limited contribution to growth The power sector is expected to see flattish trend, with new thermal power capacity addition of 76-80GW over FY15-20 v/s 80GW in FY10-15. East and Central India would account for 64% of planned addition over FY14-19. Hydel power (higher cement intensity of 15-18% v/s 6-7% in thermal power) might see good growth in the North East. Given rising focus of the government on renewable power, incremental capex in power generation would be towards wind and solar power projects, which have lower cement intensity.

Exhibit 37: State budget of irrigation scale-up (INR b)


Exhibit 38: East and Central account for 64% of planned TPP

Source Industry, MOSL

Industrialization would benefit North West belt and AP the maximum Delhi-Mumbai Industrial Corridor (DMIC): The ambitious USD90b+ project covers ~1,500km between Delhi and Mumbai (Rajasthan and Gujarat account for 75-80% of the corridor). DMIC aims to expand India’s manufacturing and services base and develop a global manufacturing and trading hub. It proposes to incorporate nine mega industrial zones of 200-250 square kilometers, high-speed freight line, three ports, six airports, a six-lane intersection-free expressway connecting Mumbai and Delhi, and a 4,000MW power plant. Execution is moving at snail’s pace, but once it accelerates, the North and West corridors would get a better boost.

Amravati—the new capital of Andhra Pradesh: Developments in Amravati would provide AP with next leg of construction boost. However on the back of weak state balance sheet, the execution is expected to be gradual. The city would be situated in the Vijayawada-Guntur region. About USD75b would be spent, with expected timeline for phase-I completion by June 2018, provided funding arrangement is done on time. Smart cities: The government has allocated INR480b to the smart city project for the next five years—INR2b in the first year to each selected city and INR1b subsequently each year for the next three years. We note that pace of implementation has been weaker than initial expectation, and remains futuristic. State-wise, Uttar Pradesh has the highest number of smart cities planned; region-wise, the South has the highest number of smart cities planned.

144 247 328 942

690 1000

833 1286

258 574

XI plan XII plan

Central

South

West

East

North

North, 5%

South, 18%

East, 46%

West, 13%

Central, 18%

Despite anemic progress, North, South and West will

get maximum benefits when urbanization kicks in

F

G

March 2016 15


North-Central and East regions to lead growth pace We are region-agnostic for the long term, but for the next 2-3 years, we expect variance in regional growth trends (north-central-east growing higher) to continue due to strong underlying fundamental drivers. In Exhibit 39, we rate regional growth outlook for the next 2-3 years, based on: a. Regional intensity of demand drivers,b. Near-term recovery probability of demand avenues (used as weight), andc. Political equations in states (key to various infrastructure decisions).

The outcome of this exercise suggests that the East, Central and North India markets will be better-growing. The West would catch up once industrial activity picks up and rural concerns in Maharashtra recede. Likelihood of AP/Telangana recovery by mid-CY16 provides a silver lining to the de-growing South, though partially offset by weaker immediate outlook in other states (TN, Karnataka and South Maharashtra).

Exhibit 39: We rate demand outlook by evaluating key parameters in scale of 5 Key drivers North East West Central South Rural Housing 3 5 2.5 4 3 Urban Housing (Pvt.) 2 3 3 3 4 Urban Housing (Govt.) 4 5 3 4 3 Road 5 3 4 4 3 Railways and Metros 5 3 4 5 2 Irrigation 2 3 4 3 5 Power and others 2 4 3 4 4 Commercial RE 4 3 4 3 4 Industrial capex 4 3 5 3 4 Political Equation 5 3 5 4 4 Weighted avg SCORE 3.8 3.8 3.6 3.8 3.4

Exhibit 40: Growth convergence gradual – East, North and Central to lead in near term (%)


-10%

-3%

5%

13%

20%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E


East, North and Central India score high on early

cycle growth potential

We are region agnostic for medium-term but prefer

northern half in the beginning

March 2016 16


Exhibit 41: Volume growth across regions have shown improvement (%)

Source: Company, MOSL Exhibit 42: Project LOI has risen meaningfully; on-ground execution to follow (INR b)

Source: CMIE, MOSL

Exhibit 43: Budget allocation (%) to cement intensive sectors improved

Source: Budget data, Company

Exhibit 44: Projects added monthly to cement intensive sectors

Source: CMIE, MOSL

Exhibit 45: Subsidy cut eased off pressure in FY16-17 for uptick in infra spending in FY17

Source: Government documents, MOSL

-20

-10

0

10

20

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16E

Total Pan India Players Non-south South

0

500

1,000

1,500

2,000

Feb-10 Dec-10 Oct-11 Aug-12 Jun-13 Apr-14 Mar-15 Jan-16

LOI Tenders Invited Orders given

9% 10% 10% 16% 11% 11%

6% 4% 5%

7% 12% 15% 9% 10% 9%

13% 17% 17%

FY12 (A) FY13 (A) FY14 (A) FY15 (A) FY16 (RE) FY17 (BE)

Power Road Transport and Highways Railways

0

200

400

600

800

1,000

1,200

Aug-

11N

ov-1

1Fe

b-12

May

-12

Aug-

12N

ov-1

2Fe

b-13

May

-13

Aug-

13N

ov-1

3Fe

b-14

May

-14

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

Transport, Industrial, services Electricity Irrigation

0

1

2

3

4

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

RE

FY16

BE

Subsidy (as % of GDP) Capital expenditure (as % of GDP)

Volume accelerates in North-Central India, steady East and contraction of de-

growth in South

NDA government has targeted 2-2.5x scale-up in

infra spending in 2015-19 v/s the XIth plan

March 2016 17


Strategic investments of past key to competitive resilience Prefer utilization levers, scalability and favorable market/client mix

The early phase of growth could turn out to be competitive, as surplus capacity stoodat 3.5x incremental demand in FY17. Expanding players in MOSL coverage universegained 6pp market share in the past 18 months.

Market share gains would be contingent on (a) high utilization headroom created, (b)better reach led by low cost structure, and (c) strong institutional client mix to garnerinfra demand.

With mounting entry barriers, long-term scalability and sustainability hinge on level ofpreparedness (access to critical resources and funding), and ability to acquire costlyresources. On growth visibility, we rate UTCEM, SRCM, JKLC, JKCE and DBEL higher.

Early growth phase could turn out to be competitive On the back of high unutilized capacity headroom, during the early phase of recovery cycle, there could be interim focus on market share gain by the cement players. This was evident in the North-Central market in the form of extremely competitive pricing in early part of 4QFY16 as demand picked up. Companies with significantly expanded capacity have shown aggression in pricing strategy (Exhibits 46 & 47). Surplus capacity in the system would still remain above comfort zone (3.5x of incremental demand) in FY17 (Exhibit 48)

Exhibit 46: Growth trends of Type B (capacity expanding) and Type A (non-expanding)


Exhibit 47: Volume market share between Type A and Type B categories (%)


-12%

-5%

2%

9%

16%

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

Type A Type B

51 52 51 50 50 50 51 50 51 50 49 48 49 47 47 45 45 44 43

49 48 49 50 50 50 49 50 49 50 51 52 51 53 53 55 55 56 57

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

Type A Type B

Players with recent capacity expansion (Type B) have

been gaining major share in incremental volumes

Type A players are hardly growing, with loss of 6pp

market share in 18 months

March 2016 18


Exhibit 48: Surplus capacity as multiple (x) of incremental demand


Creation of scale during down cycle to aid initial boost Among the large caps, UTCEM and SRCM offer greater growth headroom with consistent expansion over the past 3-4 years. Among midcaps, DBEL, JKLC, ORCMNT and JKCE have created capacity headroom. ACC, ACEM, ICEM, and PRISM should underperform. The magnitude of outperformance hinges on: (a) Higher utilization in better growing markets, cost competence, and balance

sheet strength to survive price competition and augment market reach, and(b) Strong hold on institutional clients, as infra-led demand is more immediate.

Exhibit 49: Region-wise market mix of key cement companies (%)


Exhibit 50: Regional utilization levers by key companies (FY16 volume/FY18 capacity) (%) North & Central East West & South Overall

Company Region Company Region Company Region Utilization (%)

ACC 90 80 64 80-85 60 70 75 ACEM 73 80 70 80-85 74 70 75 UTCEM 73 80 75 80-85 69 70 72 SRCM 63 80 57 80-85 65 JKLC 70 80 44 80-85 69 JKCE 65 80 60 65 69 DBEL 60 80-85 55 64 58 ICEM 62 60 60 Ramco 58 60 58 ORCMNT 51 70 56 Prism 85 85-90 85 BCORP 88 80-85 70 80-85 86

4.9 3.5

1.2 1.2 0.7 1.0 0.2 2.4 2.0 2.4

14.2

6.3 5.6 3.4 2.5

0

20

40

60

80

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Producible Surplus capacity (mt) Multiple (x) of incremental demand

24 37 38 60

20 50 49

19

21 18 19

2

18

30 17

10

20

45

0 23 2

40 22

70

12

5

18 17

13 41

3

17

30

45 15

30

22

18 21

19 2

81

20 50

75

33 15 25

ACC

Ambu

ja

BCO

RP

ICEM

SRCM

Prism

UTC

EM

Orie

nt

RAM

CO JKLC

DBEL

JKCE

Indu

stry

North East Central West South

Surplus capacity in the system would still remain

above comfort zone at least in FY17

SRCM, JKLC and JKCE offer better mix in preferred

growth market of northern half of India

Utilizations, both overall and at regional level, are

essential to growth headroom

PRSM and ICEM have lower utilization levers, ACC to

suffer in north

March 2016 19


Exhibit 51: Higher institutional client base to help grab infra-led demand


Path to scalability: Preparedness, cost and strategic prowess Amidst rising structural overhangs, long-term scalability and sustainable market share gains hinge on the following: a) Ability to begin capex cycle at the right opportunity (defined by balance sheet

strength).b) Preparedness for organic expansion, with lower regulatory hurdles (access to

critical resources of land, limestone and approvals).c) Cost leadership and management prowess to combat regulations (high cost

limestone auction) and competition (brands, dealer network, ability to replicatehome market’s cost structure in new regions, etc).

Exhibit 52: Net Debt/ EBITDA (x) FY17E for MOSL cement universe (proforma)


Exhibit 53: Better preparedness for land & limestone: Land as %age of capex in FY13-15


80 80 72 60 67 75 70 55 60 55 65

20 20 28 40 33 25 30 45 40 45 35

ACC

Ambu

ja

ICEM

SRCM

UTC

EM

Orie

nt

RAM

CO JKLC

DBEL

JKCE

Indu

stry

Trade Non-Trade

-1.2 -2.8

2.6 -1.3

6.5

3.7 3.9 3.9 3.7

1.7

4.5 3.0

ACC

ACEM

UTC

EM

SHRE

E

BCO

RP

DALM

IA

ICEM JKCE

JKLC

RAM

CO

Orie

nt

PRIS

M

11 11 2

16 17 9

5 1 1 0 4

15 18 10

6 4 6

22

5

36 44

34

UTC

EM

SRCM AC

C

ACEM

ICEM

Bcor

p

JKCE

Ram

co

Dalm

ia

JKLC

Orie

nt

Land as % of capex Capex as % of gross block

UTCEM, SRCM, JKLC, JKCE and DBEL have higher institutional exposure

High limestone reserves are a distinct advantage, as

mineral allocation would gradually be through

auction route – hence, tougher and costlier

With Holcim’s strategy of limited expansion, not many players (barring

SRCM) can expand immediately without

hurting the balance sheet

UTCEM, JKLC, SRCM, JKCE and RAMCO better placed

with limestone for brownfield expansion

March 2016 20


Edge on cost and balance sheet critical to combat structural overhangs Cost structure of cement companies is likely to rise due to auction route of resource acquisition – limestone and linkage coal (from FY17-18). After failure of limestone auctions in Gujarat, Rajasthan and Maharashtra, the quantum of bids offered for the Chhattisgarh block (won by SRCM) came as surprise. At 59% of IBM* price of limestone (INR500-600/ton), RM cost would be higher by INR200-300/ton for newer plants, which is 7-8% of the existing average cost and 20-30% of the current EBITDA/ton (Exhibit 54). Thus, superior cost structure would be key to win competitive auctions in advantageous markets and achieve better scalability.

Exhibit 54: Recent limestone auctions hurt cost structure by 7-8% Particular

Reserve price for IBM* (INR/ton) 483 Floor price for bidding (%) 24% Winning bid by SRCM 59% Cost of limestone mining (INR/ton) 285 Limestone royalty (INR/ton) 80 DMF @ 30% and NMET @2% 26 Total cost of limestone (INR/ton) 390 Additional cost from existing (INR/ton) 285 RM cost (INR/ton) for OPC (Cement: Limestone = 0.8: 1) 356 PPC (Cement: Limestone = 1: 1) 285 PSC (Cement: Limestone = 1.2: 1) 237 Average cost/ton in MOSL universe 3,579 Percentage increase in cost for PPC (%) 8 Average FY16 EBITDA/ton in MOSL universe 657 Percentage increase in cost for PPC (%) 36

Note: *IBM – Indian Bureau of Minerals

Superior cost structure key to win competitive auctions

in future

March 2016 21


ID-IS positive after a decade; pricing power over FY18-19 But we prefer cost leaders to contest regulatory and vintage risk

Incremental Demand – Incremental Supply’ (ID-IS) is returning to positive zone after adecade, as the capex cycle is nearing a pause. It makes a case for strong pricing powerover FY18-19 after a modest trajectory in FY17.

Companies have gained on scale (3x) and strength (net worth, EBITDA up 5-10x) overprevious peak and ex-South utilizations are 4approaching sweet zone of 85-90%(FY18).

Yet, presence of counter-balancing forces (consumption pattern shift, utilizationdisparity, de-consolidating M&A) may keep pricing trajectory less superlative toprevious up-cycle.

We would prefer to play on cost leaders (with more flexibility, less regulatoryvulnerability and superior logistics management) than on price-leveraged bets.

ID-IS approaching positive zone, portends return of pricing power by FY18 The capex cycle is nearing a pause (Exhibit 55). The effective supply as percentage of demand should decline from 8% in FY15 to 1-4% in FY18 (based on time of commencement of some uncertain expansion). Historical precedents (Exhibit 56) suggest a strong correlation between “Pricing Power”, and “Incremental demand over Incremental supply (ID-IS)”. With waning supply, and new entry risk and demand acceleration, industry ID-IS is moving into a positive zone in FY18, almost after a decade. It creates a strong case for return of pricing power over FY18-19.

Exhibit 55: The capex cycle is largely behind; barring SRCM, no major organic plan

Source: Company, MOSL Exhibit 56: High correlation between ID-IS and change in profitability (i.e. price power)

Source: MOSL

5 7 8 4 8 23

29

32

40

25

22

17

21

17

16

13

5% 5% 6% 3%

5%

14% 16% 16%

19%

11% 9% 7% 8%

6% 6%

4% (1

%)

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Effective Cap. addition (MT) % of demand

-10 -6

4

-1

0 13 5 -10 -15 -13 -30 -10 -8 -13 -12 -7 -1

9

-19

3 -22

7 16

57

15

-13

18

-29

17 15

-260 0

23 24

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

ID - IS in mt (LHS) Change in EBITDA/t (%)

The effective supply as percentage of demand

should decline from 8% in FY15 to 1-4% in FY18

Visibility of capacity addition post 2HFY17

limited coupled with lack of execution progress in ~60%

announced capacity

Positive ID-IS similar to FY06 level makes a case for

strong pricing power by FY18

March 2016 22


Exhibit 57: Industry has shown instances of superlative pricing in the periods of high growth and utilization

Source: MOSL, Company

Gain on strength and scale should aid better resilience Industry consolidation didn’t improve post FY11 largely due to aggressive expansion by mid-cap players and lack of action in Holcim. Yet we find that the cement companies have gained on scale (~3x) and strength (net worth and EBITDA up 5-10x) compared to the start of previous up-cycle (Exhibit 58) which should induce better rationality in pricing behavior once the early phase of competitive gets over. Ex-south utilizations are approaching sweet zone of 85-90% (by FY18) auguring positively for a demand-led price uptrend ahead (Exhibit 64).

Exhibit 58: Significant improvement in scale, market share and quality of cement players Top 4 Mid Cap

INR b FY05 FY17E Scale up (x) FY05 FY17E Scale

up (x) Net worth (INR b) 12 143 12 6 28 4 Avg EBITDA (INR b) 4 27 6 1.4 8.7 6 Market share (%) 34 37 1 20 23 1 Avg Capacity (mt) 13 39 3 4 13 3 Net Debt/EBITDA (x) 0.7 -0.7 -1 1.8 3.7 2

But trajectory to pricing power could be less superlative versus past The cement prices increased at 10-12% CAGR (Exhibit 57) during the period with volume growth of 9-10% and near-peak industry utilizations. While FY18’s ID-IS is similar to that of FY06 in absolute terms, but as a percentage of industry demand or surplus capacity, it is much lower than in FY06-07 (Exhibit 59). Moreover, the industry has the following four counter-playing factors unlike previous up-cycle which might limit the pricing growth to similar magnitude.

Exhibit 59: ID-IS as % of total demand or surplus capacity would be lower in next cycle compared to FY06-07 Growth (%) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E ID-IS -1 0 13 5 -10 -15 -13 -30 -10 -8 -13 -12 -7 -1 9 (ID-IS) as % of total demand (0) 0 9 3 (6) (8) (7) (14) (4) (4) (6) (5) (3) (0) 3(ID-IS) as % of surplus capacity 1 63 32 (1) 17

-10

0

10

20

30

-10

6

22

38

54

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

EFY

17E

Price Chg (INR/bag) Price Chg (%) - RHS

Cement prices increased by 13.3% CAGR on volume CAGR

of over 9%

We factor in ~7% CAGR price change over

FY16-18E

Several mid-sized players have grown significantly on

scale and are gradually moving towards critical

mass

March 2016 23


Factor # 1: Early demand cycle may witness competitive strategy Delay in recovery made players with under-utilized capacity more savvy on market share gains, resulting in aggressive pricing strategy. This is evident from volatility, which brought down prices to 5-year or 7-year lows in various parts of North and Central India (Exhibit 60). Even the Tier I brands, with historically profit-focused strategies in general, got into competitive pricing, leading to sharp dip in realizations. With the last leg of capex conclusion/stabilization continuing till FY17-end, we apprehend that modest price delta in the early cycle of demand recovery.

Exhibit 60: North volume uptick co-existed with interim price disruption


Factor #2: Consumption pattern shift towards institutional demand While the previous super-cycle was led by growth in retail demand, the current recovery hinges on infrastructure, and mostly by government projects. Given that institutional buyers are bulk purchasers and not brand conscious, the realization growth is unlikely to be as strong as in the previous cycle. However, with rising acceptance of PPC among government agencies for large institutional consumption (was mainly OPC earlier), there is improvement scope in profitability. PPC mix in India is currently 60-65% and is likely to grow to 70-75% in 5-6 years.

Can it lead to a dual pricing scenario? While the prevalent pricing strategy is competitive, with gradual normalization of demand, a scenario of dual pricing may arise. Tier-II brands could focus more on institutional sales, reducing competitive intensity for tier-I brands (ACC, ACEM, UTCEM, Lafarge, etc) in the retail vertical. Consequently, the realization gap between the two sets could widen.

Factor #3: M&A not consolidating always; albeit recent instances positive The previous up-cycle (FY04-08) witnessed several M&A transactions, aiding industry consolidation. However industry didn’t see further consolidation since FY11 due to (a) gain in market share or regional diversification by mid-sized players, and (b) lack of expansion from Holcim (Exhibit 61). Going forward, market share gain byestablished players through inorganic means may see overhangs of (a) CCI norms (ahurdle that was not present in previous cycle), and (b) weak balance sheet of mostmid-caps, at least for next 2-3 years. Rather, we see strong strong appetite from (a)private equity players (Blackstone, Baring Asia, Apollo Global, Temasek are fewactive names), and (b) non-traditional groups (JSW, Wonder Cement, Emami,Piramal). Therefore, unlike the previous cycle, M&A may lead to fragmentation(instead of consolidation) in many instances. De-consolidating M&As would be a riskto pricing due to unknown behavior of new players,

-10

-2

6

14

22

200

225

250

275

300

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Volume growth (%) North Pricing(INR/bag)LHS

Companies with underutilized capacity

aggressive on market share gains

Rise in consumption from institutional side to limit

realization growth

Entry of non-traditional group poses a risk to price

discipline

Unlike previous cycle, CCI norms may bar some M&A

from being consolidating

March 2016 24


However, recent M&A announcements (UTCE-JPA and BCROP-Reliance Cement) have been a respite and would lead to strong consolidation in Central India. Despite its large size of 22.4mt, UTCEM-JPA may not face CCI hurdles given the complementary market positioning of the two companies.

Exhibit 61: Trend in industry consolidation


Exhibit 62: Non-traditional players gaining market share (%)


Factor #4: High regional disparity in utilization a concern In the last 15 years, instances of superlative pricing power were very limited and were evident only in periods of high demand growth and near-maximum utilization of 85-100%. While expecting a similar peak at pan-India level is ultra-ambitious, two aspects raise hope: (a) Ex-South consumption utilization to reach 85-90% by FY18-19 (75-80% now),(b) Industry utilization understated (Exhibit 63 & 65) due to rise in split grinding

units (clinker utilization up 7-8pp to 76%).

However, high regional disparity of utilizations (Exhibit 64), which was not chronic in the previous up cycle, is concerning. Inter-regional transportation of cement is not easy due to high freight cost and need of established distribution network. Yet, continuation of strong discipline is essential to prevent such dumping.

32 33 43 43 39 43 26 27 48 52 51 56 64 64 68 69 69 68

564 581

883 817 761

871

2001 2004 2008 2012 2015 2018E

Top 3 (%) Top 5 (%) Top 10 (%) HHI Index

17 15 14 14 13 13 11 10 11

9 9 9 8 8 7 7 7

2 3 4 6 6 6 7 6

2001 2003 2005 2007 2009 2012 2014 2016 2018E

Marginal players Non-traditional

Barring recent M&As in central India, industry didn’t

see improvement in consolidation

Continuation of discipline essential to prevent

dumping risk to higher utilization regions

March 2016 25


Exhibit 63: Utilization is understated due to excess split grinding capacity in the system


Exhibit 64: Regional utilization disparity unlike previous up-cycle, could be an impediment for superlative price (%)


Exhibit 65: Excess grinding capacity – a broad estimate for regions North Central East West South

Nameplate Capacity (mt) 87 54 60 59 140

Clinker capacity (mt) 60 33 33 41 96

OPC (1x) 35% 35% 5% 55% 40%

PPC (1.32x) 65% 60% 55% 43% 50%

PSC (1.75x) 0% 5% 40% 2% 10%

Producible Capacity (mt) 73 40 48 48 119

Excess grinding (%) 16% 26% 20% 18% 15%

Prefer to play on cost leaders now than on pricing leverage bets We factor in modest (3-5%) price growth in FY17 (v/s 1-3% cost inflation), considering (a) demand growth just surpassing supply threshold (5-6%), and (b) two consecutive years of weak pricing in FY15/16 keeping the base low. However, the industry should witness pricing power in FY18-19 (factoring in 7-8%). Yet we would prefer to play on cost leaders (more flexibility, less regulatory vulnerability and superior logistics management) than on price-leveraged bets due to likelihood of less superlative pricing trajectory and various regulatory hurdles hurting the players with inferior cost structure.

Exhibit 66: Comparative total cost structure and inflation in FY16


-3 -4 -9 -7-12 -13

6 15 44 52 55 51 45 45 57 53 58 -2 -3-6 -4

-8 -8

3 7

16

17 17 15

12 12 14 13 14

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Excess Grinding Cap (MT) % of reported capacity

40%

60%

80%

100%

120%

FY01

FY03

FY05

FY07

FY09

FY11

FY13

FY15

FY17

E

FY19

E

South Ex-south

1% 0% -1% -2%

-4%

-1%-2% -3%

-7%

-3%

-6%

2%

0

1200

2400

3600

4800

ACC

ACEM

UTC

EM

SHRE

E

JKCE

JKLC

BCO

RP

PRIS

M

DALM

IA

ICEM

RAM

CO

ORI

ENT

Direct Cost (INR/t) Indirect cost (INR/t) Inflation (FY16) RHS

Excess grinding impact highest in north-central and

east

Cost leadership would be critical to enhance margins

and market coverage

SRCM, UTCEM, ACEM , JKLC and ORCMNT have better

cost structure, while DBEL, Ramco and JKCE shown

improvement

March 2016 26


Edge on cost would be crucial to withstand price volatility and enhance market coverage early in the demand recovery cycle. Price-levered companies (bottom quartile of cost) are likely to gain once healthy pricing power kicks in; however, timeline for this is hard to ascertain. SRCM, UTCEM, followed by ACEM (among large caps), JKLC and DBEL (among multi-region midcaps), and RAMCO and ORCMNT (among southern bets) have superior cost structure. ACC and ICEM would be pricing leverage plays.

Exhibit 67: Sensitivity of EBITDA/ton to 1% change


Prefer more flexibility and less vulnerability While input costs are showing favorable trends, companies with more flexible cost structure would be at the forefront to derive maximum benefits. At several vintage plants, use of pet coke as fuel is unviable. These plants would

lose out on cost savings. Companies with higher number of older plants would continue to suffer from

inferior cost, limited scope for improvement, high maintenance and upgradecost, etc (ACC, ICEM, CENT, JKCE, BCORP have high number of older plants).

Similarly, higher dependency on linkage coal in existing fuel mix would makeplayers like ACC, PRSC, BCORP, ORCMNT and ICEM prone to regulatory risk ofmandatory auction of coal linkage from FY17/18. (Exhibit 68)

Shift in limestone mine acquisition process towards auction route would inflatecost for companies with lower reserves.

Exhibit 68: Fuel mix across companies (%)


7

4 4 4

9

5

7 6 6

3

5 4

6 5 4 3

7

4 5 5 5

3 5

4

ACC

ACEM

UTC

EM

SRCM

BCO

RP

PRIS

M

JKLC

JKCE

ORC

MN

T

RAM

CO

ICEM

DBEL

FY17 FY18

30 25 20 20 10

60

5

45

44 25

15

65

20

30

15 40 30

5

10 2

5

5

8

5 10

25 30 15

17 35

60 100

10

60 75 90

30 30 55

ACC

ACEM

UTC

EM

SHRE

E

BCO

RP

DALM

IA

ICEM JKCE

JKLC

RAM

CO

ORI

ENT

PRSI

M

Imported Linkage E-Auc Pet Other (AFR, WHR)

ACC and ICEM offer better pricing leverage plays due

to higher sensitivity

According to the CMA, modern cement plants

consume 68-93units/ton of power versus 100-

120units/ton for older plants

Higher linkage coal dependence and barrier to

switch fuel mix pose risks to medium-term cost structure

March 2016 27


Pet coke use a massive transformation – advantage to sustain in immediate future: Pet coke mix in fuel has increased meaningfully from 20-25% to 45-50% over the last 2-3 years. Rise in use of pet coke is attributable to the sharp ~50% decline in prices (linked to oil) over the last two months. Our analysis suggests that any North-based cement plant (RIL pet coke sourcing) is currently saving 40%/25% by using pet coke compared to linkage/imported coal on landed basis (Exhibit 69). While emission (SoX, NoX) has been a concern for pet coke, we understand most players would incur INR40-50m capex per plant to offset the environmental impact.

Exhibit 69: Comparative landed cost of different fuels (INR/’000 Kcal)

For Cement Kiln Linkage Imported Pet Coke

Coal Price 3,100 4,284 3,400 Nameplate Kcal/Kg 5,950-6,250 6,000 7,800 Actual realized Kcal/Kg 5500 6,000 7,800

Royalty @ 14% 564 Sizing 150 Clean Energy Cess 400 400 CST @ 2% / Customs @ 2.5% 73 107 68 Handling charges 50 200 200 Wet coal (with moisture) 4,337 4,991 3,668 Dry Coal (adj for moisture) 4,566 5,254 3,668 Cost ex freight 0.83 0.88 0.47

Manufacturing efficiencies largely captured; headroom declining The period of hyperinflation in FY10-15 is behind (cost CAGR of 8-9%, coal price CAGR of 6-7%, freight cost CAGR of 11%, led by diesel deregulation and higher lead distances). Input commodities viz. pet coke, diesel, imported coal, which account for 55-60% of variable cost, are in deflationary zone since FY16 (Exhibit 70). Moreover, cement manufacturers captured production efficiencies significantly in the last 5-6 years (Exhibit 71): a. Captive power usage up from 59% in FY08 to 77-80%b. Blended cement mix up from 25% in FY01 to >75%c. Process optimization largely in place (wet dry kiln, efficient plant layout, new

technology for better power and fuel usage)d. Multi-fuel boilers (plants put up after 2007 have flexibility to optimize fuel

mixpet coke mix from 25-100%).

Barring waste head recovery (WHRS) and alternate fuel (AFR), headroom for further reduction in direct cost is declining. ACC, ACEM and UTCEM are using 3-6% AFR mix v/s maximum of 25-30% in developed countries. AFR is 60-70% cheaper than the average cost of fuel from existing sources. In WHRS usage, SRCM (16 %) has been pioneer in India, while the focus has just started rising, with UTCEM (5%), ACEM (1.5%) and many midcaps gradually investing in the same.

RIL Pet coke price (INR/t)

Any North plant is currently saving 40%/25% in pet coke

versus linkage/imported coal on landed basis

59 71 77

3.1 3.2

4.4

FY08 FY10 Now

Captive power mix (%)

Purchase power rate (INR/kwh)

Indian plants best in power consumption (unit/ton)

82

92

100

100

102

110

112

118

118

140

141

Indi

aSp

ain

Germ

any

Japa

nKo

rea

Braz

ilIta

lyCh

ina

Mex

ico

Cana

daU

SA

Trend in pet coke prices

Continuous improvement in Captive Power mix (%)

March 2016 28


Exhibit 70: Cost moderation continues to percolate (%)

Source: Company, MOSL Exhibit 71: Significant improvement across companies in energy efficiency parameters

Coal Consumption*

Power Consumption (unit/ton of cement)

Captive Power mix (%)

FY08 FY15 FY08 FY15 FY15 ACC (Kcal/ton) 752 730 89 80 77 ACEM 742 735 85 81 67 UTCEM 713 714 85 79 85 SHREE (%) 11 10 79 75 98 BCORP (%) 11 11 84 91 74 DALMIA (%) 13 15 75 72 70 ICEM (%) 16 16 89 94 41 JKCE (Kcal/ton) 779 796 93 86 70 JKLC (%) 80 726 79 73 80 RAMCO (%) 14 12 78 80 89 ORIENT (%) 13 14 82 76 80 PRISM (%) 17 17 68 77 0

Logistics the key to incremental edge in future Contribution of freight cost as a percentage of realizations has risen by 8-10pp over the past eight years (Exhibit 72). Some of the structural overhangs are: a) Higher lead distance due to (1) shrinking limestone and other inputs from low-

hanging sources, and (2) higher inter-regional sales (low demand),b) Deregulated diesel prices (factored in, but would be susceptible to oil prices in

future),c) Rail freight hike and non-availability of rakes, andd) Greater focus on consistency of customer service with need for timely delivery.

Exhibit 72: Cost mix (%): Freight cost key inflation driver in past (update)


5% 5% 5% 4% 1%

-2% -4%

7% 4%

9%

2%

-8% -9%-12%

7%

13%

4% 8% 9%

1% 1%

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Total cost Direct Cost Freight cost

16

14

15

18

16

15

18

17

17

17

16

18

16

16

16

18 24

23

25

24

23

24

24

24

23

23

24

24

22

21

21

19

21

21

21

23

23

23

23

24

24

24

24

25

24

25

23

24

13

13

15

13

16

16 18

18

16

15

17

17

15

16

18

17 22

23

19

15

16

16 9 10

14

15

12

10

16

15

14

14

Mar

-12

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

Sep-

15

Dec-

15

RM ENERGY FREIGHT STAFF OTHERS EBITDA

Direct cost (RM and energy cost) has shown three

consecutive quarters of YoY decline (5-10% YoY)

Strategically-located split grinding, efficient bulk

handling and distribution network the key

Contribution of freight cost has risen significantly by 8-

10pp over the past eight years

March 2016 29


Focus on logistics, material handling, and distribution management would rise in planning and core strategy (Exhibit 73). This would be aimed at (a) lower cost, (b) improving market reach, and (c) higher volume growth. Strategically-located split grinding units, efficient bulk handling structure and distribution network would be the key factors to induce efficiency in freight cost (Exhibit 75)

Exhibit 73: Logistics strategies adopted by various players Company Visibility of better logistics management

UTCEM Efforts to bulk terminus (6 terminus and upcoming Mumbai), and grinding unitsin east and north would be beneficial going forward

SRCM Traditionally been at the forefront in managing logistics efficiency, with large

number of split grinding facilities. UP and Bihar split grinding to aid benefits FY17onwards.

ACC RFID implementation in key plants; But vintage issue keeps freight cost high. ACChas 5 split grinding units versus ACEM with 8 split grinding units for 7 plants.

ACEM ACEM with 8 split grinding units for 7 plants, making existing freight costcompetitive. New grinding unit at Sankrail to benefit in east.

JKCE Historically sub-normal but expansion in north with split grinding unit in Jajjhar

and railway siding connectivity with clinker unit at Nimbhera to aid meaningfulimprovement in freight cost by ~INR100/ton

JKLC Surat grinding unit to benefit home market. But delay in Orissa grinding and

railway siding (delayed by a quarter due to local issues) may keep near-term coststructure and market reach sub-optimal in east.

ORCMNT Historical advantage of plant locations near input sources (incl. coal mine at

Singreni) would dilute in new plant at Gulbarga (Karnataka). Railway siding atGulbarga (by FY17) would aid some improvement.

RAMCO Vizak unit to benefit on transport to east market where. Home market is wellsupported by strategic location of clinker and split grinding units.

Exhibit 74: Comparative freight cost of key cement companies (INR/ton)

Source: Company, MOSL Exhibit 75: Integrated units v/s split grinding units (number)


-16

-8

0

8

16

400

650

900

1,150

1,400

ACC

ACEM

UTC

EM

SHRE

E

BCO

RP

DALM

IA

ICEM JKCE

JKLC

RAM

CO

ORI

ENT

FY16 Freight cost(INR/ton) YoY Growth(%)

13

7

15

3 3 3 2 1

7 7 5

2 5

8

16

8

4 4 2 1 2 2

4 1

ACC

ACEM

UTC

EM

SRCM JKCE

JKLC

BCO

RP

PRSC

DBEL

ICEM

RAM

CO

Orie

nt

Integrated location Grinding location

SRCM, JKLC, DBEL and ORCMNT are historically

strong strategic or locational advantage

More split grinding to enhance market reach at

lower freight cost viz. ACC v/s ACEM

March 2016 30


North to deliver 1.5-2x higher expansion in return ratios Waning B/S, credible recovery and better ID-IS aid stronger price outlook

Tangible sign of growth sustenance and most favorable ID-IS render betterpricing trajectory for north-central regions, followed by west.

Debt servicing ability of North-players waned significantly in FY16. While notnecessarily sufficient, this is a strong reason for better pricing rationality.

North-central players in MOSL universe to deliver 1.5-2x higher expansion inreturn ratios and earnings growth over FY16-18 compared to southern peers.

Capex concluding: North, Central & West India offer better pricing outlook North, Central and West India are expected to see better pricing dynamics due to (a) higher utilization and ID-IS value (Exhibit 72), (b) better industry consolidation and lower new entry risk and (c) credible sign of demand recovery. Despite growing the fastest and having a strong retail base, the East might see immediate pressure of new entry risk (SRCM, JKLC, Emami) and some de-consolidating M&A (Lafarge assets). Southern discipline should continue, with high leverage pressure, though upside risk is limited.

Exhibit 76: Regional trend in ID-IS; all regions turning positive by FY18

ID-IS FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E North & Central 0 0 -4 -11 -2 2 8 7 East 1 2 -1 0 -3 -2 1 2 West 0 -2 0 2 -1 1 4 6 South -11 -12 -7 -3 -7 -2 3 3


Exhibit 77: Market share of top-5 players: East seeing deterioration (%)

Exhibit 78: Total capacity addition in FY15-18 (mt) and % new entry


83 90

71

52

86

52.8

73

87

72

46

72

52.3

81 77

74

53

77

53

North East West South Central Industry

FY10 FY14 FY18

13.1 19.1 9.4 8.8 2.0

25

70

20


Capacity addition mt (FY15-18) new entry as % of total

Regional ID-IS shows better pricing outlook in the North

and West

East has seen deterioration in consolidation

Amidst concluding capex, impact of entry behavior or

capacity stabilization comparatively higher in East

March 2016 31


Can the East be the next South? Present dynamics of East India (production utilization down from 85% in FY13 to 75% in FY16) are being compared with those of the South over FY10-16. While our immediate pricing outlook for the East is inferior, we do not expect a South-like crisis due to (a) no issue on growth (South de-grew on AP turmoil), (b) more stable retail-driven consumption pattern, (c) limitation of consistent capacity addition in future due to lack of limestone availability in east (unlike South), and (d) possibility of lower inflow from Central India going ahead. A major portion of recent addition in the East is split grinding, with clinker units in other regions (except SRCM, ACC and JKLC) and therefore, dispatch would be viable only at remunerative price points.

Deteriorating balance sheets strong reason for price discipline in North Before recent price upswing, high competition led cement prices to 5-years’ low in various parts of North and Central India. We analyze performance of ~22 listed cement companies (covering 70-75% of industry capacity), which highlights that ~19% of capacity holders continue to make PAT loss in 3QFY16 (v/s peak of 25% in 3QFY14), while ~15% made loss at EBITDA – interest in 3QFY16 (v/s peak of 24%) Exhibit 79. Profit sub-normality clearly shifted towards North due to dismal pricing. In the sample of North capacity (which is 65% of total North and Central India capacity), 45% are making net loss (PAT-level), while in the sample of South capacity (which is 50% of total South capacity), only 15% made net loss in 3Q (Exhibit 80).

Exhibit 79: % of players making PAT loss from our sample of 75% industry capacity


Exhibit 80: % of capacity holders making net loss in North versus South


5 18 8 8

2

9 3 2 1 3 5 2 7 21 25 17 21 14 22 11 16 16 19

3

9 8

4

1

8

3 1 1

2 4

2

6

11 8

5 5 5

8

3

6 7 9

Jun-

10

Sep-

10

Dec-

10

Mar

-11

Jun-

11

Sep-

11

Dec-

11

Mar

-12

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

Sep-

15

Dec-

15

% of Capacity No of players

0

25

50

75

100

Jun-

10

Sep-

10

Dec-

10

Mar

-11

Jun-

11

Sep-

11

Dec-

11

Mar

-12

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

Sep-

15

Dec-

15

% of North Capacity % of South capacity

East carries new entry and deconsolidation risk, but

South-like concern unwarranted

In our sample (75% of India capacity), almost 19% of

capacity holders continue to make net loss…

…and almost 80% of those holders are in North-Central

India

March 2016 32


The North-Central players have seen significant deterioration in debt servicing ability over the last 12-24 months. Analyzing the financials of our sample set, we note that interest coverage (ICR) of the North pack stood at 0.3x (including SRCM and JPA) and 0.75x (excluding SRCM and JPA) as on 3QFY16 (Exhibit 81). Incidentally, the ICR is in similar zone from where the South gained pricing discipline in FY14. Similarly, net debt/EBITDA of the North sample stood at 4.8x excluding SRCM (2x including SRCM) and may surpass the South level by FY17 if southern discipline sustains (Exhibit 82). If the thesis of discipline led by balance sheet stress works, we see limited headroom for price disruption in North-Central India.

Though above argument suggests for a stronger pricing growth in north, the risk to the thesis could be strength of balance sheets of Shree Cement and 3 PAN India players (who account for ~30% of North-Central capacity versus <20% in the South). Therefore, they have greater control on pricing discipline in north and strength to withstand price competition. However, over February and March 2016, the INR50-70/bag increase in north-central prices, with better sustainability till date, shows early playing out of the thesis in anticipated direction.

Exhibit 81: Comparison of interest coverage (EBIT/interest) for regional players


Exhibit 82: Combined Net debt/ EBITDA (x) across regions


0.0

1.0

2.0

3.0

4.0

Mar

-11

Jun-

11

Sep-

11

Dec-

11

Mar

-12

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

Sep-

15

Dec-

15

North (Ex SRCM) South North (ex-JPA, SRCM)

At this point, south gain price discipline

0.3 0.2 1.0 0.6 0.8

2.3 2.1 2.0 1.9

0.3 0.4 1.1 1.2 1.3

3.7 4.1 4.8

4.3

2.1

3.1 3.8

3.2 3.4

4.9 5.4

4.2

2.8

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

North Ex-SRCM South

Deteriorating balance sheets a strong, albeit not sufficient reason for price

discipline in the North

Southern interest servicing ability reached bottom of its

strength in 1HCY14; similar stress was seen in North in

3QFY16

Net debt/EBITDA of North sample (ex SRCM ex JPA)

stood at 4.8x, weaker than South

North is here

March 2016 33


North to deliver 1.5-2x higher expansion in return ratios We estimate north-central players in MOSL universe to deliver 1.5-2x higher expansion in return ratios (Exhibit 83) and earnings growth (Exhibit 84) over FY16-18 compared to southern peers, led by superior growth visibility and stronger pricing outlook. Concern of balance sheet weakness should gradually normalize once price strength returns.

Exhibit 83: Regional comparison for RoCE expansion


Exhibit 84: Regional comparison for EBITDA growth over FY16-18


10 12 13 9 8 15 4 11 8 5 8 5

21 21 22 15

10 20 15

28

15 17 22

11

ACC

ACEM

UTC

EM

DBEL

ICEM

Ram

co

ORC

MN

T

SRCM JKCE

JKLC

PRIS

M

BCO

RP

FY16 FY18E

Pan India South players North and central players

39 38 33 29 16 15

96

33 35 60 44 49

ACC

ACEM

UTC

EM

DBEL

ICEM

Ram

co

ORC

MN

T

SRCM JKCE

JKLC

PRIS

M

BCO

RP

EBITDA FY16-18E CAGR(%)

Pan India South Players North and central players

Northern peers to outperform on improving

dynamics led by better pricing and demand outlook

March 2016 34


Subsiding downgrade risk to aid 30%+ EBITDA CAGR Focus on Quality; but keep an eye on entry valuations

Downgrades risk is waning with strengthening demand and price outlook.MOSL cement universe is poised for 30%+ EBITDA CAGR over FY16-18.

Valuations are back to premium zone, with rising credentials in (a) earningsinflection, and (b) upswing in FCFE and return ratios almost after a decade.

“Sustainable, Profitable and Predictable” growth is the key to overcomevaluation discomfort, as demand-pricing surprise is hard to quantify.

Prefer UTCEM and SRCM in large caps. In mid-caps, we prefer north-centric stocks(JKCE, JKLC). RAMCO, though expensive, is the best bet for south.

Downgrade risk easing off; FCFE and RoCE at inflection after a decade With both volume and pricing showing strength, especially in north-central zone, we expect limited headroom for consensus downgrades ahead. We are 7-8% below consensus in FY17 and at par in FY18 due to our assumptions of modest pricing trajectory in early phase. If happens so, MOSL cement universe is poised for 30%+ EBITDA CAGR over FY16-18. Valuation multiples should appear less demanding as profitability normalizes, and return ratios and FCFE enter upward trajectory after a decade (Exhibit 85 and 86) with capex approaching end barring select M&As.

Exhibit 85: As capex cycle ends, return ratio and margins to recover from low


Exhibit 86: FCFE to improve meaningfully as capex is largely over (INR b)


65

77

89

101

0.0

15.0

30.0

45.0

60.0

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

EBITDA Margins (%) RoCE (%)Utilization (%) RHS Ex-South Utilization (%) RHS

0

60

120

180

240

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Interest Capex OCF

MOSL cement universe is poised for 30%+ EBITDA

CAGR over FY16-18. We are 7-8% below consensus in

FY17 and at par in FY18

Demand-supply dynamics favoring to turn profitability

and RoCE trajectory up

OCF was entirely used in capex and interest in FY13-16, expect B/S strength to

improve going ahead

http://institution.motilaloswal.com/emailer/Research/CEM-20160217-MOSL-SU-PG012.pdf

March 2016 35


Valuations back to premium zone However, on the back of credible sign of recovery on ground, the cement stocks are back in premium valuation zone (Exhibit 87 and 88) with large caps (ex SRCM) trading at 15x/11x FY17/18E (US$150/ton) and mid-caps trading at 10-12x/7-8x FY17/18E (US$85-100/ton). Our thesis of outperformance of north based stocks has played out to a good extent (Refer note link).

Exhibit 87: Trend in EV/EBITDA


Exhibit 88: Trend in EV/ton


Exhibit 89: Stock return according to region since October 2015 to January 2016(%)


Exhibit 90: Stock return according to region since February 2016 to March 2016(%)


0

6

12

18

24

Jan-

04

Mar

-05

Apr-

06

May

-07

Jun-

08

Aug-

09

Sep-

10

Oct

-11

Nov

-12

Jan-

14

Feb-

15

Mar

-16

Large cap (Ex SRCM) MidCap

0

50

100

150

200

Apr-

04

Feb-

05

Nov

-05

Sep-

06

Jun-

07

Apr-

08

Jan-

09

Nov

-09

Aug-

10

Jun-

11

Mar

-12

Jan-

13

Oct

-13

Aug-

14

May

-15

Mar

-16

EV/Ton Replacement Cost

12

-1-8

-2-14

-21 -21-13

-24

0

-18 -19

10

-4

19

-15

0

23

-6

UTC

EM

ACEM AC

C

SRCM JKCE

JKLC

MAN

G

PRSM

BCO

RP

HEID

OCL

STAR

DBEL

ICEM

RAM

CO

ORC

MN

T

SAGA

R

DECC

Sens

ex

Pan India North Focused Central East South

16 8

-1

18 25 9 9 5

-4

10

-2

-17

0

-14

3

-6 -6 -6

2

UTC

EM

ACEM AC

C

SRCM JKCE

JKLC

MAN

G

PRSM

BCO

RP

HEID

OCL

STAR

DBEL

ICEM

RAM

CO

ORC

MN

T

SAGA

R

DECC

Sens

ex

Pan India North Focused Central East South

Our thesis of outperformance of north

based stocks has played out to a good extent

Weak pricing led north centric stock

underperforming significantly

But pricing normalization led subsequent bounce

back


March 2016 36


Sticking to quality to derive comfort on valuations Industry dynamics are gradually improving with demand growth poised for gradual acceleration, supply near a pause, and cost inflation largely behind. While valuations (after recent bounce back) are back in premium zone, in our views, stocks that offer greater sustainability and predictability of growth should aid greater comfort on valuations. We identify companies with better quality characteristics based on 5-parameters scorecard.

5-parameters framework matrix: Combination of Quality and ComfortA. Growth levers and scalability: Timely capacity addition in the recent past.

Better preparedness for access to critical resources, cost efficiency and balancesheet strength for sustainable market share gains (Weight 25%)

B. Market mix: Market size and diversification or higher utilization levers in regionswith better visibility of demand-price recovery (Weight 20%)

C. Cost leadership – genesis of superior growth and profitability: Edge on existingcost structure, focus on logistics management, resilience to regulatory risk,lower vintage issue and more flexibility in operations (Weight 25%)

D. Liquidity comfort: Balance sheet strength and debt servicing ability in case ofprice disruption and delay in recovery (Weight 15%)

E. Capital efficiency and strategic prowess: Credentials in strategy, dividendpayout, capital allocation, etc (Weight 15%)

Exhibit 91: Weighted average ratings for cement companies under coverage based on 5-parameters framework ACC ACEM UTCEM SHREE BCORP DALMIA ICEM JKCE JKLC Ramco ORIENT PRISM

Growth & Scalability (25%) 2 3 5 5 2 4 2 4 4 3 3 2 Market Mix And Size (20%) 4 4 5 4 4 3 3 4 4 3 3 4 Cost Leadership (25%) 2 3 4 5 2 4 2 3 4 4 4 3 Liquidity Comfort (15%) 5 5 4 5 2 3 3 3 3 4 3 3 Capital Efficiency, Strategy (15%) 5 4 4 5 2 3 2 3 3 4 4 3

Qualitative Score 3.3 3.7 4.5 4.8 2.4 3.5 2.4 3.5 3.7 3.5 3.4 2.8

Exhibit 92: Quadrants of quality versus valuation comfort

UTCEM SHREE

BCORP ICEM

JKCE JKLC

RAMCO

ORIENT PRISM

ACEM

DALMIA

ACC

We evaluate quality based on sustainability, efficiency,

near-term resilience and strategic prowess

Intersection of Quality and Comfort quadrant offer

ideal entry avenues

Qualitative parameters

Valu

atio

n pa

ram

eter

s

VALUE QUADRANT

QUALITY QUADRANT

COMFORT QUADRANT

March 2016 37


Quality quadrant: Relatively expensive stocks with market leadership, superiorsustainability and predictability of earnings growth. Rich valuations are genesisof scarcity premium.

Comfort quadrant: Stocks at valuation discount, mostly the midcaps whichtrade at discount to large caps, but quality factors in place for future re-rating.

Value quadrant: Companies with cheap valuations but fundamental inferiority,long-drawn concerns. May offers price leverage play once absolute pricingpower returns

Prefer UTCEM, SRCM and north-centric play Based on the above framework, intersection of Quality and Comfort quadrant offers ideal entry avenues. We prefer UTCEM, followed by SRCM. ACEM scores better in quality parameters over ACC which is, albeit a better operating leverage play if pricing power surprises. In mid-caps, north-centric stocks offer stronger fundamentals and earning outperformance viz. JKCE, JKLC, Heidelberg etc. Therefore, comfort quadrant valuations for such stocks should aid good entry points. While we expect south to lag on earning growth, RAMCO remains the best bet for southern recovery despite rich valuations. We also like ORCMNT (play on west recovery and operational stabilization) and DBEL (potential of second round of re-rating).

Critical mass matters for midcaps Midcap cement companies are trading at 45% discount to large cap on EV/EBITDA and EV/ton v/s long-term average of 25-35% discount. While the risks of market concentration and liquidity justify some discount, we believe that magnitude will narrow, as profitability improves and free cash generation helps them to de-leverage their balance sheets. Over the last decade, many mid-sized players have grown significantly on (a) scale (recent expansion), and (b) retail reach (lack of infra demand in past) and are gradually moving towards critical mass for self-sustaining growth (Exhibit 58). We find higher quality comfort and potential re-rating scope in the JKCE and JKLC (north-centric), DBEL (south-east) due to better growth outlook.

Exhibit 93: Midcap discount to large cap at peak (%)


45

26

-100

-60

-20

20

60

Apr-

06

Sep-

06

Feb-

07

Jul-0

7

Dec-

07

May

-08

Oct

-08

Mar

-09

Aug-

09

Jan-

10

Jun-

10

Nov

-10

Apr-

11

Sep-

11

Feb-

12

Jul-1

2

Dec-

12

May

-13

Oct

-13

Mar

-14

Aug-

14

Jan-

15

Jun-

15

Nov

-15

Discount (%) Average

Midcaps at near-peak valuation discount

March 2016 38


Exhibit 94: Valuation table

Reco CMP INR

TP INR

PE (x) EV/EBITDA (x) EV/Ton (USD) at CMP Imp. TP EV/EBITDA

FY18E

Imp. TP

EV/ton FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

ACC Neutral 1,365 1,500 42.7 28.2 18.2 19.5 14.4 10 111 106 103 11 120 Ambuja Buy 230 263 42 28.5 20.1 20.9 15.4 10.9 152 148 140 12 150 Ultratech Buy 3,202 3,800 42 29.4 19.8 20.4 15 10.6 197 190 181 13 220 Shree Cement Buy 12,598 14,435 74.5 38.4 25.4 24.7 18.5 12.8 239 216 193 15 220 LARGE CAP 41.4 28.6 20 21.1 15.6 11 178 169 159 Dalmia Bharat Buy 800 960 69.5 19.5 11.4 11 8.3 6.2 92 90 85 7 95 India Cements Neutral 86 90 18 12.6 8.3 7.8 6.7 5.6 60 59 58 6 60 JK Cement Buy 640 757 180.6 27 12.7 14 10.2 6.9 90 87 80 8 90 JK Lakshmi Buy 330 410 -138.2 39.8 12.9 19.5 11.7 7 89 86 74 8 85 RAMCO Buy 405 470 22 18.6 14.8 12 10.1 8.1 114 104 97 9.5 110 Orient Cement Buy 147 170 114.8 35 14.5 29.3 12.7 7.3 82 84 79 8 90 Prism Cement Buy 81 95 -221.7 25.5 11.9 18 10.4 7 134 108 95 8 90 MID CAPS 47.6 21.4 12.2 12.3 9.1 6.5 76 65 58

Source: Company, MOSL Exhibit 95: Operating Matrix

Capacity (mt) Volume (MT) EBITDA (INR/Ton) Net debt (INR b) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

ACC 30.7 33.2 33.2 23.6 24.8 26.2 497 659 871 -15.3 -19.2 -25.2ACEM 29.6 30.4 30.4 21.8 22.8 24.3 660 919 1,128 -50.5 -20.8 -31.1UTCEM 66.7 66.7 66.7 47.8 51.4 56.5 899 1,095 1,341 15.4 -2.2 -27.6SRCM 25.5 27.1 29.1 18.3 21.1 24.5 924 1,023 1,220 -17.1 -28.2 -45.1Large Cap 152.5 157.4 159.4 111.5 120.2 131.5 771 959 1,186 -67.6 -70.3 -129.0BCORP 9.3 9.3 9.3 7.9 8.3 8.9 286 394 568 -4.7 -4.2 -6.3DBEL 21.9 21.9 21.9 10.9 12.4 13.7 1,073 1,218 1,416 65.1 61.5 59.8 ICEM 15.2 15.2 15.2 9.0 9.4 10.0 860 945 1,056 34.9 34.7 33.4 JKCE 11.6 11.6 11.6 6.8 7.4 8.1 684 835 1,033 26.3 25.5 23.2 JKLC 9.3 9.3 10.3 7.1 7.8 8.6 401 584 849 17.8 16.7 15.3 RAMCO 15.5 16.0 16.0 7.0 7.3 7.8 1,354 1,457 1,599 22.3 16.7 10.1 ORCMNT 8.0 8.0 8.0 4.1 5.2 6.1 363 681 944 15.5 15.8 16.6

PRISM 5.6 5.6 5.6 5.5 5.8 6.2 465 627 845 19.0 16.2 14.1 Mid-caps 96.3 96.8 97.8 58.4 63.6 69.4 733 878 1,069 196.1 183.0 166.0

Source: Company, MOSL Exhibit 96: Financial Matrix

EPS (INR) RoE (%) RoCE (%) Net Debt/Equity (x) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

ACC 32.0 48.4 75.0 7.2 10.6 15.7 9.8 14.0 20.7 -0.2 -0.2 -0.3ACEM 5.5 8.1 11.4 8.2 8.2 11.2 12.3 14.5 20.9 -0.5 -0.1 -0.2UTCEM 76.2 109.1 161.6 10.6 13.7 17.7 13.2 17.2 22.1 0.1 0.0 -0.1SRCM 169.1 328.1 496.5 10.8 18.7 23.4 11.4 19.0 27.8 -0.3 -0.4 -0.6Large Cap 11.4 14.8 18.0 12.0 16.3 22.7 -0.2 -0.1 -0.2BCORP 13.6 21.1 37.8 4.0 6.0 10.0 5.0 7.1 10.9 -0.2 -0.2 -0.2DBEL 11.5 41.1 70.0 3.0 9.2 14.0 8.9 11.6 15.2 1.7 1.5 1.3 ICEM 4.8 6.8 10.4 3.2 5.1 6.9 7.8 8.5 9.9 0.9 0.9 0.8 JKCE 3.5 23.7 50.6 1.9 9.9 18.6 7.7 10.8 15.3 1.6 1.5 1.1 JKLC -2.4 8.4 26.1 -2.2 7.7 21.6 4.7 9.7 17.2 1.4 1.3 1.0 RAMCO 18.4 21.7 27.4 15.4 15.9 17.5 14.6 16.4 19.6 0.7 0.5 0.3 ORCMNT 1.3 4.3 10.3 2.8 9.1 19.6 3.7 9.4 15.0 1.6 1.6 1.4 PRISM -0.4 3.2 6.9 -1.8 15.0 26.3 7.6 15.5 22.5 1.9 1.4 1.0 Mid-caps 5.0 10.4 16.5 7.7 11.0 15.3


March 2016 39


Large cap asset multiple of 1.5-1.6x of set-up cost fair in our view Over FY07-16, large cap cement players have generated average RoIC of ~26% (peak 30%+), while regional players generated 15-16% (peak 25%+). Likewise, capacity addition (derived from change in gross block and capacities) shows present cumulative cost of capacity at USD117/ton for pan-India and USD94/ton for regional players, with marginal addition happening at USD130-140/ton. Therefore, the quality large cap players should garner an maximum valuation multiple of 1.5-1.6x (USD200-220/ton) on set-up cost of USD130-140/ton, given medium-term RoIC expectation at ~25% (post tax ~18%) versus cost of capital of ~12%. We expect the industry to return to this normalcy in dynamics by FY18.

Exhibit 97: Change in capex cost (USD/ton)


Exhibit 98: Long-term average RoIC of pan-India players


Exhibit 99: Annual returns by large cap stocks: Difference is quite significant (%) Year ACC ACEM UTCEM SRCM **GAP

FY05 61% 58% 14% 56% 4

FY06 56% 53% 42% 76% 2 FY07 87% 59% 91% 131% 2

FY08 3% 11% 9% 15% 6

FY09 -40% -40% -43% -52% 1

FY10 41% 23% 56% 155% 7

FY11 18% 31% 25% 26% 2

FY12 17% 16% 14% 2% 8

FY13 18% 25% 53% 80% 5

FY14 -13% -3% 5% 22% (2)

FY15 29% 26% 43% 91% 3

40

65

90

115

140

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E

Pan India Regional

0

12

24

36

48

FY07 FY09 FY11 FY13 FY15 FY17E

Large Cap Mid Cap

Picking the winner is important even for a

homogeneous sector like cement

March 2016 40


Exhibit 100: Industry dynamics over multiple phases FY00-05 FY05-10 FY10-15 FY15-17 FY18-20

Demand - Supply Nameplate Capacity CAGR (%) 6.9 12.1 7.0 3.6 5.7 Effective supply CAGR (%) 7.3 10.6 8.7 4.4 5.0 Demand CAGR (%) 5.9 9.9 4.8 5.0 8.5 Average Utilization (%) 84 90 72 70 75 Ex-south utilization (%) 85 93 86 80-83 90 Demand drivers Rural Housing 4.0 6.0 7.0 5.0 7.0 Urban (Organized housing) 4.0 10.0 5.0 3.0 7.0 Infrastructure 12.0 15.0 4.0 10.0 15.0 Industrial capex 8.0 11.8 -2.0 4.0 8.0 Profit dynamics Realization CAGR (%) 1.5 13.3 3.9 3-4 7-8Cost CAGR (%) 2.5 8.7 10 1.5-2 4-5EBITDA/ton CAGR (%) 1 25.7 -8.5 5-10 15-25Average Margins (%) 19 26 19.3 13-17 20-25Max margins (%) 21 31 22 Return ratios Average RoE (%) 13.3 33.9 13.5 10-15 20-30Average RoCE (%) 11.9 31.7 16.4 10-15 20-25Working capital days Valuation metrics (Large cap) PTD* Average premium to replacement cost (%) -25 19 5 15 Max premium to replacement cost (%) 5 100 40 25 Average EV/EBITDA (x) 8-10 6-8 12.4 17-18Maximum EV/EBITDA (x) 12 11.5 20 20 P/B (x) 2.3 3.2 2.8 2.7 Stock performances (%) Sensex return 6 21 10 -12MOSL Cement return 23 27 20 7

*Period to date from April 2015 to now

Ex-South, industry utilization in FY18-20

getting closer to optimum

Infrastructure demand to drive growth; housing

intensity to increase with greater volume focus

Hyper growth of price uncertain, FY17 price rise to

be modest, followed by pricing power over FY18-19

Favorable costs to drive up margins (to 20-25%) and

RoE

Growth should offset any downside in multiples,

making them less demanding

March 2016 41


Companies BSE Sensex: 25,330 S&P CNX: 7,715 March 2016

Companies Covered

ACC 42

Ambuja Cement 47

Ultratech Cement 52

Shree Cement 59

Dalmia Bharat 64

India Cement 70

JK Cement 75

JK Lakshmi Cement 80

Orient Cement 85

Prism Cement 90

Ramco Cement 95 *Prices as on 22 March 2016

March 2016 42

March 2016

Update | Sector: Cement

ACC

BSE SENSEX S&P CNX CMP: INR1,365 TP: INR1,500(+10%) Downgrade to Neutral 25,330 7,715

Stock Info Bloomberg ACC IN Equity Shares (m) 187.7 52-Week Range (INR) 1,678/1,173 1, 6, 12 Rel. Per (%) 0/3/-2 M.Cap. (INR b) 258.2 M.Cap. (USD b) 3.9 Avg Val ( INR m) 467 Free float (%) 49.7 Financials Snapshot (INR b) Y/E Dec 2015 2016E 2017E Net Sales 114.3 126.4 143.1 EBITDA 11.7 16.3 22.8 PAT 6.0 9.1 14.1 EPS (INR) 32.0 48.4 75.0 Gr. (%) -30.3 51.3 55.1 BV/Sh (INR) 449.3 467.5 488.3 RoE (%) 7.2 10.6 15.7 RoCE (%) 9.8 14.0 20.7 P/E (x) 42.7 28.2 18.2 P/BV (x) 3.0 2.9 2.8 EV/EBITDA (x) 19.5 14.4 10.0 EV/Ton (x) 115 109 105 Shareholding pattern (%)

As On Dec-15 Sep-15 Dec-14

Promoter 50.3 50.3 50.3

DII 18.2 17.7 15.6

FII 15.3 13.2 16.7

Others 16.2 18.8 17.4

FII Includes depository receipts Stock Performance (1-year)

Growth and profitability to lag peers Vintage and regulatory risk high; price leverage play still away

Utilization levers low Lack of expansion led to loss in ACC’s market share from 11% to 9% over CY10-15. It has limited headroom for growth in North and Central India, as utilization is near optimum level. The addition of 2.5mt capacity in Jamul (Chhattisgarh) and restoration of mining in the East might help in CY16, though. Cost structure to improve in CY16 ACC’s cost structure is inferior to its large cap peers. We expect some improvement in CY16 from efforts towards (a) logistics efficiencies (reduction in demurrage, with increasing use of RFID/GPS, enabling savings of INR60-70/ton), (b) rise in AFR and pet coke usage target to 50-60% (savings of INR30/ton), (c) manpower rationalization, and (d) lower electricity consumption (limited headroom albeit). Lower clinker purchase in the East (post mining commencement) would benefit, as well. While cost saving strategies are in place, there has been disappointment in past in timely implementation of the same. However, vintage and regulatory risk structural concerns Legacy issues – vintage plants, higher fixed overheads, limitation in usage of pet coke, etc – would curb ACC’s ability to match peers’ profitability. High dependence on linkage coal (35-45% fuel mix) carries the overhang of impending auction of linkage coal from CY17-18, which could have a cost impact of INR1.5b-1.75b (INR80/ton). Price leverage play still some time away Due to weak cost structure, ACC is the most sensitive large cap to play price recovery (4% FY17E EPS sensitivity v/s 2-2.5% for UTCEM/ACEM for INR1/bag change in price). However, we believe it is not yet time to play the price recovery theme, given (a) the expectation of delayed and gradual return of pricing power in the industry, and (b) the incremental risk to ACC’s cost structure making it lag peers in terms of profitability. Cheap valuation, but low in pecking order, neutral ACC trades at a discount to peers at an EV of 14.4x CY16E and 10x CY17E EBITDA, and at USD105/ton. Yet, it remains low in the pecking order due to (a) lower qualitative score (Exhibit 85), (b) sub-normal growth and profitability, and relatively higher risk to cost structure, and (c) no immediate pricing trigger. We downgrade our stock recommendation to Neutral. We value ACC at INR1,500 (11x CY17E EBITDA), with upside of 10%. Our 3-years target price is INR1,950/share (@9x FY20E EBITDA, upside of 40%).

1,100

1,250

1,400

1,550

1,700

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

ACCSensex - Rebased

ACC

March 2016 43

Exhibit 1: True PAN India exposure (%)


Exhibit 2: Lost market share consistently (%)


Exhibit 3: Expect growth underperformance to continue


Exhibit 4: Utilization levers low in north-central region


Exhibit 5: Cost structure inferior to peers (INR/Ton)


Exhibit 6: Profitability lags with vintage risk (INR/ton)


23 23

27 21

15 24

24 19

10 13

Capacity Mix Volume mix

Central East North South West 11.6 10.7

10.1 10.6

10.1 9.9 9.6 9.0 9.0 8.8

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16E CY17E

-5

0

5

10

15

0

10

20

30

40

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

E

CY17

E

Capacity (mt) ACC Growth RHS (%)Industry Growth(%)

90% 80% 64%

80% 60% 70%

Com

pany

Regi

on

Com

pany

Regi

on

Com

pany

Regi

on

North & Central East West & South

-8%

-6%

-4%

-2%

0%

2%

4%

0

1000

2000

3000

4000

ACC

ACEM

UTC

EM

SHRE

E

JKCE

JKLC

BCO

RP

PRIS

M

DALM

IA

ICEM

RAM

CO

ORI

ENT


200

550

900

1,250

1,600

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Range of EBITDA/ton for MOSL universe ACC

ACC

March 2016 44

Exhibit 7: High linkage cost mix aids inflationary risk (%)


Exhibit 8: B/S healthy but capex plan elusive


Exhibit 9: Trend in EV/ton




Exhibit 11: Scenario Analysis ACC Base case Bull case Bear case

FY16 FY17E FY18E FY17E FY18E FY17E FY18E

Volume 23.62 24.80 26.17 25.27 27.17 24.33 25.18

Growth 5% 5% 7% 8% 3% 3%

Realization(INR/t) 4,840 5,096 5,468 5289 5887 4902 5064

Growth 5% 7% 9% 11% 1% 3%

EBITDA 11,731 16,332 22,786 21,536 35,053 11,311 11,759

Net Debt -15,318 -19,182 -25,235 -20,608 -30,732 -15,597 -14,541

EV 230,677 236,813 229,760 235,387 224,263 240,398 240,454

EV/EBITDA 19.7 14.5 10.1 10.9 6.4 21.3 20.4

TP for EV/EBITDA

10 1,398 2,096 740

11 1,501 2,255 793

12 1,610 2,423 849


Imported, 30

Linkage, 44

E-Auc, 5

Pet, 17

Other (AFR, WHR), 4

-12

-17

-23 -28 -31 -27 -19 -15 -19 -25

-0.2-0.3

-0.3 -0.4-0.4

-0.3

-0.2

-0.2 -0.2 -0.3

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16E CY17E

Net debt (INR b) DER (x) RHS

218

97

30

10

90

170

250

Dec-

00O

ct-0

1Au

g-02

May

-03

Mar

-04

Dec-

04O

ct-0

5Au

g-06

May

-07

Mar

-08

Dec-

08O

ct-0

9Au

g-10

May

-11

Mar

-12

Dec-

12O

ct-1

3Au

g-14

May

-15

Mar

-16

EV/ton (USD) Max Avg Min24.5

10.6

1.6 0

5

10

15

20

25

Dec-

00O

ct-0

1Au

g-02

May

-03

Mar

-04

Jan-

05O

ct-0

5Au

g-06

Jun-

07M

ar-0

8Ja

n-09

Oct

-09

Aug-

10Ju

n-11

Mar

-12

Jan-

13N

ov-1

3Au

g-14

Jun-

15M

ar-1

6

EV/EBITDA(x) Peak(x) Avg(x) Min(x)

ACC

March 2016 45

Exhibit 12: Profitability gap with peers fails to contract


Exhibit 13: Strong B/S comfortably addresses capex plan


816

572

516

497

620

880

1,12

2

717

840

695

870

1,14

6

1,00

5

763

773

937

994

1,27

1

247

168

290 319 312 329

CY12 CY13 CY14 CY15E CY16E CY17E

ACC ACEM UTCEM (ex white) Gap vs Peers

-12 -17

-23 -28 -31 -27 -19 -15 -25 -36

-0.2 -0.3

-0.3 -0.4 -0.4

-0.3

-0.2 -0.2

-0.3 -0.4

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15E CY16E CY17E


Financials and Valuations Income Statement (INR Million) Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E Net Sales 94,296 111,305 109,084 114,811 114,328 126,378 143,071 Change (%) 22.2 18.0 -2.0 5.2 -0.4 10.5 13.2 EBITDA 16,901 19,681 13,683 12,501 11,731 16,332 22,786 EBITDA Margin (%) 17.9 17.7 12.5 10.9 10.3 12.9 15.9 Depreciation 4,753 5,589 5,740 5,576 6,521 7,530 8,128 EBIT 12,148 14,092 7,943 6,925 5,210 8,802 14,657 Interest 969 1,147 517 828 673 600 600 Other Income 4,226 4,923 4,573 4,561 3,437 4,000 5,000 Extraordinary items 2,280 -3,354 2,437 3,786 -123 0 0 PBT 17,684 14,515 14,437 14,444 7,852 12,202 19,057 Tax 4,431 3,903 3,479 2,761 1,936 3,112 4,955 Tax Rate (%) 25.1 26.9 24.1 19.1 24.7 25.5 26.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 Reported PAT 13,253 10,612 10,958 11,683 5,916 9,091 14,102 Adjusted PAT 11,544 12,918 9,108 8,621 6,008 9,091 14,102 Change (%) 13.9 11.9 -29.5 -5.3 -30.3 51.3 55.1 Balance Sheet (INR Million) Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E

Share Capital 1,879 1,880 1,880 1,880 1,880 1,880 1,880

Reserves 70,043 71,949 76,369 80,477 82,551 85,980 89,890

Net Worth 71,923 73,828 78,248 82,356 84,430 87,859 91,770

Debt 5,061 850 0 0 355 355 355

Deferred Tax 5,184 5,169 5,073 5,356 4,692 4,875 4,875

Total Capital Employed 82,167 79,848 83,321 87,712 89,477 93,089 96,999

Gross Fixed Assets 95,757 101,600 103,996 109,507 123,603 140,603 144,603

Less: Acc Depreciation 34,378 42,961 48,956 53,523 60,044 67,574 75,702

Net Fixed Assets 61,378 58,639 55,040 55,984 63,559 73,030 68,901

Capital WIP 4,353 3,113 8,196 19,146 13,000 3,000 4,000

Investments 16,250 25,536 21,940 15,730 14,757 13,651 18,927

Current Assets 37,912 31,975 35,760 35,853 37,092 43,919 47,505

Inventory 10,995 11,336 11,215 12,556 11,886 12,793 14,090

Debtors 1,877 3,035 3,972 4,107 4,844 5,008 5,277

Cash & Bank 16,526 6,784 5,034 3,043 916 5,886 6,664

Loans & Adv, Others 8,513 10,821 15,539 16,147 19,446 20,232 21,474

Curr Liabs & Provns 37,726 39,415 37,615 39,002 38,931 40,510 42,333

Curr. Liabilities 25,996 25,574 25,916 28,469 31,339 32,200 34,494

Provisions 11,730 13,841 11,698 10,532 7,592 8,310 7,840

Net Current Assets 186 -7,440 -1,855 -3,148 -1,839 3,408 5,172

Total Assets 82,167 79,848 83,321 87,712 89,477 93,089 96,999

ACC

March 2016 46

Financials and Valuations Ratios Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E

Basic (INR)

EPS 61.4 68.7 48.5 45.9 32.0 48.4 75.0

Cash EPS 86.7 98.5 79.0 75.5 66.7 88.4 118.3

Book Value 382.7 392.9 416.4 438.2 449.3 467.5 488.3

DPS 28.0 30.0 30.0 34.0 17.0 25.0 45.0

Payout (incl. Div. Tax.) 46.0 61.8 60.2 63.6 65.1 62.3 72.3

Valuation(x)

P/E 29.8 42.7 28.2 18.2

Cash P/E 18.1 20.5 15.4 11.5

Price / Book Value 3.1 3.0 2.9 2.8

EV/Sales 1.9 2.0 1.9 1.6

EV/EBITDA 17.5 19.5 14.4 10.0

Dividend Yield (%) 2.5 1.2 1.8 3.3

EV/ton (USD-Cap) 110 115 109 105

Profitability Ratios (%)

RoE 16.9 17.7 12.0 10.7 7.2 10.6 15.7

RoCE 21.0 23.5 15.3 13.4 9.8 14.0 20.7

RoIC 32 32 17 14 9 13 21

Turnover Ratios (%)

Asset Turnover (x) 0.9 0.7 0.8 0.8 0.8 0.7 0.7

Debtors (No. of Days) 7 10 13 13 15 14 13

Leverage Ratios (%)

Net Debt/Equity (x) -0.2 -0.1 -0.1 0.0 0.0 -0.1 -0.1 Cash Flow Statement (INR Million) Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E Adjusted EBITDA 16,901 19,681 13,683 12,501 11,731 16,332 22,786 Non cash opr. exp (inc) 4,226 4,923 4,573 4,561 3,437 4,000 5,000 (Inc)/Dec in Wkg. Cap. -4,391 -2,116 -7,335 -697 -3,436 -278 -986 Tax Paid -2,863 -3,917 -3,576 -2,478 -2,600 -2,929 -4,955 Other operating activities 2,280 -3,354 2,437 3,786 -123 0 0 CF from Op. Activity 16,152 15,217 9,782 17,672 9,010 17,126 21,845 (Inc)/Dec in FA & CWIP -4,032 -1,609 -7,224 -17,470 -7,950 -7,000 -5,000 Free cash flows 12,119 13,608 2,559 202 1,060 10,126 16,845 (Pur)/Sale of Invt 777 -9,286 3,595 6,210 973 1,106 -5,276 Others 0 0 0 0 0 0 0 CF from Inv. Activity -3,255 -10,895 -3,628 -11,260 -6,977 -5,894 -10,276 Inc/(Dec) in Net Worth 70 -2,153 60 -148 9 0 0 Inc / (Dec) in Debt -177 -4,211 -850 0 355 0 0 Interest Paid -969 -1,147 -517 -828 -673 -600 -600 Divd Paid (incl Tax) & Others -6,095 -6,553 -6,597 -7,427 -3,850 -5,662 -10,192 CF from Fin. Activity -7,171 -14,064 -7,904 -8,403 -4,160 -6,262 -10,792 Inc/(Dec) in Cash 5,725 -9,742 -1,750 -1,991 -2,127 4,970 778 Add: Opening Balance 10,800 16,526 6,784 5,034 3,043 916 5,886 Closing Balance 16,526 6,784 5,034 3,043 916 5,886 6,664

March 2016 47

March 2016


Ambuja Cements

BSE SENSEX S&P CNX CMP: INR230 TP: INR263 (+15%) Buy 25,330 7,715

Stock Info Bloomberg ACEM IN Equity Shares (m) 1,551.9 52-Week Range (INR) 266/185 1, 6, 12 Rel. Per (%) 11/12/0 M.Cap. (INR b) 360.1 M.Cap. (USD b) 5.4 Avg Val ( INR m) 499 Free float (%) 49.7 Financials Snapshot (INR b) Y/E Dec 2015 2016E 2017E Net Sales 93.7 230.8 264.0 EBITDA 14.4 35.8 48.9 PAT 8.5 16.0 22.7 EPS (INR) 5.5 8.1 11.4 Gr. (%) -37.8 47.4 41.7 BV/Sh (INR) 67.8 98.5 104.7 RoE (%) 8.2 8.2 11.2 RoCE (%) 12.3 14.5 20.9 P/E (x) 42.0 28.5 20.1 P/BV (x) 3.4 2.3 2.2 EV/EBITDA (x) 20.9 14.5 10.4 EV/Ton (USD) 156 135 130 Shareholding pattern (%)


Promoter 50.3 50.3 50.4

DII 16.7 12.8 9.8

FII 25.1 29.1 32.1

Others 7.9 7.9 7.8


Re-rated in line with anticipation

Profit normalization in operating markets to benefit Concerns on growth strategy, but medium-term headroom in place ACEM has lagged peers on expansion and is likely to grow slower than the industry. Holcim-Lafarge’s global communication indicates conservative expansion strategy ahead; however, it considers India (18%/13% of capacity/EBITDA) as a better growing market in its portfolio and therefore, may trigger expansion decision once conviction on growth revives. ACEM’s favorable distribution of utilization (70-72%) in better growing regions – the North and the East – aids medium-term respite on growth (compared to ACC). Market mix was at wrong end; normalization benefit to follow Market mix has been a drag for ACEM in the last 12-15 months due to dismal price trend in the North and West (80% exposure v/s 65-70% for UTCEM/ACC) and no exposure to the South, where discipline boosted profitability. Now, with signs of tangible volume and price recovery in north, ACEM is well poised to benefit. Core strength intact ACEM’s core strengths are intact, with (a) efficient operations and cost initiatives (fuel mix, alternative fuels, logistics), (b) balance sheet strength (net cash of INR20b+ after ACC buyout), (c) annual standalone OCF of INR20b-25b over CY16-17, and (d) high payout (60-65%). Holcim’s focus on de-bottlenecking, synergies and payout would enhance the strength. Potential decline in government subsidies would be a drag on profitability as it accounts for INR180-200/ton of EBITDA. Long drawn restructuring overshadows potential benefits The potential synergy benefits from ACC-ACEM integration of INR7-8b remains elusive as restructuring process is still awaiting clearance from FIPB. ACEM being the strongest franchise in India, we expect benefits to percolate favorably. Overhang of Lafarge merger has subsided, with the company planning to sell the entire asset. Recent bounce back long awaited We upgraded ACEM in 3QFY16 on the back of its attractive valuation discount (report link). The stock has delivered 16% return since then. We expect ACEM’s standalone EBITDA to grow at a CAGR of ~38% over CY15-17 on the back of better demand and pricing outlook in operating markets. ACC transaction would be a drag on return ratios unless synergies percolate. We value ACEM at INR263 (12 x CY17E EBITDA; USD150/ton of prorata capacity including ACC). Buy. Our 3-years target price is INR320/share (@10x FY20E EBITDA, upside of 40%). 180

205

230

255

280

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

Ambuja Cem.Sensex - Rebased

http://ftp.motilaloswal.com/emailer/Research/ACEM-20151028-MOSL-RU-PG012.pdf

Ambuja Cements

March 2016 48

Exhibit 1: Growth to underperform due to limited expansion by Parent (Lafarge-Holcim), better regional headroom in north-central offer respite


Exhibit 2: Holcim Management guided for capex-light strategy with more focus on de-bottlenecking and cost-synergy driven growth, cash flows and payout

Source: Holcim, MOSL

Exhibit 3: Lafarge-Holcim holds better growth outlook for India among its bigger market of exposure

Source: Lafarge-Holcim PPT, MOSL

Exhibit 4: Market mix skewed towards north and west, adversity of weak pricing till date, should reverse now (%)


Exhibit 5: Pricing drag in operating regions hurt realizations (indexed to 100); we expect normalization ahead (INR/ton)


Exhibit 6: EBITDA in top quartile, but hurt in CY15 (FY16) due to weak realization in operating markets (INR/ton)


72% 80% 70% 80% 78% 65%

Com

pany

Regi

on

Com

pany

Regi

on

Com

pany

Regi

onNorth & Central East West & South

50%

58%

65%

73%

80%

-7%

-3%

0%

3%

7%

Chin

a

SE A

sia

Oce

ania

Euro

pe

LAT

Amer

ica

Braz

il

Nor

th A

fric

a

Mid

dle

East

Cana

da US

Indi

a

CAGR (CY15-18) Utilization (%)

24 37

63

18

13

41

30

23

2 25

12

21

18 13

17

19 2

22

ACC Ambuja SRCM UTCEM

North West Central East South Exports

100

102 97

101

97

100

99

89

94 95

100

104

98

104 100

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

ACC ACEM UTCEM

200

550

900

1,250

1,600

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Profit Range ACEM

% increase in ex-freight realizations with Dec-14 quarter indexed to 100

Ambuja Cements

March 2016 49

Exhibit 7: Core strengths (cost efficiency, B/S strength) intact, rise in pet coke mix plateauing


Exhibit 8: Subsidy benefits to decline ahead, may dilute profitability


Exhibit 5: Trend in EV/Ton




Exhibit 11: Scenario Analysis ACEM Base case Bull case Bear case


Volume 21.76 22.85 24.33 23.28 25.26 22.41 23.42

Growth 5% 6% 7% 9% 3% 4%


Growth 7% 7% 11% 11% 3% 3%

EBITDA 14,362 21,001 27,441 25,411 37,951 16,742 17,964

Net debt -50,518 -47,174 -58,385 -46,808 -59,660 -42,993 -47,851

EV 303,522 301,367 285,656 301,733 284,381 305,547 296,190

EV/EBITDA 21.1 14.3 10.4 11.9 7.5 18.3 16.5

TP for EV/EBITDA

11 242 318 168

12 260 342 180

13 269 354 186


3,200 3,730 4,140 4,300 4,680 4,390

157 174 188 199 211 202

CY10 CY11 CY12 CY13 CY14 CY15

Subsidies from Govt (INR m)Subsidies from Govt (INR/ton)

268

116

28 10

90

170

250

330

Dec-

00O

ct-0

1Au

g-02

May

-03

Mar

-04

Dec-

04O

ct-0

5Au

g-06

May

-07

Mar

-08

Dec-

08O

ct-0

9Au

g-10

May

-11

Mar

-12

Dec-

12O

ct-1

3Au

g-14

May

-15

Mar

-16

EV/ton (USD) Max

17.3

9.1

2.1 05

1015202530

Dec-

00O

ct-0

1Au

g-02

May

-03

Mar

-04

Dec-

04O

ct-0

5Au

g-06

May

-07

Mar

-08

Dec-

08O

ct-0

9Au

g-10

May

-11

Mar

-12

Dec-

12O

ct-1

3Au

g-14

May

-15

Mar

-16

EV/EBITDA(x) Peak(x) Avg(x) Min(x)

Ambuja Cements

March 2016 50

Financials and Valuations Income Statement (consol) (INR Million) Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E Net Sales 85,043 96,749 90,868 99,107 93,683 230,805 263,995 Change (%) 15.1 13.8 -6.1 9.1 -5.5 146.4 14.4 EBITDA 19,387 24,675 15,482 18,610 14,362 35,832 48,925 EBITDA Margin (%) 22.8 25.5 17.0 18.8 15.3 15.5 18.5 Depreciation 4,452 5,373 4,901 5,095 6,257 13,155 13,648 EBIT 14,935 19,302 10,581 13,515 8,105 22,677 35,277

Interest 526 757 651 645 918 1,327 1,450 Other Income 2,978 4,042 4,349 4,964 4,535 6,400 8,700 Extraordinary items -358 -3,570 3,269 1,757 -557 0 0 PBT 17,029 19,018 17,549 19,591 11,165 27,750 42,527 Tax 4,740 6,048 4,603 4,627 3,090 7,472 12,313 Tax Rate (%) 27.8 31.8 26.2 23.6 27.7 26.9 29.0 Min. Int. & Assoc. Share 0 0 0 0 0 4,284 7,558 Reported PAT 12,289 12,971 12,946 14,964 8,076 15,994 22,657 Adjusted PAT 12,547 15,435 10,464 13,622 8,478 15,994 22,657 Change (%) 0.9 23.0 -32.2 30.2 -37.8 88.6 41.7

Balance Sheet (INR Million) Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E

Share Capital 3,069 3,084 3,092 3,100 3,100 3,966 3,966

Reserves 77,626 84,966 91,764 97,934 101,361 190,705 203,029

Net Worth 80,694 88,051 94,855 101,033 104,460 194,671 206,995

Minority Interest 0 0 0 0 0 4,284 11,842

Debt 466 395 292 191 227 855 855

Deferred Tax 6,436 5,483 5,643 5,890 5,649 10,510 11,051

Total Capital Employed 87,597 93,929 100,790 107,115 110,336 210,320 230,742

Gross Fixed Assets 97,023 101,836 108,262 116,905 118,050 262,153 268,653

Less: Acc Depreciation 35,158 43,213 47,637 52,732 58,989 132,188 145,836

Net Fixed Assets 61,865 58,624 60,625 64,173 59,062 129,965 122,817

Capital WIP 4,868 5,201 6,949 5,000 6,000 11,500 16,000

Goodwill on consolidation 0 0 0 0 1,392 42,020 58,537

Investments 8,643 16,558 17,885 21,727 22,261 20,896 20,896

Current Assets 40,043 43,864 44,187 48,108 54,297 82,872 98,843

Inventory 9,250 9,839 9,339 8,884 8,955 22,703 24,060

Debtors 2,409 2,134 2,315 2,280 2,864 6,424 6,994

Cash & Bank 20,691 22,537 23,411 24,581 28,484 27,132 38,344

Loans & Adv, Others 7,694 9,353 9,122 12,364 13,995 26,613 29,445

Curr Liabs & Provns 27,822 30,318 28,856 31,894 32,675 76,934 86,351

Net Current Assets 12,221 13,545 15,332 16,215 21,622 5,938 12,492

Total Assets 87,597 93,929 100,790 107,115 110,336 210,320 230,742

Ambuja Cements

March 2016 51

Financials and Valuations Ratios Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E

Basic (INR)

EPS 8.2 10.0 6.8 8.8 5.5 8.1 11.4

Cash EPS 11.1 13.5 9.9 12.1 9.5 14.7 18.3

Book Value 52.4 56.9 61.2 65.0 67.8 98.5 104.7

DPS 3.2 3.5 3.6 5.0 2.8 3.9 4.7

Payout (incl. Div. Tax.) 46.7 49.8 49.9 61.8 57.6 60.0 54.6

Valuation(x)

P/E 26.4 42.4 28.8 20.3

Cash P/E 19.2 24.4 15.8 12.7

Price / Book Value 3.6 3.4 2.4 2.2

EV/Sales 3.2 3.2 2.5 2.1

EV/EBITDA 17.1 21.1 14.6 10.5

Dividend Yield (%) 2.1 1.2 1.7 2.0

EV/Ton (Cap) - US$ 165 158 136 131


RoE 16.3 18.3 11.5 13.9 8.2 8.2 11.2

RoCE 23.2 27.6 16.3 18.9 12.3 14.5 20.9

RoIC 29.7 37.5 20.7 24.9 14.8 15.0 23.0

Turnover Ratios (%)

Asset Turnover (x) 1.0 1.0 0.9 0.9 0.8 1.1 1.1

Debtors (No. of Days) 10 8 9 8 11 10 10

Leverage Ratios (%)

Net Debt/Equity (x) -0.3 -0.3 -0.2 -0.2 -0.3 -0.1 -0.2

Cash Flow Statement (INR Million) Y/E Dec 2011 2012 2013 2014 2015 2016E 2017E Adjusted EBITDA 19,387 24,675 15,482 18,610 14,362 35,832 48,925 Non cash opr. exp (inc) 2,428 3,057 4,349 4,964 4,535 6,400 8,700 (Inc)/Dec in Wkg. Cap. -203 -417 -913 287 -1,505 14,332 4,657 Tax Paid -4,722 -6,399 -4,603 -4,627 -3,090 -7,472 -12,313Other operating activities 0 0 3,269 1,757 -557 0 0 CF from Op. Activity 16,890 20,917 17,585 20,991 13,746 49,093 49,970 (Inc)/Dec in FA & CWIP -6,233 -6,870 -8,650 -6,694 -3,537 -130,188 -27,517Free cash flows 10,657 14,047 8,935 14,297 10,209 -81,095 22,453(Pur)/Sale of Invt -1,700 -7,157 -1,326 -3,843 -534 1,365 0 Others 0 0 0 0 0 0 0 CF from Inv. Activity -7,933 -14,027 -9,976 -10,537 -4,071 -128,823 -27,517Inc/(Dec) in Net Worth 462 831 322 455 0 82,779 0 Inc / (Dec) in Debt 738 -636 57 147 -206 5,489 541 Interest Paid -251 -275 -651 -645 -918 -1,327 -1,450Divd Paid (incl Tax) & Others -5,697 -4,964 -6,462 -9,241 -4,649 -8,563 -10,333CF from Fin. Activity -4,748 -5,044 -6,735 -9,284 -5,772 78,379 -11,242Inc/(Dec) in Cash 4,209 1,846 874 1,170 3,903 -1,352 11,211Add: Opening Balance 16,482 20,691 22,537 23,411 24,581 28,484 27,132Closing Balance 20,690 22,537 23,411 24,581 28,484 27,132 38,344

28 March 2016 52

28 March 2016


Ultratech Cement

BSE SENSEX S&P CNX CMP: INR3,202 TP: INR3,800 (+19%) Buy 25,330 7,715

Stock Info Bloomberg UTCEM IN Equity Shares (m) 274.4 52-Week Range (INR) 3,370/2,531 1, 6, 12 Rel. Per (%) 6/17/22 M.Cap. (INR b) 878.6 M.Cap. (USD b) 13.2 Avg Val ( INR m) 9030.3 Free float (%) 38.3 Financials Snapshot (INR b) Y/E Mar 2015 2016E 2017E Net Sales 238.1 268.2 314.0 EBITDA 43.0 56.3 75.9 PAT 20.9 29.9 44.4 EPS (INR) 76.2 109.1 161.8 Gr. (%) 3.8 43.1 48.4 BV/Sh (INR) 750.2 841.8 983.4 RoE (%) 10.6 13.7 17.7 RoCE (%) 13.2 17.2 22.2 P/E (x) 42.0 29.4 19.8 P/BV (x) 4.3 3.8 3.3 EV/EBITDA (x) 20.4 15.0 10.6 EV/Ton (USD) 197 190 181 Shareholding pattern (%)


Promoter 62.8 61.7 61.7

DII 7.6 7.1 5.9

FII 18.4 20.2 21.3

Others 11.2 11.0 11.2


Best pick for impending upturn Right levers in place; JPA deal a bold call on the cycle

Pan India growth levers in place: UTCEM renders the most predicable and profitable growth visibility due to its (a) pan-India presence, with 17-18% market share (#1 or #2 across regions), (b) strong utilization headroom led by recent expansions, and (c) resilience in profit strength (UTCEM’s EBITDA/ton improved to 50-100% premium v/s ACC, ACEM). Top quartile growth and profitability over past 2-3 years raise comfort on operating prowess. Edge on efficiencies key to strong and stable margins: UTCEM delivered strong margins (18-20%), with lowest variance, led by (a) consistent efforts in cost savings (rise in pet coke/AFR/WHRS mix, sea route transport, and operating efficiency), and (b) benefits of healthy profitability of white cement. It witnessed strongest savings in direct cost in past 12 months, with further benefits from logistics measures expected ahead (split grinding facilities in North, West and East; bulk terminus). Mounting entry barriers, UTCEM is prepared: Rising entry barriers give natural scarcity premium to UTCEM for its scale and growth sustainability (strong preparedness in terms of land and limestone access – can add 20-35mt of brownfield capacity). From its existing assets, it would generate INR30b-50b of growth capital from operations (after meeting fixed commitment), which would aid self-sustaining growth. JPA deal a bold call on cycle; dilutive to RoCE, but would add strategic value: JPA deal would expand UTCEM’s capacity by 33% (to 92mt) and capital employed by 45-50%. Deal valuation at USD110/ton looks attractive in M&A context, but it is 30-40% higher than UTCEM’s book. Therefore, sub-normal profitability, low utilization and fresh debt should lead to dilution in EPS (for 2-3 years) and RoCE (over medium-term). However we expect the transaction would strengthen UTCEM’s competitive position with complementary market reach, synergies (price and cost), and sufficient limestone reserves (value accretion of 5-7% likely). Dilution in B/S strength would be short-lived, in our view, and should normalize over 2-3 years. Preferred pick: At the critical juncture demand recovery, UTCEM’s strong focus on growth and cost efficiency make it most predictable play. Impact of JPA deal would be contingent on pace of recovery of the sector. It is a strong bet on the cycle upturn, and in our view, the success in asset creation should overshadow any near-term concerns for long-term investors. We value UTCEM at INR3,800 (13x FY18E EBITDA; USD220/ton). Our 3-year target price is INR5,300 (@11x FY20E EBITDA, 65% upside)

2,000

2,400

2,800

3,200

3,600

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

UltraTech Cem.Sensex - Rebased

Ultratech Cement

28 March 2016 53

What does JPA deal offer? Assets that are part of MoU: UTCEM entered into an MoU with JPA for 22.4mt (clinker 16.2mt) of cement assets at a valuation of INR165b. The deal comprises (a) 11.4mt in Satna Cluster, 4.8mt in the North and 6.2mt in the South, (b) 325MW of captive power plants, and (c) 40 years+ of limestone reserves. With 94.5mt capacity (by mid-FY17), UTCEM would become the 4th largest capacity holder in the world (outside China). What makes the assets attractive for UTCEM? (a) Demand cycle at the cusp of acceleration, (b) organic expansion getting costly and time consuming (land, limestone and approvals), and (c) JPA portfolio of 12 plants offering complementary market reach to its existing asset base – creating strong strategic sense. Regulatory hurdles? CCI, MMDR both seems surmountable: Complementary market mix keeps us optimistic on CCI nod, despite large size of the deal. 50% of capacities fall in Satna cluster, where UTCEM had no presence. State-wise combined entity’s market share wouldn’t cross 20-30%, while share in the central region would be ~30%. CCI’s “CR4 conditions” demands (a) post M&A market share of <70% for top 4 and (b) HHI index of <1500 in relevant market. In our assessment, we find easy adherence of the conditions at all cluster (HHI 100-1400) barring some border-line case in north (albeit UTCEM is confident based on their internal evaluation). Post addition of Mining concession rule to MMDR Act (awaiting RS approval), the long-pending hurdle is close to be subsided. The management is optimistic deal conclusion in 12-15 months (by 1QFY18). Good valuation for UTCEM, in our view: At INR165b (plus INR4.7b for under construction GU of 4mt), implied EV is ~USD110/ton. Adjusting for MP asset of 4.9mt (IN54b), the incremental assets (17.5mt) come at ~USD100/ton. Currently, JPA has sub-normal utilization (60-70%) and EBITDA (~INR500/ton) due to operating constraints like working capital management. Assuming 6-7% pricing CAGR in FY16-18 and UTCEM’s brand premium of INR200-250/ton (v/s JPA), the target assets may generate EBITDA of INR1,100-1,200/ton (v/s INR1,300-1,400 for UTCEM) within 12 months of integration (FY19). This, at 70-75%, makes the transaction valued at 10x 1-year forward EBITDA. RoCE dilutive over medium-term: The deal (45-50% addition in capital employed) would keep UTCEM’s RoCE weaker than peers over medium-term due to (a) new assets being higher than book, and (b) profitability sub-normal. We expect EPS dilution for initial 2-3 years. However it may offer 5-7% accretion to SoTP. Synergy benefits not guided, but qualitative hints strong: Barring natural brand premium, we expect synergies to emerge from (a) logistics – complementary locations to reduce lead distances in North and Central India, (b) greater market reach in coastal AP and HP, and (c) resolution of operational bottlenecks boosting utilization. Lower capex aggression ahead, B/S weakness should be short-lived: We expect UTCEM’s net debt/EBITDA to rise to 2.9x (v/s 0.6x now) on conclusion of the deal, before gradually declining to 1.7-2x, with asset ramp-up and disciplined capex. Being well within UTCEM’s gearing threshold of 3.5x net debt/EBITDA and 0.75x net DER, the management guided no major investment in organic capex for the next 2-3 years, barring select investments in acquisition of critical resources (land and limestone).

Zone/Region (mt) Pre* JPA Post

North 19 4.8 23.8

Satna cluster 11.4 11.4

East 11.4 11.4

West 20.4 20.4

South 15.5 6.2 21.7

All India 66.3 22.4 88.7

Overseas 3.6 3.6

Total 69.9 22.4 92.3

Ultratech Cement

28 March 2016 54

Exhibit 1: Global positioning to improve significantly post acquisition of JPA


Exhibit 2: Consistently created growth levers with expansion


Exhibit 3: Market mix balance to enrich further (%)


Exhibit 4: Utilization (%) levers to aid growth performance


Exhibit 5: Consistent focus kept cost structure superior and inflation impact low (INR/ton)


CNBM, 400

Lafarge-Holcim, 390

Anhui Conch, 264

Jidong , 100

Heidelberg, 128

Cemex, 94

UTCEM*,92

Itla cementi, 65

Votorantim, 54

Buzzi , 45 Top 10 cement companes by capacity globally

UTCEM, 92

Hol-Laf, 61.3

SRCM, 23.5

Dalmia, 24

Chettinad , 16.8

Ramco, 16

BCORP, 16

ICEM, 15.5

JKCE, 10.5

JKLC, 9.2 Top 10 cement companies in India by capacity

23.1

48.8

48.8

48.8

50.9

54.0

61.6

66.2

66.2

66.2

20.2

34.7

34.7

40.7

40.7

41.5

44.9

47.2

50.7

55.9

88

71

71

84 80

77 73

71

77

84

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Capacity (MT) Dispatches (MT) Cap. Util (%)

21 21 18

29 28 22

24 18 30

17 13 17

8 19 12

Current capacitybreak-up

Capacity break uppost JP deal

Current volumemix(%)

North South West East Central

73% 80%

75% 80%

69% 70%

Com

pany

Regi

on

Com

pany

Regi

on

Com

pany

Regi

on

North & Central East West & South

-8%

-6%

-4%

-2%

0%

2%

4%

0

1000

2000

3000

4000

ACC

ACEM

UTC

EM

SHRE

E

JKCE

JKLC

BCO

RP

PRIS

M

DALM

IA

ICEM

RAM

CO

ORI

ENT


Ultratech Cement

28 March 2016 55

Exhibit 6: Focus on improving cost parameters

FY09 FY10 FY11 FY12 FY13 FY14

% of CPP 47% 78% 81% 80% 81% 83%

3Q FY15

4Q FY15 FY15

1Q FY16

2Q FY16

3Q FY16

Pet Coke(%) 51% 64% 64% 68% 65% 74%

WHRS (%) 1% 1% 2% 3% 4% 5%


Exhibit 7: Best performer in cost savings in recent time


Exhibit 8: Significantly uplifted profitability, led by cost measures and value added products (INR/ton)


Exhibit 9: Large investment in land (and limestone) in past makes it better placed for efficient, faster expansion


Exhibit 10: Ongoing operating cash flow offers strong self-sustaining growth capex for organic expansion (INR b)


Exhibit 11: Return ratios relatively subdued due to strong capex cycle, but would gain relative to competition (%)


-20

-10

0

10

20

ACC ACEM UTCEM SRCM

Mar-14 Sep-14 Mar-15 Sep-15 Dec-15

200400600800

1,0001,2001,4001,600

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

ERange of EBITDA/ton for MOSL universe UTCEM

19.6

11.2

0.8

16.9

8.7

23.0

9.2 6.7

Ultra TechCement

Shree Cement ACC Ambuja

Land as % of capex Capex as % of gross block

35 46 43 48

56

6 7 8 8 8

22

30 27 30

38

FY14 FY15E FY16E FY17E FY18E

OCF Maintenance capex Growth capex

31.0 26.6

18.4 20.5 18.7

12.8 11.2 10.6 13.7

29.2 28.5

21.1 23.5

21.3

14.4 14.1 13.2 17.2

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

RoE RoCE

Ultratech Cement

28 March 2016 56

Exhibit 15: JPA deal is EPS and ROCE dilutive, but may aid 5-7% upside (at 10x 1-year forward EBITDA after stabilization) INR m FY16E FY17E FY18E FY19E FY20E Capacity (mt) 18.4 18.4 22.4 22.4 22.4 Volumes (mt) 12.0 12.7 13.4 14.6 15.7 Implied growth (%) 6% 6% 8% 8%

EBITDA (INR m) 5,382 7,618 11,346 17,636 22,624 EBITDA (INR/ton) 450 600 844 1,211 1,443 Core EBITDA of JPA (INR/ton) 844 1,011 1,193 Pricing synergy assumed (INR/ton) 200 200 Cost synergy (INR/ton) 50 v/s UTCEM's grey EBITDA/ton 789 981 1,227 1,392 1,574 Depreciation (INR m) 6,800 6,800 6,800 Interest (INR m) 15,300 15,300 15,300 PBT (INR m) -10,754 -4,464 524 PBT dilution (%) -24% -8% 0%

RoCE of JPA asset (%) 2.7 6.4 9.3 RoCE of existing asset (%) 22.1 25.0 26.5






Exhibit 14: Scenario Analysis UTCEM Base case Bull case Bear case


Volume 47.18 50.74 55.85 51.68 57.93 49.79 53.82 Growth 8% 10% 10% 12% 6% 8% Realization(INR/t) 4,214 4,434 4,766 4603 5131 4265 4414 Growth 5% 7% 9% 11% 1% 3% EBITDA 42,988 56,293 75,935 69,188 106,971 43,716 47,304 Net Debt 24,873 7,348 -18,198 5,991 -25,763 16,179 8,292 EV/EBITDA 20.7 15.2 10.7 12.3 7.5 19.8 17.8 TP for EV/EBITDA

12 3,552 4,937 2,200

13 3,800 5,294 2,362

14 4,100 5,716 2,548


Aug-

04

Dec-

05

Mar

-07

Jul-0

8

Oct

-09

Jan-

11

May

-12

Aug-

13

Nov

-14

Mar

-16

EV/ton (USD) Max Min Avg

215 21.3

9.7

1.7 048

12162024

Aug-

04

Jul-0

5

Jun-

06

Apr-

07

Mar

-08

Feb-

09

Dec-

09

Nov

-10

Oct

-11

Aug-

12

Jul-1

3

Jun-

14

Apr-

15

Mar

-16

EV/EBDITA(x) Max(x) Avg(x) Min(x)

Ultratech Cement

28 March 2016 57

Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 132,062 181,664 199,991 200,779 226,565 238,096 268,164 314,010 Change (%) 87.3 37.6 10.1 0.4 12.8 5.1 12.6 17.1 EBITDA 25,597 40,039 44,946 36,160 39,153 42,988 56,293 75,935 EBITDA Margin (%) 19.4 22.0 22.5 18.0 17.3 18.1 21.0 24.2 Depreciation 7,657 9,026 9,454 10,523 11,331 12,858 13,387 13,828 EBIT 17,939 31,013 35,492 25,637 27,822 30,129 42,906 62,107

Interest 2,725 2,239 2,097 3,192 5,475 5,255 5,363 5,175 Other Income 2,619 4,568 4,620 5,310 6,515 5,000 5,200 6,500 Extraordinary items 0 666 0 956 0 0 0 0 PBT 17,833 34,009 38,015 28,711 28,863 29,875 42,743 63,432 Tax 3,791 9,467 11,700 7,266 8,715 8,962 12,823 19,030 Tax Rate (%) 21.3 27.8 30.8 25.3 30.2 30.0 30.0 30.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 14,042 24,542 26,315 21,445 20,147 20,912 29,920 44,402 Adjusted PAT 14,042 24,062 26,315 20,731 20,147 20,912 29,920 44,402 Change (%) 28.4 71.4 9.4 -21.2 -2.8 3.8 43.1 48.4

Balance Sheet (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Share Capital 2,740 2,741 2,742 2,742 2,744 2,744 2,744 2,744

Reserves 103,920 125,858 149,606 168,233 185,833 203,084 228,222 267,046

Net Worth 106,660 128,598 152,348 170,975 188,576 205,828 230,966 269,789

Debt 26,373 41,529 54,085 51,993 74,142 64,142 59,142 59,142

Deferred Tax 17,301 17,378 19,059 22,958 27,920 29,414 31,765 35,253

Total Capital Employed 150,334 187,505 225,493 245,927 290,638 299,383 321,872 364,185

Gross Fixed Assets 179,423 190,138 213,822 250,778 318,741 354,478 359,478 364,478

Less: Acc Depreciation 65,420 73,797 82,599 92,059 109,267 122,125 135,512 149,340

Net Fixed Assets 114,003 116,342 131,224 158,718 209,475 232,353 223,966 215,139

Capital WIP 6,831 18,965 35,054 20,384 20,737 15,000 30,000 45,000

Investments 37,303 37,888 51,087 53,917 52,088 24,500 29,500 29,500

Current Assets 41,809 56,257 56,723 64,489 69,850 92,762 104,529 141,650

Inventory 19,565 20,359 23,505 23,684 27,514 26,093 29,388 34,412

Debtors 6,023 7,660 10,172 12,810 12,032 13,046 13,225 15,485

Cash & Bank 1,448 1,896 1,427 2,775 2,139 24,269 31,794 57,340

Loans & Adv, Others 14,773 26,342 21,619 25,220 28,165 29,354 30,123 34,412

Curr Liabs & Provns 49,612 41,947 48,595 51,582 61,511 65,232 66,123 67,104

Curr. Liabilities 43,877 33,740 37,903 41,884 48,481 52,185 55,102 55,920

Provisions 5,735 8,207 10,692 9,698 13,030 13,046 11,020 11,184

Net Current Assets -7,803 14,310 8,128 12,907 8,339 27,530 38,406 74,546

Total Assets 150,334 187,505 225,493 245,927 290,638 299,383 321,872 364,185

Ultratech Cement

28 March 2016 58

Financials and Valuations Ratios Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Basic (INR)

EPS 51.2 87.8 96.0 75.6 73.4 76.2 109.1 161.8

Cash EPS 79.2 120.7 130.5 114.0 114.7 123.1 157.8 212.2

Book Value 389.2 469.2 555.7 623.5 687.3 750.2 841.8 983.4

DPS 6.0 8.0 9.0 9.0 9.0 11.0 15.0 17.5

Payout (incl. Div. Tax.) 13.6 10.4 11.0 13.5 14.2 16.8 16.0 12.6

Valuation(x)

P/E 42.4 43.6 42.0 29.4 19.8

Cash P/E 28.1 27.9 26.0 20.3 15.1

Price / Book Value 5.1 4.7 4.3 3.8 3.3

EV/Sales 4.2 3.9 3.7 3.2 2.6

EV/EBITDA 23.6 22.4 20.4 15.0 10.6

Dividend Yield (%) 0.3 0.3 0.3 0.5 0.5


RoE 18.4 20.5 18.7 12.8 11.2 10.6 13.7 17.7

RoCE 21.1 23.5 21.3 14.4 14.1 13.2 17.2 22.2

Turnover Ratios (%)

Asset Turnover (x) 0.9 1.0 0.9 0.8 0.8 0.8 0.8 0.9

Debtors (No. of Days) 17 15 19 23 19 20 18 18

Inventory (No. of Days) 54 41 43 43 44 40 40 40

Creditors (No. of Days) 121 68 69 76 78 80 75 65

Leverage Ratios (%)

Net Debt/Equity (x) -0.1 0.0 0.0 0.0 0.2 0.1 0.0 -0.1

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 25,597 40,039 44,946 36,160 39,153 42,988 56,293 75,935 Non cash opr. exp (inc) 1,262 1,743 1,864 5,310 6,515 5,000 5,200 6,500 (Inc)/Dec in Wkg. Cap. -925 158 -3,887 -3,399 3,900 2,939 -3,351 -10,594Tax Paid -5,190 -7,340 -7,165 -3,367 -3,753 -7,469 -10,472 -15,541Other operating activities 0 -22 -32 956 0 0 0 0 CF from Op. Activity 20,743 34,578 35,727 35,660 45,815 43,458 47,670 56,300 (Inc)/Dec in FA & CWIP -12,169 -31,575 -32,676 -23,348 -62,440 -30,000 -20,000 -20,000Free cash flows 8,574 3,003 3,051 12,312 -16,625 13,458 27,670 36,300(Pur)/Sale of Invt -4,321 2,159 -10,349 -2,862 1,861 27,588 -5,000 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -16,489 -29,416 -43,025 -26,210 -60,579 -2,412 -25,000 -20,000Inc/(Dec) in Net Worth 14 16 79 69 323 -154 0 0 Inc / (Dec) in Debt -664 83 12,557 -2,092 22,149 -10,000 -5,000 0 Interest Paid -2,930 -2,907 -3,268 -3,192 -5,475 -5,255 -5,363 -5,175Divd Paid (incl Tax) & Others -728 -1,905 -2,539 -2,887 -2,869 -3,507 -4,782 -5,579CF from Fin. Activity -4,309 -4,714 6,829 -8,102 14,128 -18,916 -15,145 -10,754Inc/(Dec) in Cash -55 448 -469 1,348 -636 22,130 7,525 25,546Add: Opening Balance 1,503 1,448 1,896 1,427 2,775 2,139 24,269 31,794Closing Balance 1,448 1,896 1,427 2,775 2,139 24,269 31,794 57,340

March 2016 59

March 2016


Shree Cement

BSE SENSEX S&P CNX CMP: INR12,598 TP: INR14,435 (+15%) Upgrade to Buy 25,330 7,715

Stock Info Bloomberg SRCM IN Equity Shares (m) 34.8 52-Week Range (INR) 13,345/9,350 1, 6, 12 Rel. Per (%) 11/11/24 M.Cap. (INR b) 438.9 M.Cap. (USD b) 6.6 Avg Val ( INR m) 240 Free float (%) 35.2 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 72.4 84.3 102.9 EBITDA 16.9 21.6 29.9 PAT 5.9 11.4 17.3 EPS (INR) 169.1 328.1 496.5 Gr. (%) 27.0 94.0 51.3 BV/Sh (INR) 1,612 1,899 2,349 RoE (%) 10.8 18.7 23.4 RoCE (%) 11.4 19.0 27.8 P/E (x) 74.5 38.4 25.4 P/BV (x) 7.8 6.6 5.4 EV/EBITDA(x) 24.9 19.0 13.2 EV/Ton(USD) 245 222 199 Shareholding pattern (%)


Promoter 64.8 64.8 64.8

DII 15.4 4.9 5.6

FII 13.6 13.6 11.3

Others 6.2 16.7 18.3


Consistent outperformer Poised to lead in growth and return ratios

On the cusp of next phase of expansion Notwithstanding regional concentration, SRCM has delivered the strongest and most consistent growth in the industry (14% in FY13-16 v/s ~4% for the industry). This was achieved by doubling capacity to 25.5mt over the last 3-4 years and entry into the fast growing East market. After creating leadership in the North (20-25% capacity share), SRCM is on cusp of replicating the same in the East (existing 4mt to double) and South (entry with 4mt in Gulbarga). This, along with another 4mt of additional lines in north would take SRCM’s capacity at 38-40mt by FY20. Differentiating, self-sustainable and low cost expansion aid comfort SRCM aims to add 12-15mt over FY17-20 spending ~INR60b implying US$65-75/ton of incremental capex (v/s industry practice of US$90-130/ton) thanks to its strong preparedness in limestone and land. SRCM’s differentiated expansion strategy and on-time execution drives our conviction in its growth capability. It has followed a strategy of small but regular expansions aligned with market demand, which helps to achieve (a) quick payback and (b) minimum pressure on balance sheet. Interestingly, during doubling of capacity, SRCM’s net cash grew from INR14b (FY13) to INR17b (FY16) – which speaks volume on its growth sustenance. Absolute cost leadership – ahead of the curve initiatives Being the pioneer in many cost initiatives in India, SRCM is the lowest cost producer (30-35% lower than industry average). It enjoys (a) best in class energy efficiency (earliest adoption of pet coke, WHRS, AFR, 100% CPP), (b) single location largest kiln in the North (12mt), aiding economies of scale, and (c) pioneer in split grinding strategy (savings on logistics, open wagon transport). SRCM’s cost competence and balance sheet strength make it favorably placed for growth, scalability and profitability with (a) wide market reach, (b) quick utilization ramp-up, and (c) ability to garner critical resources (land, limestone) by overcoming regulatory hurdles stand it in good stead. Consistent outperformer; look for right entry opportunity Its strategic prowess and superior track record render to SRCM the most premium valuations in the sector. With the sector poised for recovery, we remain confident of SRCM delivering consistent outperformance. With 30% EBITDA CAGR over FY15-18, we expect SRCM to post industry leading return ratios (RoCE of 28% by FY18). We upgrade the stock to Buy, with a revised target price of INR14,435 (EV of 15x FY18E EBITDA and USD220/ton). Our three-year price target is INR20,000 (12x one-year forward EBITDA, 60% upside). Look for the right entry opportunity.

8,000

10,000

12,000

14,000

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

Shree CementSensex - Rebased

Shree Cement

March 2016 60

Exhibit 1: Consistent expansion aids volume levers


Exhibit 2: Capacity expansion without hurting B/S strength


Exhibit 3: Market mix(%): Regional diversification underway


Exhibit 4: Kiln commissioning time half of industry average: Demonstrates strong execution prowess


Exhibit 5: Emerged as lowest cost producer (INR/ton)


Exhibit 6: Power and fuel efficiencies best among peers, led by pioneering in several aspects

ACC ACEM UTCEM SCRM

Energy(KWh/t) 84.0 80.4 80 73.8

Power(INR/unit) 4.8 4.4 4.6 2.3

Pet coke(%) 17 35 60 100

CPP(%) 77 67 83 98

WHRS(%) 2.3 1.5 5 16


5.6

7.0

9.0

12.0

13.2

13.5

13.5

17.5

23.5

25.5

27.1

29.1

4.9

6.6

8.5

10.2

10.3

12.2

12.5

14.3

16.2

18.3

21.1

24.5

88 94 94

85

78

90 92

81

69 72

78 84

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Capacity (mt) Dispatch (mt) Utilization (%)

-0.8

-0.4

0.0

0.4

0.8

-50

-40

-30

-20

-10

0

10

FY08 FY10 FY12 FY14 FY16E FY18E

Net debt (INR b) DER (x)

North , 60 East, 15

Central, 25

465 435 456 435

367 330

Kiln 3 Kiln 4 Kiln 5 Kiln 6 Kiln 7 Kiln 8

2,000

2,500

3,000

3,500

4,000

4,500

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Cost range of universe SRCM

Shree Cement

March 2016 61

Exhibit 7: Grey Cement profitability best in the lot barring any major regional pricing adversity (EBITDA/ton)


Exhibit 8: Cash flows offer comfort and growth capex(INR b)


Exhibit 5: Low cost growth led RoCE(%) best in the business


Exhibit 9: Trend in EV/EBITDA (1-yr forward)


Exhibit 10: Scenario Analysis SCRM Base case Bull case Bear case


Volume 18.83 21.13 24.52 21.51 25.38 20.76 23.66

Growth 12% 16% 14% 18% 10% 14%


Growth 3% 7% 7% 11% -1% 3%

Total EBITDA 18,984 21,625 29,917 25,085 38,781 18,273 21,876

Net debt -17,125 -28,156 -45,084 -30,687 -49,080 -24,829 -33,079

EV 418,140 400,608 383,680 398,078 379,685 403,936 395,686

EV/EBITDA 24.6 20.1 13.4 17.0 10.1 24.3 19.3

TP for EV/EBITDA

14 13,604 17,281 10,028

15 14,435 18,357 10,635

16 15,322 19,507 11,284


400

600

800

1,000

1,200

1,400

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

ACC ACEM UTCEM SRCM

-505

1015202530

FY11

FY12

FY13

E

FY14

E

FY15

E

FY16

E

FY17

E

FY18

E

Operating CF Capex FCF

0

6

12

18

24

30

FY13 FY14 FY15 FY16E FY17E FY18E

ACC ACEM UTCEM SRCM

15.3

7.1

0.8 0369

121518212427

Mar

-01

Feb-

02Ja

n-03

Nov

-03

Oct

-04

Aug-

05Ju

l-06

Jun-

07Ap

r-08

Mar

-09

Jan-

10De

c-10

Oct

-11

Sep-

12Au

g-13

Jun-

14M

ay-1

5M

ar-1

6

EV/EBDITA(x) Peak(x) Avg(x) Min(x)

Shree Cement

March 2016 62

= Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 34,535 47,806 55,671 58,759 64,399 72,420 84,324 102,870 Change (%) -4.9 38.4 16.5 5.5 9.6 12.5 16.4 22.0 EBITDA 8,848 13,865 15,378 13,784 13,302 16,930 21,625 29,917 EBITDA Margin (%) 25.6 29.0 27.6 23.5 20.7 23.4 25.6 29.1 Depreciation 6,758 7,133 4,356 5,499 9,248 11,079 10,589 10,201 EBIT 2,091 6,732 11,022 8,285 4,054 5,851 11,036 19,716

Interest 1,753 1,878 1,931 1,292 1,206 959 745 595 Other Income 1,251 1,471 2,114 1,964 1,515 1,293 2,000 2,500 Extraordinary items -485 -41 -11 154 -355 -262 0 0 PBT 1,103 6,284 11,194 9,111 4,008 5,922 12,291 21,621 Tax -994 649 1,155 1,238 -255 280 860 4,324 Tax Rate (%) -90.0 10.3 10.3 13.6 -6.4 4.7 7.0 20.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 2,097 5,635 10,040 7,872 4,263 5,642 11,430 17,297 Adjusted PAT 2,582 5,671 10,049 7,739 4,640 5,892 11,430 17,297 Change (%) -63.6 119.7 77.2 -23.0 -40.0 27.0 94.0 51.3


Share Capital 348 348 348 348 348 348 348 348

Reserves 19,513 26,991 38,088 46,760 52,416 55,802 65,816 81,493

Net Worth 19,862 27,339 38,436 47,109 52,764 56,151 66,164 81,842

Debt 20,079 16,611 11,274 10,783 8,200 8,200 6,700 5,200

Deferred Tax -723 -697 -938 -1,429 -1,952 -2,779 -3,762 -3,979




Net Fixed Assets 13,961 14,678 16,653 21,023 29,154 31,329 23,239 22,038

Capital WIP 5,000 1,500 2,500 8,500 6,000 3,500 10,000 10,000

Investments 11,965 25,352 22,033 22,444 16,626 21,626 21,626 21,626

Current Assets 17,756 17,499 19,478 19,892 26,246 27,111 38,642 57,405

Inventory 4,042 5,033 5,305 8,098 9,189 9,127 9,934 11,273

Debtors 1,082 1,811 3,147 2,966 4,764 4,762 5,083 5,637

Cash & Bank 4,987 4,590 3,694 1,593 3,075 3,698 13,230 28,658

Loans & Adv, Others 7,644 6,065 7,333 7,236 9,219 9,524 10,396 11,837



Provisions 2,828 1,954 1,050 1,186 880 1,161 1,304 1,232

Net Current Assets 8,293 1,723 7,587 4,496 7,231 5,116 14,236 29,399

Total Assets 39,218 43,253 48,773 56,463 59,012 61,571 69,101 83,063

Shree Cement

March 2016 63


Basic (INR)

EPS 74.1 162.8 288.5 222.2 133.2 169.1 328.1 496.5

Cash EPS 394.1 479.1 441.3 427.5 541.3 641.8 760.6 883.0

Book Value 570.1 784.8 1103.3 1352.3 1514.6 1611.8 1899.2 2349.3

DPS 14.0 20.0 20.0 22.0 24.0 30.0 35.0 40.0


Valuation(x)

P/E 56.7 94.6 74.5 38.4 25.4

Cash P/E 29.5 23.3 19.6 16.6 14.3

Price / Book Value 9.3 8.3 7.8 6.6 5.4

EV/Sales 7.6 6.9 6.1 5.1 4.0

EV/EBITDA 30.9 32.1 24.9 19.0 13.2

Dividend Yield (%) 0.2 0.2 0.2 0.3 0.3


RoE 13.5 24.0 30.6 18.1 9.3 10.8 18.7 23.4

RoCE 8.4 19.6 28.1 19.0 9.4 11.4 19.0 27.8

Turnover Ratios (%)

Asset Turnover (x) 0.9 1.2 1.2 1.1 1.1 1.2 1.3 1.4




Leverage Ratios (%)

Net Debt/Equity (x) 0.8 0.4 0.2 0.2 0.1 0.1 -0.1 -0.3

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 8,848 13,865 15,378 13,784 13,302 16,930 21,625 29,917 Non cash opr. exp (inc) 1,251 1,471 2,104 2,118 1,161 -3,110 2,000 2,500 (Inc)/Dec in Wkg. Cap. -1,315 6,173 -5,957 990 -1,253 2,918 412 265 Tax Paid 395 -564 -2,198 -1,729 -268 -834 -1,844 -4,540Other operating activities 0 0 0 0 0 0 0 0 CF from Op. Activity 9,180 20,945 9,326 15,162 12,942 15,904 22,193 28,142 (Inc)/Dec in FA & CWIP -8,525 -4,350 -7,331 -15,869 -14,879 -8,371 -9,000 -9,000Free cash flows 655 16,594 1,995 -707 -1,938 7,533 13,193 19,142(Pur)/Sale of Invt 3,958 -13,447 3,319 -411 5,818 -5,000 0 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -4,567 -17,798 -4,012 -16,280 -9,062 -13,371 -9,000 -9,000Inc/(Dec) in Net Worth -482 2,617 1,867 1,697 2,364 0 0 0 Inc / (Dec) in Debt -983 -3,468 -5,337 -491 -2,583 0 -1,500 -1,500Interest Paid -1,753 -1,878 -1,931 -1,292 -1,206 -695 -745 -595Divd Paid (incl Tax) & Others -571 -815 -810 -897 -972 -1,214 -1,417 -1,619CF from Fin. Activity -3,789 -3,544 -6,211 -983 -2,398 -1,910 -3,662 -3,714Inc/(Dec) in Cash 823 -397 -896 -2,101 1,482 623 9,532 15,428Add: Opening Balance 4,164 4,987 4,590 3,694 1,593 3,075 3,698 13,230Closing Balance 4,987 4,590 3,693 1,592 3,075 3,698 13,230 28,658

March 2016 64

March 2016


Dalmia Bharat


Stock Info Bloomberg DBEL IN Equity Shares (m) 81.3 52-Week Range (INR) 885/408 1, 6, 12 Rel. Per (%) 13/24/98 M.Cap. (INR b) 64.4 M.Cap. (USD b) 1.0 Avg Val ( INR m) 28 Free float (%) 37.2 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Sales 60.2 71.3 83.2 EBITDA 13.1 17.0 21.7 NP 1.0 3.6 6.2 Adj EPS (INR) 11.5 41.1 70.0 EPS Gr. (%) 919.3 256.9 70.3 BV/Sh. (INR) 426 464 532 RoE (%) 3.0 9.2 14.0 RoCE (%) 8.9 11.6 15.2 P/E (x) 69.5 19.5 11.4 P/BV (x) 1.9 1.7 1.5 EV/EBITDA (x) 11.0 8.3 6.2 EV/Ton (USD) 94 92 88 Shareholding pattern (%)


Promoter 62.7 62.8 62.8

DII 5.1 5.3 3.8

FII 8.3 7.9 10.3

Others 19.9 24.1 23.2 FII Includes depository receipts Stock Performance (1-year)

Benefits of scale creation to unfold Further re-rating hinges on consistency, discipline and structure

Benefits of scale creation to unfold in recovery cycle DBEL’s strategy of aggressive leverage-backed expansion would help it reap benefits as the demand cycle turns favorable. Capacity of 24mt (effective stake of 21.9mt) and utilization of 50% (FY16E) should help it to garner benefits of operating leverage. Stabilization of expansion in Karnataka and the North East, and recovery in southern demand and North East infrastructure plan would be key triggers.

Market mix much balanced now Over the last three years, DBEL’s entry into the East and North East rendered strong balance to market mix. With 9% share in the South and 12% share in the East, it has created brand recall in both regions, strengthening realizations. In the duopolistic North East region, with Star Cement focusing more on retail, DBEL is likely to reap strong volume share in the impending infra-led demand.

Cost advantage percolating Under the new operating leadership, there has been significant improvement in efficiencies (energy consumption down 6% YoY, pet coke use up 72% v/s 32% a year ago, higher blended cement, lower lead distance, inter-unit synergies, etc). Cost of production is down ~15% since FY14 and utilization ramp-up would aid further benefits ahead. With pricing support in the South, DBEL is generating industry-leading profitability.

Simplification of structure raising comfort Partial progress has been made to simplify corporate structure through (a) KKR exit in equity plus cash deal (valuation not decretive), (b) stake increase in OCL and Bokaro, and (c) amalgamation of east operations (OCL and Bokaro) and Adhunik and power subsidiary with DCBL. Rise in stake in Calcom and subsequent merger of all subsidiaries are pending for value uncloaking (accumulated loss benefits in the North East), but timeline remains elusive.

Stage one re-rating done, rest hinges on disciplined growth Concerns of high gearing (net debt/EBITDA of 5x) should abate, with steady asset sweating and disciplined capital allocation. On the back of moderating capex, we expect net debt/EBITDA to improve to 3x by FY18. With strong profitability and growth show, DBEL has seen the first round of re-rating. At an EV of 8.4x FY17E and 6.0x FY18E EBITDA and USD81/ton for the 4th largest group, the stock is trading at discount. Further re-rating hinges on (a) consistent operations, (b) further simplification of holding structure, and (c) rationality in capital allocation and de-leveraging. We value DBEL at USD95/ton (implied EV/EBITDA of 7x FY18E) or INR960/share.

300

450

600

750

900

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

Dalmia Bhar.Sensex - Rebased

Dalmia Bharat

March 2016 65

Exhibit 1: With Steady growth in capacity, DBEL has utilization levers in place


Exhibit 2: De-risked market mix over time (%)


Exhibit 3: Cost of capacity creation at good valuation


Exhibit 4: Proximity to input sources reduces lead distance to 300KM – very competitive compared to peers


Exhibit 5: Improving power consumption (KWh/ton)


Exhibit 6: Variable cost seen steady improvement (INR/ton)


11.5 3.6 6.75 21.85

40 36

71

51

South North East East Overall

Capacity(mt) Utilization(%)

25 44

12

13

62 43

FY15 FY17E

East North East South

74

70 69

67 68

FY14 2QFY15 4QFY15 1QFY16 2QFY16

1,70

3

1,57

0

1,61

3

1,67

0

1,56

5

1,52

0

1,46

8

1,41

0

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

74 115 130 90

OCL Calcom Adhunik Bokaro

EV/ton(USD)

*

*Incremental stake from 48% to 77% came at USD 93/ton

Dalmia Bharat

March 2016 66

Exhibit 7: Profitability remains healthy and in top quartile (INR/ton) thanks to south pricing and cost savings


Exhibit 8: DBEL break up of EBITDA and trend in net DER

INR b FY14 FY15 FY16 FY17 FY18

EBITDA (INR b) 5.3 3.8 12.2 15.1 19.0

South (INR b) 2.7 1.1 7.4 9.1 11.2

OCL (INR b) 2.2 2.5 3.0 3.6 4.6

North East & Bokaro (INR b)

0.5 0.3 1.7 2.4 3.3

Net Debt (INR b) 38.3 61.3 65.1 61.9 60.6

Net DER (x) 1.2 2.0 1.7 1.5 1.3

Net Debt/EBITDA (x) 7.2 16.0 5.3 4.0 3.1


Exhibit 9: Pre and Post amalgamation of (a) East operations (OCL and Bokaro) and (b) Adhunik and power assets with DCBL


50

500

950

1,400

1,850

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Range of EBITDA/ton for MOSL universe DALMIA

Dalmia Bharat

March 2016 67

Exhibit 10: Simplified corporate structure to be beneficial (KKR exit)




Exhibit 12: Trend in EV/EBITDA (x)


Exhibit 13: Scenario Analysis DBEL Base case Bull case Bear case

FY16E FY17E FY18E FY17E FY18E FY17E FY18E Volume 12.24 13.92 15.33 14.17 15.88 13.68 14.79 Growth 14% 10% 16% 12% 12% 8% Realization(INR/t) 4,921 5,120 5,424 5316 5846 4923 5019 Growth 4% 6% 8% 10% 0% 2% EBITDA (Eco int) 12,205 15,772 20,192 18,643 27,143 12,991 13,901 Net Debt 67,056 62,843 60,385 62,650 60,609 63,866 64,672 EV 135,373 132,160 124,702 120,967 110,926 134,183 134,989 EV/EBITDA 10.3 7.8 5.7 6.0 3.8 9.6 9.0 TP for EV/EBITDA 6 753 1220 279 7 960 1496 420 8 1208 1832 592


77.1

51.8

35455565758595

105115

Jan-

11

Jun-

11

Oct

-11

Mar

-12

Jul-1

2

Nov

-12

Apr-

13

Aug-

13

Dec-

13

May

-14

Sep-

14

Feb-

15

Jun-

15

Oct

-15

Mar

-16

EV/ton (US$) Max Avg Min

10.2

8.1

3.5 3.05.07.09.0

11.013.015.017.019.0

Jan-

11

Jun-

11

Oct

-11

Feb-

12

Jun-

12

Oct

-12

Feb-

13

Jun-

13

Oct

-13

Mar

-14

Jul-1

4

Nov

-14

Mar

-15

Jul-1

5

Nov

-15

Mar

-16

EV/EBDITA(x) Peak(x)

Dalmia Bharat

March 2016 68

hapter Title Chapter Sub Title… Chapter Subhead … This is Text Style…

Chapter Subhead 1… This is Text Style…

This is bulleted text.

This is Callout Style…

Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 17,459 23,422 27,906 28,670 33,662 60,211 71,286 83,165 Change (%) -19.0 34.2 19.1 2.7 17.4 78.9 18.4 16.7 EBITDA 3,648 5,674 6,342 3,263 4,546 13,124 16,959 21,712 EBITDA Margin (%) 20.9 24.2 22.7 11.4 13.5 21.8 23.8 26.1 Depreciation 1,753 1,817 2,059 2,422 2,716 4,564 5,003 5,239 EBIT 1,895 3,857 4,282 842 1,830 8,559 11,956 16,473

Interest 1,724 1,513 2,314 3,151 4,344 6,955 7,317 6,957 Other Income 543 756 769 2,081 2,413 2,000 2,100 2,000 Extraordinary items 0 -395 0 0 -61 0 0 0 PBT 714 2,704 2,738 -229 -162 3,604 6,739 11,517 Tax 611 1,229 1,336 644 469 2,271 2,696 4,607 Tax Rate (%) 85.5 45.4 48.8 -281.5 -288.7 63.0 40.0 40.0 Min. Int. & Assoc. Share -395 185 154 -302 -176 313 400 705 Reported PAT 498 1,435 1,971 -84 30 1,021 3,644 6,205 Adjusted PAT 103 1,691 1,971 -84 92 1,021 3,644 6,205 Change (%) -92.1 1,538.8 16.5 -104.3 -209.2 1,013.4 256.9 70.3


Share Capital 162 162 162 162 162 177 177 177

Reserves 27,615 28,743 30,517 30,785 30,539 37,578 41,016 47,015

Net Worth 27,777 28,905 30,679 30,947 30,702 37,756 41,194 47,193

Minority Interest 4,086 4,272 5,181 4,464 7,477 3,352 3,752 4,457

Debt 18,890 19,127 35,744 42,760 84,797 82,797 79,797 74,797

Deferred Tax 531 927 1,563 1,865 4,279 3,391 3,391 3,391




Net Fixed Assets 35,919 34,328 42,569 42,594 58,233 74,811 76,808 74,819

Capital WIP 1,167 1,165 5,503 12,379 19,142 2,000 1,000 6,000

Investments 6,592 11,935 11,804 12,336 16,905 10,905 10,905 10,905

Current Assets 11,571 8,844 20,191 20,250 30,147 31,315 34,858 34,886

Inventory 2,976 2,615 3,520 3,311 7,293 7,588 7,812 8,430

Debtors 1,008 1,354 2,572 2,843 5,253 5,444 6,250 6,835

Cash & Bank 4,543 664 999 844 5,281 5,911 7,124 4,582

Loans & Adv, Others 3,043 4,211 13,100 13,252 12,320 12,372 13,671 15,038



Total Assets 51,284 53,231 73,167 80,036 127,254 127,296 128,133 129,837

Dalmia Bharat

March 2016 69


Basic (INR)

EPS 6.1 20.3 24.3 -1.0 1.1 11.5 41.1 70.0

Cash EPS 22.9 43.2 49.6 28.8 34.6 63.0 97.5 129.0

Book Value 342.1 356.0 377.8 381.1 378.1 425.7 464.4 532.0

DPS 1.3 1.5 2.0 2.0 1.5 1.5 2.0 2.0


Valuation(x)

P/E -772.8 708.0 69.5 19.5 11.4

Cash P/E 27.8 23.1 12.7 8.2 6.2

Price / Book Value 2.1 2.1 1.9 1.7 1.5

EV/Sales 3.3 3.4 2.3 1.9 1.5

EV/EBITDA 18.2 29.5 11.0 8.3 6.2

EV/Ton (US$) 96 80 94 92 88

Dividend Yield (%) 0.3 0.2 0.2 0.3 0.3


RoE 2.4 5.8 6.6 -0.3 0.3 3.0 9.2 14.0

RoCE 5.4 9.7 8.8 4.2 4.5 8.9 11.6 15.2

Turnover Ratios (%)

Asset Turnover (x) 0.3 0.4 0.4 0.4 0.3 0.5 0.6 0.6



Leverage Ratios (%)

Net Debt/Equity (x) 0.4 0.5 0.9 1.2 2.1 1.8 1.5 1.3 Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Oper. Profit/(Loss) before Tax 1,895 3,883 5,118 1,185 4,546 13,124 16,959 21,712

Interest/Dividends Recd. 543 874 936 928 2,413 2,000 2,100 2,000

Depreciation 1,753 1,817 1,847 1,946 2,716 4,564 5,003 5,239

Direct Taxes Paid -2,971 -832 -597 302 469 2,271 2,696 4,607

(Inc)/Dec in WC 4,454 -3,419 -3,452 3,709 -857 1,775 1,373 -1,235

CF from Operations 955 9,008 10,102 -1,899 7,347 11,078 14,991 20,341

CF from Operating incl EO 903 12,648 3,457 5,462 13,356 9,304 17,251 19,935

(inc)/dec in FA -499 -220 -16,330 -9,343 -41,767 -11,751 -6,000 -8,250

Free Cash Flow 403 12,427 -12,872 -3,881 -28,411 -2,447 11,251 11,685

(Pur)/Sale of Investments 656 -5,343 132 -533 -4,569 6,000 0 0

CF from investments 157 -5,563 -16,198 -9,876 -46,335 -5,751 -6,000 -8,250

Issue of Shares 8,475 -1,042 -1,088 -213 -135 6,188 0 0

(Inc)/Dec in Debt -10,072 237 16,617 7,016 42,037 -2,000 -3,000 -5,000

Interest Paid -1,724 -1,513 -2,263 -2,355 -4,344 -6,955 -7,317 -6,957

Dividend Paid -118 -141 -189 -190 -142 -155 -206 -206

CF from Fin. Activity -3,439 -2,459 13,077 4,258 37,416 -2,922 -10,523 -12,163

Inc/Dec of Cash -2,380 4,625 336 -155 4,437 631 728 -478

Add: Beginning Balance 2,203 4,543 664 999 844 5,281 5,911 7,124 Closing Balance -177 9,169 1,000 844 5,281 5,911 6,639 6,646

March 2016 70

March 2016


India Cements

BSE SENSEX S&P CNX CMP: INR86 TP: INR90 (+5%) Neutral 25,330 7,715

Stock Info Bloomberg ICEM IN Equity Shares (m) 307.2 52-Week Range (INR) 112/64 1, 6, 12 Rel. Per (%) 13/17/4 M.Cap. (INR b) 26.0 M.Cap. (USD b) 0.4 Avg Val ( INR m) 314 Free float (%) 71.8 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 40.9 43.6 48.6 EBITDA 7.5 8.2 9.4 PAT 1.2 1.9 2.8 EPS (INR) 4.8 6.8 10.4 Gr. (%) NA 42.4 52.9 BV/Sh (INR) 120.4 126.8 135.8 RoE (%) 3.2 5.1 6.9 RoCE (%) 7.8 8.5 9.9 P/E (x) 18.0 12.6 8.3 P/BV (x) 0.7 0.7 0.6 EV/EBITDA(x) 7.9 6.9 5.7 EV/Ton(USD) 60 60 59 Shareholding pattern (%)


Promoter 28.2 28.2 28.2

DII 14.0 14.8 12.8

FII 28.7 23.1 34.0

Others 29.1 33.8 25.1


Leverage play in the South Non-core investments, legal hurdles impediments to re-rating Southern recovery gradual, ICEM to grow in line ICEM is among the leaders in the southern region, with strong presence and good brand recall. At 60% utilization, volume growth would be gradual (estimate 5% CAGR in FY16-18) on the back of southern discipline. With 45% of its capacity (16mt) in Andhra Pradesh (AP), the benefits of AP recovery would percolate from FY17. Cost structure lags; could improve from historical high base Despite strategically located plants, ICEM has historically had higher cost structure due to (1) high dependence on grid power, (2) increase in lead distance, and (3) constraints of vintage issue in Tamil Nadu (TN) plants. Amidst constraints, ICEM would see benefits of (a) higher pet coke use (50% by 1HFY17 v/s 25% now), and (b) captive power plants in AP and TN and Indonesian coal mine, as utilization improves. Non-core investments and legal hurdles As on March 2015, ICEM had invested around INR21b (INR70/share) in non-cement assets such as shipping, IPL franchise, land bank, captive coal mines, infrastructure, etc, which amounts to 50-55% of the current book value. It has taken steps such as (a) spin-off of IPL, and (b) merger of subsidiary, Trinetra Cement and RMC business (awaiting court approval). However, significant inter-group company loans and potential diversification into the infrastructure business raise concerns of suboptimal capital efficiency. Various government and legal inquiries on the promoter as well as the group could limit the re-rating of the stock. Play on southern recovery, but cheap valuations a mirage ICEM offers an alternative play on southern demand recovery on the back of (a) 14mt of capacity (9% share) in the South and Maharashtra, (b) strong brand, and (c) leveraged balance sheet (INR34.5b, net DER of 1x and net debt/EBITDA of 4.7x). No major capex visibility (barring replacement of old mills) should trigger gradual de-leveraging, if price strength sustains in the South. The stock trades at an EV of 6.9x FY17E and 5.7x FY18E EBITDA, and at USD59/ton. We value the stock at INR90 (EV of 6x FY18E EBITDA and USD60/ton), considering the overhangs of capital allocation and legal hurdles. Neutral.

60

75

90

105

120

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

India CementsSensex - Rebased

India Cements

March 2016 71

Exhibit 1: At 60% utilization in disciplined south market, growth to follow regions trends


Exhibit 2: Market comprise 25-30% non-south mix (%)


Exhibit 3: Brand strong, but cost positioning weak INR m Ramco Orient ICEM Dalmia Realization 5,046 3,463 4,943 4,921 Direct Cost 1,597 1,437 1,899 1,597 As % of Realization 32 41 38 32 Indirect cost 934 747 1,020 895 As % of Realization 19 22 21 18


Exhibit 4: South pricing drove up profitability (INR/ton)


Exhibit 5: Gearing discomfort to ease off gradually if southern discipline persists


13.0 14.1 14.1 15.1 15.1 15.2 15.2 15.2 15.2 15.2

70 78 71

67

71 71

65

60 62

66


Capacity (mt) Utilization (%)AP

11%

TN/Kerela 50%

KNT 11%

Maharshtra 16%

North 12%

50

450

850

1,250

1,650

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Profit Range ICEM

0.01.02.03.04.05.06.07.0

0

10

20

30

40

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Net debt (INR b) Net DER (x) Net Debt/EBITDA

India Cements

March 2016 72





Exhibit 8: Scenario Analysis ICEM Base case Bull case Bear case

FY16E FY17E FY18E FY17E FY18E FY17E FY18E

Volume 8.28 8.56 9.10 8.72 9.45 8.39 8.76

Growth 3% 6% 5% 8% 1% 4%


Growth 3% 5% 7% 9% -1% 1%

Total EBITDA 7,775 8,858 10,521 8,858 10,521 8,858 10,521

Net Debt 34,926 34,715 33,409 33,884 30,888 36,064 37,103

EV 58,700 57,489 57,183 56,658 54,662 58,838 60,877

EV/EBITDA 7.55 6.49 5.44 6.40 5.20 6.64 5.79

TP for EV/EBITDA

5 66 74 54

6 90 100 80

7 134 142 122


211

85

48 0

50

100

150

200

250

Mar

-01

Feb-

02Ja

n-03

Nov

-03

Oct

-04

Aug-

05Ju

l-06

Jun-

07Ap

r-08

Mar

-09

Jan-

10De

c-10

Oct

-11

Sep-

12Au

g-13

Jun-

14M

ay-1

5M

ar-1

6


14.2

7.9

4.2 0

5

10

15

20

Mar

-05

Feb-

06

Jan-

07

Dec-

07

Nov

-08

Oct

-09

Sep-

10

Aug-

11

Jul-1

2

Jun-

13

May

-14

Apr-

15

Mar

-16


India Cements

March 2016 73

Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 35,007 42,034 45,970 44,409 44,236 40,918 43,649 48,571 Change (%) -7.2 20.1 9.4 -3.4 -0.4 -7.5 6.7 11.3 EBITDA 4,337 9,034 8,433 5,371 6,826 7,473 8,183 9,430 EBITDA Margin (%) 12.4 21.5 18.3 12.1 15.4 18.3 18.7 19.4 Depreciation 2,440 2,513 2,818 2,764 2,579 2,209 2,336 2,442 EBIT 1,897 6,521 5,615 2,608 4,246 5,264 5,847 6,988

Interest 1,417 2,867 3,078 3,537 4,260 3,736 3,687 3,580 Other Income 396 193 186 396 308 250 275 276 Extraordinary items 23 -36 -200 -1,091 0 -150 0 0 PBT 899 3,810 2,524 -1,624 295 1,628 2,434 3,684 Tax 218 880 888 0 0 563 487 921 Tax Rate (%) 24.2 23.1 35.2 0.0 0.0 34.6 20.0 25.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 681 2,930 1,636 -1,624 295 1,065 1,948 2,763 Adjusted PAT 664 2,958 1,765 -533 295 1,163 1,948 2,763 Change (%) -79.6 345.8 -40.3 -130.2 -155.3 295.0 67.4 41.9


Share Capital 3,072 3,072 3,072 3,072 3,072 3,072 3,072 3,072

Reserves 37,826 37,516 37,825 35,441 32,859 33,924 35,872 38,635

Net Worth 40,898 40,587 40,896 38,513 35,931 36,996 38,944 41,707

Debt 24,561 27,010 30,230 32,000 34,000 34,849 33,699 32,549

Deferred Tax 2,743 3,245 3,297 3,297 3,297 3,697 3,697 3,697




Net Fixed Assets 38,345 41,329 44,063 41,625 35,749 35,540 35,603 37,161

Capital WIP 3,088 1,451 750 1,000 1,000 1,000 2,000 1,000

Investments 1,603 8,520 9,578 9,455 15,852 15,852 15,852 15,852

Current Assets 36,349 31,114 33,638 35,288 30,513 33,066 32,933 34,380

Inventory 4,973 5,258 4,961 5,509 6,069 5,942 5,860 5,988

Debtors 2,544 2,098 4,656 4,225 4,661 4,260 4,305 4,657

Cash & Bank 331 29 47 31 39 2,729 1,637 1,556

Loans & Adv, Others 28,501 23,728 23,974 25,523 19,744 20,135 21,131 22,178



Provisions 1,265 1,325 1,396 594 588 163 243 461


Total Assets 68,201 70,842 74,423 73,810 73,228 75,542 76,339 77,952

India Cements

March 2016 74


Basic (INR)

Consol EPS 2.3 8.5 5.8 -7.9 0.0 4.8 6.8 10.4

Cash EPS 10.1 17.8 14.9 7.3 9.4 11.0 13.9 16.9

Book Value 133.1 132.1 133.1 125.4 117.0 120.4 126.8 135.8

DPS 1.5 2.0 2.0 0.0 0.0 0.0 0.0 0.0


Valuation(x)

P/E -10.9 -2225.1 18.0 12.6 8.3

Cash P/E 11.9 9.2 7.9 6.2 5.1

Price / Book Value 0.7 0.7 0.7 0.7 0.6

EV/Sales 1.2 1.2 1.4 1.3 1.1

EV/EBITDA 10.3 8.3 7.9 6.9 5.7

Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0

EV/Ton (US$) 60 62 61 60 59


RoE 1.6 7.3 4.3 -1.3 0.8 3.2 5.1 6.9

RoCE 3.6 10.1 8.4 4.2 6.5 7.8 8.5 9.9

Turnover Ratios (%)

Asset Turnover (x) 0.5 0.6 0.6 0.6 0.6 0.5 0.6 0.6



Leverage Ratios (%)

Net Debt/Equity (x) 0.6 0.7 0.8 0.9 1.0 0.9 0.9 0.8

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 4,337 9,034 8,433 5,371 6,826 7,473 8,183 9,430 Non cash opr. exp (inc) 396 193 186 396 308 250 275 276 (Inc)/Dec in Wkg. Cap. -9,349 5,321 -472 -1,714 1,111 167 -826 -1,136Tax Paid -168 -378 -836 0 0 -163 -487 -921Other operating activities 23 -36 -200 -1,091 0 -150 0 0CF from Op. Activity -4,760 14,133 7,112 2,963 8,244 7,577 7,145 7,650 (Inc)/Dec in FA & CWIP 1,766 -4,105 -4,851 -576 3,297 -2,000 -3,400 -3,000Free cash flows -2,994 10,028 2,261 2,387 11,542 5,577 3,745 4,650(Pur)/Sale of Invt 1,537 -6,917 -1,059 123 -6,397 0 0 0 Others 576 245 0 0 0 0 0 0 CF from Inv. Activity 3,878 -10,777 -5,910 -453 -3,099 -2,000 -3,400 -3,000Inc/(Dec) in Net Worth -603 -2,521 -613 -760 -2,876 0 0 0 Inc / (Dec) in Debt 3,233 2,449 3,220 1,770 2,000 849 -1,150 -1,150Interest Paid -1,417 -2,867 -3,078 -3,537 -4,260 -3,736 -3,687 -3,580Divd Paid (incl Tax) & Others -539 -719 -714 0 0 0 0 0 CF from Fin. Activity 675 -3,658 -1,184 -2,526 -5,136 -2,887 -4,837 -4,730Inc/(Dec) in Cash -207 -302 18 -17 9 2,690 -1,092 -81Add: Opening Balance 538 331 29 47 31 39 2,729 1,637 Closing Balance 331 29 47 31 39 2,729 1,637 1,556

March 2016 75

March 2016


J K Cement

BSE SENSEX S&P CNX CMP: INR640 TP: INR757(+18%) Buy 25,330 7,715

Stock Info Bloomberg JKCE IN Equity Shares (m) 69.9 52-Week Range (INR) 742/425 1, 6, 12 Rel. Per (%) 34/1/5 M.Cap. (INR b) 43.9 M.Cap. (USD b) 0.7 12M Avg Val (INR M) 21 Free float (%) 33.0 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E

Net Sales 37.8 43.2 50.5 EBITDA 5.0 6.6 8.9 PAT 0.3 1.7 3.5 EPS (INR) 3.5 23.7 50.6 Gr. (%) -80.2 568.4 113.5 BV/Sh (INR) 229.7 247.6 289.4 RoE (%) 1.9 9.9 18.6 RoCE (%) 7.7 10.8 15.3 P/E (x) 180.6 27.0 12.7 P/BV (x) 2.8 2.6 2.2

EV/EBITDA(x) 14.0 10.2 6.9

EV/Ton(USD) 90 87 80 Shareholding pattern (%)


Promoter 67.0 67.0 66.9

DII 25.1 14.0 9.5

FII 0.0 11.0 10.0

Others 7.9 8.1 13.5


Superior growth headroom White cement business a cushion Medium-term growth levers strong Post 3mt expansion, JKCE’s North capacity is operating at ~66% utilization (new plant at near maximum and older units at ~50%). This coupled with 60% utilization in the South plant provides headroom to outperform industry growth. Market mix is healthy, with North and West India accounting for ~70% of its dispatches and likely to benefit from incremental demand from mega infrastructure projects such as DFCC and DMIC. JKCE has limestone reserve of 375mt to add a further 5-6mt in its North line with lower incremental capex. Vintage issues partially offset by induced efficiencies JKCE’s gray cement profitability lagged peers in the past due to (a) older plants (low operating efficiency) and (b) higher lead distance/freight cost (absence of split grinding). New plants at Mangrol and Jhajjar offer better cost structure (energy/total cost lower by INR150/300 per ton); railway siding (from 2QFY16) enables savings on in-bound logistics (factored in 2HFY16 cost). While blended operating efficiency may be diluted, as contribution from older plant increases, JKCE’s gray cement cost structure would remain better than past, with induced efficiencies and economies of scale. White cement a cash cow JKCE is the second largest player in the duopolistic white cement industry in India, with 40% market share. Moderation in white cement growth (owing to lower exports to the Middle East) would be offset by healthy growth in putty and 0.2mt expansion in Katni (Madhya Pradesh) by FY16-end. With INR3b-3.5b of steady EBITDA cushion, white cement business remains a cash cow. Middle East a drag on return ratios UAE white cement plant (0.6mt) has been a drag on return ratios (INR9b capital employed 20% of overall capital employed), with net loss due to (a) weaker demand in the Middle East (oil price fall), and (b) unavailability of grid power hurting profitability (resolution nearing). We expect breakeven in FY17. Preferred leverage play on earning growth of north-west market JKCE is in early stage of evaluating Madhya Pradesh expansion. With lower immediate capex and FCFE of INR3.5b-4b in FY17-18, it offers visibility of deleveraging from the FY16 peak of INR27.5b (1.7x). We maintain Buy with a target price of INR757 (EV of USD90/ton on blended capacity, 8x FY18E grey cement EBITDA and 8x FY18E white cement EBITDA).

400

500

600

700

800

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

J K CementsSensex - Rebased

J K Cement

March 2016 76

Exhibit 1: Strong utilization lever in place at both regions


Exhibit 2: Near Pan-India market reach cement (%)


Exhibit 3: Steady putty volume offsetting deterioration of growth in white cement


Exhibit 4: EBITDA breakup: White cement renders resilience amidst earning volatility of grey cement (INR b)


Exhibit 5: Historically inferior grey cement cost structure shown improvement post new plants stabilizing (INR/t)


Exhibit 6: Operating efficiency better at new plant


4.0 7.5 7.5 7.5 7.5 7.5 10.5 10.5

94

57 69 71

86 86

59 66

60 50

62 61

FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16E

Capacity (mt) North-Util (%) RHS South-Util (%)RAJ, 18

HAR, 15

Delhi, Pun, CNDGRH,

12 MAH, 17

KAR, 15

UP, 10

MP, 8 Others, 5

28

43

28 21 18

10 10 16

23

10 4

-1

3 3

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Putty Growth(%) White cement growth(%)

3.8 3.6 1.6

3.6 3.6 1.6 2.1 2.0 2.8

4.6

0.4 1.0

1.2

1.6 2.0

2.2 2.5 2.8

3.1

3.3

-0.1

0.3

0.8

1.2

FY08 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E

Grey White (Domestic) White (UAE)

-5%

0%

5%

10%

2,000

2,500

3,000

3,500

4,000

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

JKCE (INR/ton)As premium to peers' avg (%) RHS 84

Old plants New Plants

Power(KWh/unit)

>70

J K Cement

March 2016 77

Exhibit 7: Blended and Grey Cement EBITDA (INR/Ton)


Exhibit 6: De-leveraging to kick off in FY17 onwards as capex cycle is over






Exhibit 9: Scenario Analysis JKCE Base case Bull case Bear case


Grey cement Volume 6.79 7.40 8.14 7.54 8.44 7.27 7.85

Growth 9% 10% 11% 12% 7% 8%

Grey Realization(INR/t) 3,646 3,806 4,116 3952 4432 3660 3812

Growth 4% 8% 8% 12% 0% 4%

EBITDA 4,974 6,600 8,946 8,216 12,847 5,023 5,346

Net Debt 26,260 25,471 23,181 25,207 21,815 26,466 26,416

EV/EBITDA 13.7 10.0 6.8 8.0 4.6 13.3 11.9

TP for EV/EBITDA

7 650 1,060 243

8 757 1,214 307

9 906 1,427 396


1,01

0

835

306

667

637

298

332

297

383

559

1,04

0

968

511

894

909

618

655

649

736

897


Cement EBITDA/ton Blended EBITDA/ton

4.4 9.4 10.6 8.5 8.4 23.0 23.8 26.3 25.5 23.2

0.4

0.7 0.8 0.6 0.5

1.3 1.5

1.6 1.5

1.1



100.7

53.6

22.8 15

40

65

90

115

Mar

-06

Jan-

07

Dec-

07

Nov

-08

Oct

-09

Sep-

10

Aug-

11

Jul-1

2

Jun-

13

May

-14

Apr-

15

Mar

-16

EV/ton (US$) MaxAvg Min

15.9

6.3

2.0 0.03.06.09.0

12.015.018.0

Mar

-06

Jan-

07

Nov

-07

Sep-

08

Jul-0

9

May

-10

Mar

-11

Jan-

12

Nov

-12

Sep-

13

Jul-1

4

May

-15

Mar

-16


J K Cement

March 2016 78

Financials and Valuations

Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 20,831 25,379 29,040 27,815 33,874 37,794 43,196 50,547 Change (%) 14.0 21.8 14.4 -4.2 21.8 11.6 14.3 17.0 EBITDA 2,651 5,050 5,493 3,384 4,308 4,974 6,600 8,946 EBITDA Margin (%) 12.7 19.9 18.9 12.2 12.7 13.2 15.3 17.7 Depreciation 1,128 1,256 1,287 1,342 1,461 2,021 2,205 2,237 EBIT 1,523 3,794 4,206 2,042 2,847 2,953 4,395 6,709

Interest 1,185 1,443 1,398 1,526 2,291 2,998 2,705 2,605 Other Income 412 558 567 626 713 639 685 788 Extraordinary items 72 -78 0 0 172 0 0 0 PBT 822 2,830 3,375 1,142 1,441 594 2,376 4,892 Tax 196 1,085 1,071 392 22 346 720 1,356 Tax Rate (%) 23.9 38.3 31.7 34.4 1.5 58.3 30.3 27.7 Min. Int. & Assoc. Share 0 0 -3 -22 -17 -56 -2 37 Reported PAT 626 1,746 2,308 772 1,436 304 1,658 3,499 Adjusted PAT 571 1,794 2,308 772 1,267 304 1,658 3,499 Change (%) -74.6 214.2 28.6 -66.6 64.2 -76.0 446.0 111.0


Share Capital 699 699 699 699 699 699 699 699

Reserves 13,250 14,522 16,206 16,762 15,470 15,365 16,614 19,540

Net Worth 13,949 15,221 16,905 17,462 16,170 16,064 17,314 20,240

Deferred Liabilities 2,109 2,291 2,490 2,685 2,798 2,798 2,798 2,798

Total Loans 13,808 12,963 12,482 27,750 30,308 30,308 30,308 30,308

Capital Employed 29,866 30,475 31,925 48,041 49,404 49,242 50,489 53,453

Gross Block 27,450 29,013 30,822 31,743 50,671 55,244 55,544 55,544

Less: Accum. Deprn. 4,481 5,845 7,132 8,474 9,935 11,956 14,161 16,398

Net Fixed Assets 22,969 23,167 23,690 23,269 40,736 43,288 41,383 39,146

Capital WIP 1,028 904 2,546 17,875 3,373 1,300 3,000 6,000

Total Investments 42 92 324 675 675 675 675 675

Curr. Assets, Loans&Adv. 9,948 11,596 13,518 15,814 17,717 16,466 18,277 21,676

Inventory 3,210 3,628 4,614 5,420 5,415 5,713 6,108 6,502

Account Receivables 608 837 1,153 1,117 1,771 2,023 2,307 2,696

Cash and Bank Balance 3,215 4,332 3,753 4,086 5,861 3,373 4,162 6,452

Loans and Advances 2,916 2,799 3,998 5,191 4,670 5,356 5,700 6,026

Curr. Liability & Prov. 4,121 5,284 8,152 9,592 13,097 12,486 12,846 14,045

Account Payables 1,753 2,286 1,966 4,401 5,071 4,999 5,429 6,026

Provisions 435 630 799 497 673 346 360 407


Appl. of Funds 29,866 30,476 31,925 48,041 49,404 49,242 50,489 53,453

J K Cement

March 2016 79


Basic (INR)

EPS 8.2 25.7 33.0 10.7 17.9 3.5 23.7 50.6

Cash EPS 24.3 43.6 51.4 29.9 38.8 32.4 55.2 82.6

Book Value 199.5 217.7 241.7 249.7 231.2 229.7 247.6 289.4

DPS 2.0 5.0 6.5 3.0 4.0 5.0 5.0 7.0


Valuation(x)

P/E 59.7 35.8 180.6 27.0 12.7

Cash P/E 21.4 16.5 19.7 11.6 7.8

Price / Book Value 2.6 2.8 2.8 2.6 2.2

EV/Sales 1.8 1.9 1.8 1.6 1.2

EV/EBITDA 14.7 15.1 14.0 10.2 6.9

Dividend Yield (%) 0.5 0.6 0.8 0.8 1.1


RoE 4.2 12.3 14.4 4.5 7.5 1.9 9.9 18.6

RoCE 7.4 15.6 16.6 7.2 7.8 7.7 10.8 15.3

Turnover Ratios (%)

Asset Turnover (x) 0.7 0.8 0.9 0.6 0.7 0.8 0.9 0.9




Leverage Ratios (%)

Net Debt/Equity (x) 0.8 0.6 0.5 1.3 1.5 1.6 1.5 1.1

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Oper. Profit/(Loss) before Tax 2,651 5,050 5,493 3,384 4,308 4,974 6,600 8,946

Interest/Dividends Recd. 498 585 594 844 844 388 -102 -394

Depreciation -734 602 69 -635 1,595 414 -759 42

Direct Taxes Paid 55 -902 -872 -198 91 -346 -720 -1,356

(Inc)/Dec in WC 135 30 0 392 22 0 0 0

CF from Operations 2,604 5,364 5,285 3,787 6,860 5,430 5,020 7,238

EO expense -2,410 -1,423 -1,992 -10,767 -2,751 -2,500 -2,000 -3,000

CF from Operating incl EO 194 3,941 3,293 -6,980 4,109 2,930 3,020 4,238

(inc)/dec in FA 2 -50 -1,585 -1,302 -150 0 0 0

Free Cash Flow -2,408 -1,473 -3,576 -12,069 -2,901 -2,500 -2,000 -3,000

(Pur)/Sale of Investments -25 -67 -120 -507 -2,383 0 0 0

CF from investments 3,071 -860 -659 10,711 1,308 0 -1,000 -1,000

-1,185 -1,443 -1,398 -1,526 -2,194 -2,674 -2,381 -2,281

Issue of Shares -163 -406 -532 -245 -327 -409 -409 -573

(Inc)/Dec in Debt 1,698 -2,776 -2,709 8,433 -3,597 -3,083 -3,790 -3,854

Interest Paid 1,894 1,114 -1,000 151 363 -153 -770 385

Dividend Paid 1,317 3,211 4,325 3,325 3,476 3,838 3,686 2,916

CF from Fin. Activity 1,695 -2,761 -2,503 13,527 -2,462 -3,407 -3,114 -3,178

Inc/Dec of Cash 1,896 1,117 -579 214 1,775 -2,488 789 2,290

Add: Beginning Balance 1,318 3,215 4,332 3,753 4,086 5,861 3,373 4,162

Closing Balance 3,214 4,332 3,753 3,967 5,861 3,373 4,162 6,452

March 2016 80

March 2016


J K Lakshmi Cement


Stock Info Bloomberg JKLC IN Equity Shares (m) 117.7 52-Week Range (INR) 410/253 1, 6, 12 Rel. Per (%) 19/-6/-2 M.Cap. (INR b) 39.7 M.Cap. (USD b) 0.6 12M Avg Val (INR M) 61 Free float (%) 54.1 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Sales 25.9 30.3 36.1 EBITDA 2.8 4.5 7.3 NP -0.3 1.0 3.1 Adj EPS (INR) -2.4 8.4 26.1 EPS Gr. (%) -119.1 -446.9 210.0 BV/Sh. (INR) 107.7 112.0 129.3 RoE (%) -2.2 7.7 21.6 RoCE (%) 4.7 9.7 17.2 P/E (x) -138.2 39.8 12.9 P/BV (x) 3.1 3.0 2.6 EV/EBITDA (x) 18.7 11.3 6.8 EV/Ton (USD) 88 85 74 Shareholding pattern (%)


Promoter 45.9 45.9 45.9

DII 19.4 18.4 17.0

FII 13.7 14.4 13.3

Others 21.0 21.3 23.7


Right levers and quality in place Near-term constrained by liquidity and Durg operations

Among the fastest growing regional players JKLC is among the two fastest growing regional players, with (a) high operating leverage (60% capacity expansion in FY14-16 to 9.3mt), and (b) favorable market mix (North, Gujarat and East), enabling it to benefit from a good blend of infrastructure, industrial and retail demand. Its plant efficiency has enabled it to consistently operate at high utilization in past (100-105% in FY12-14). JKLC delivered 10% volume CAGR over FY12-16 (v/s 3-4% for India and the markets it operates in).

Medium-term sustainability and scalability in place JKLC’s North plants are operating at 80-85%, while its East plant is stabilizing at 77% (within 12 months). Its ability to maximize utilization, upcoming expansions – Surat grinding (1mt by April 2016), Udaipur (1.7mt by October 2016) and Orissa grinding (1mt by FY17-end), and recovery in operating markets render headroom to sustain growth. Its existing limestone reserves, with potential to add 6-7mt, offer visibility of cost effective scalability.

Existing cost structure among the lowest JKLC is one of the most efficient players, with (a) superior power/fuel consumption (72kWh/704kcal/ton), (b) self-sufficiency in power in the North (74 MW +21MW LT contract with VS Lignite), (c) high pet coke mix (80-85%), and (c) split grinding units and concentrated market keeping logistics cost under control. Two dampeners – Durg operations and constrained liquidity Despite brand establishment (Pro-plus, Platinum) and 75-80% utilization, EBITDA in Durg (East) is negative, as cost is 20-25% higher than in the North (expensive power – no CPP, no grinding support hurting market reach). Orissa grinding, WHRS (8-9MW), and railway siding by 1HCY17 would be critical for normalization of profit and return ratios (Durg operations account for 45-50% of standalone capital employed). Liquidity is a matter of concern, given net debt/EBITDA of 6.3x and decline in EBITDA to INR400/ton (due to dismal prices in the North West and sub-normal prices in the East). However, on the back of normalization of pricing in north in 4QFY16, we draw some comforts. With moderating capex, JKLC would require 2.5-3% YoY uptick in pricing in FY17 (v/s our estimate of 4-5%) to address its fixed commitment. Play on north-central recovery, provided east operations normalize We value JKLC at INR410/share (EV of 8x FY18E EBITDA and USD85/ton). Volume/pricing CAGR of 10%/7% over FY16-18 translates into 60% EBITDA CAGR. If prevailing concerns subside, JKLC offers one of the better quality and scalable regional plays on recovery. Buy.

200

260

320

380

440

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

JK Lakshmi Cem.Sensex - Rebased

J K Lakshmi Cement

March 2016 81

Exhibit 1: Utilization lever in place, JKLC demonstrated ability to operate at maximum utilization


Exhibit 2: Timely expansion helped outperforming peers in operating markets (%)


Exhibit 3: Market diversification improved (%)


Exhibit 4: Existing cost structure among the best (INR/ton)


Exhibit 5: Competitive freight cost with strategic split grinding (INR/ton)


Exhibit6: EBITDA/ton sub-normal due to (a) dismal pricing and (b) weak cost structure of east plant (INR/ton)


4.7

4.7

4.7

4.7

5.3

5.9

8.3

9.3

9.3

10.3

4.0

4.6

4.3 4.9

5.3

5.6

5.9 7.1 7.8 8.6

78 88 91

100 105 103

92

80 84 87


Capacity (mt) Dispatch (mt)Effective Utilization (%)

6% 5% 3% 4% 4%

11%

4%

1% 2%

6%

14%

8% 7% 6%

19%

FY12 FY13 FY14 FY15 FY16

India JKLC Zone JKLC

80 64 65

51

26 35

27

20 15 22

Cap mix FY14 Cap mix FY17 Vol mix FY14 Vol mix FY17

North East West

1,500

2,300

3,100

3,900

4,700

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Cost range of universe JKLC

1,07

3

1,10

1

1,18

8

863

767 89

1

1,04

6

1,02

4

868

1,03

8

778 1,04

2

ACC

ACEM

UTC

EM

SHRE

E

BCO

RP

DALM

IA

ICEM JKCE

JKLC

MCE

M

ORI

ENT

Tota

l

609

653

364

758

851

876

936

785

666

576

436

447

658

788

612

503

461

306

381

378

4QFY

111Q

FY12

2QFY

123Q

FY12

4QFY

121Q

FY13

2QFY

133Q

FY13

4QFY

131Q

FY14

2QFY

143Q

FY14

4QFY

141Q

FY15

2QFY

153Q

FY15

4QFY

151Q

FY16

2QFY

163Q

FY16

J K Lakshmi Cement

March 2016 82

Exhibit 7: JKLC needs 3% YoY price rise in FY17 v/s 3Q-level (if current cost structure remains) to keep gearing stable 3QFY16

North Plant cost(INR/Ton) 3127

East Plant cost(INR/Ton) 3907

FY17

Tax 188

Interest 2112

Capex 1500

EBITDA required for fixed commitment 3799

EBITDA (INR/ton) 488

Realization (INR/ton) 3759

Price increase needed in FY17 over FY16 3% Source: Company, MOSL

Exhibit 8: Gearing not in comfort zone, hinges on price increase and better cost structure in east






Exhibit 11: Scenario Analysis JKLC Base case Bull case Bear case


Volume 7.08 7.78 8.56 7.93 8.88 7.64 8.25

Growth 10% 10% 12% 12% 8% 8%


Growth 6% 8% 10% 12% 2% 4%

EBITDA 2,834 4,548 7,266 5,793 10,376 3,344 4,458

Net debt 15,392 14,960 14,252 14,615 13,128 16,084 17,557

EV/EBITDA 18.7 11.4 6.9 8.9 4.7 15.8 11.9

TP for EV/EBITDA

8 345 540 116

9 410 628 154

10 468 716 192


2.3 2.4

5.6

9.5

12.3 14.7

17.8 16.7

15.3

0.5 1.3

1.7 2.2

4.1 4.2

6.3

3.7

2.1

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Net debt (INR b) Net debt/EBITDA

109.8

52.6 11.4

0

25

50

75

100

Mar

-01

Aug-

02

Dec-

03

Apr-

05

Sep-

06

Jan-

08

May

-09

Oct

-10

Feb-

12

Jun-

13

Oct

-14

Mar

-16


21.2

6.6

0.7 0.0

5.0

10.0

15.0

20.0

25.0

Mar

-03

Dec-

03Se

p-04

May

-05

Feb-

06N

ov-0

6Ju

l-07

Apr-

08Ja

n-09

Sep-

09Ju

n-10

Mar

-11

Nov

-11

Aug-

12Ap

r-13

Jan-

14O

ct-1

4Ju

n-15

Mar

-16

EV/EBDITA(x) Peak(x)Avg(x) Min(x)

J K Lakshmi Cement

March 2016 83

Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 13,168 17,177 20,550 20,566 23,071 25,947 30,254 36,062 Change (%) -11.7 30.4 19.6 0.1 12.2 12.5 16.6 19.2 EBITDA 1,854 3,353 4,287 3,020 3,495 2,834 4,548 7,266 EBITDA Margin (%) 14.1 19.5 20.9 14.7 15.1 10.9 15.0 20.1 Depreciation 846 1,297 1,489 1,352 1,119 1,634 1,679 1,727 EBIT 1,008 2,056 2,798 1,668 2,376 1,200 2,869 5,539

Interest 605 874 835 772 907 1,960 1,980 1,818 Other Income 385 638 555 443 282 320 350 375 Extraordinary items 0 -392 -163 -185 -633 -108 0 0 PBT 788 1,427 2,354 1,154 1,118 -547 1,239 4,096 Tax 197 340 596 224 162 -192 248 1,024 Tax Rate (%) 25.0 23.8 25.3 19.4 14.5 35.0 20.0 25.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 591 1,088 1,757 930 956 -356 991 3,072 Adjusted PAT 591 1,387 1,879 1,079 1,497 -286 991 3,072 Change (%) -75.5 134.5 35.5 -42.6 38.7 -119.1 -446.9 210.0


Share Capital 612 612 589 589 589 589 589 589

Reserves 9,851 11,140 12,010 12,444 12,719 12,087 12,596 14,635

Net Worth 10,463 11,752 12,598 13,032 13,307 12,676 13,185 15,224

Debt 8,483 11,004 13,370 16,042 18,992 20,202 20,202 20,202

Deferred Tax 1,072 1,233 1,134 1,226 1,284 1,284 1,284 1,284




Net Fixed Assets 13,810 13,293 14,346 15,715 25,825 27,191 26,011 26,284

Capital WIP 409 2,941 6,881 9,080 2,000 2,000 3,000 4,000

Investments 5,278 4,538 4,065 4,477 4,228 2,688 2,688 2,688

Current Assets 4,880 7,085 6,145 6,392 8,819 9,120 10,781 12,619

Inventory 1,199 1,201 1,148 1,024 2,235 2,533 2,769 2,971

Debtors 280 382 501 555 705 793 925 1,102

Cash & Bank 888 890 127 356 1,768 1,440 2,473 3,925

Loans & Adv, Others 2,514 4,612 4,369 4,457 4,112 4,354 4,615 4,621



Provisions 232 355 439 415 473 -287 149 410

Net Current Assets 521 3,218 1,810 1,028 1,531 2,283 2,972 3,738

Total Assets 20,018 23,989 27,101 30,300 33,584 34,162 34,671 36,710

J K Lakshmi Cement

March 2016 84


Basic (INR)

EPS 4.8 11.3 16.0 9.2 12.7 -2.4 8.4 26.1

Cash EPS 11.7 21.9 28.6 20.7 22.2 11.5 22.7 40.8

Book Value 85.5 96.0 107.0 110.7 113.1 107.7 112.0 129.3

DPS 1.2 1.9 2.5 2.0 2.0 2.0 3.5 7.5

Payout (incl. Div. Tax.) 30.1 25.3 19.5 29.6 28.8 -77.4 48.6 33.6

Valuation(x)

P/E 36.6 26.4 -138.2 39.8 12.9

Cash P/E 16.2 15.1 29.3 14.8 8.2

Price / Book Value 3.0 3.0 3.1 3.0 2.6

EV/Sales 2.1 2.3 2.0 1.7 1.4

EV/EBITDA 14.1 14.9 18.7 11.3 6.8

EV/Ton (USD) 111 97 88 85 74

Dividend Yield (%) 0.6 0.6 0.6 1.0 2.2


RoE 5.7 12.5 15.4 8.4 11.4 -2.2 7.7 21.6

RoIC 8.0 13.6 14.2 7.0 8.9 4.1 9.5 18.3

RoCE 7.3 12.9 13.8 7.7 8.7 4.7 9.7 17.2

Turnover Ratios (%)

Asset Turnover (x) 0.6 0.7 0.8 0.7 0.7 0.8 0.9 1.0


Leverage Ratios (%)

Net Debt/Equity (x) 0.2 0.5 0.8 0.9 1.1 1.4 1.3 1.0

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 1,854 3,746 4,450 3,205 4,127 2,942 4,548 7,266 Non cash opr. exp (inc) 385 246 391 258 -351 212 350 375 (Inc)/Dec in Wkg. Cap. 1,253 -2,693 644 1,012 909 -1,080 344 687 Tax Paid -45 -179 -696 -132 -103 192 -248 -1,024Other operating activities 123 127 -163 -185 -633 -108 0 0 CF from Op. Activity 3,569 1,246 4,627 4,157 3,950 2,158 4,994 7,304 (Inc)/Dec in FA & CWIP -2,739 -3,831 -6,236 -4,723 -4,560 -3,000 -1,500 -3,000Free cash flows 830 -2,585 -1,610 -565 -610 -842 3,494 4,304(Pur)/Sale of Invt -472 740 473 -413 249 1,540 0 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -3,212 -3,091 -5,763 -5,135 -4,311 -1,460 -1,500 -3,000Inc/(Dec) in Net Worth -157 476 -569 -220 -406 0 0 0 Inc / (Dec) in Debt -734 2,521 2,366 2,673 2,950 1,210 0 0 Interest Paid -605 -874 -835 -772 -907 -1,960 -1,980 -1,818Divd Paid (incl Tax) & Others -178 -275 -342 -275 -275 -275 -482 -1,033CF from Fin. Activity -1,674 1,848 619 1,405 1,361 -1,025 -2,462 -2,851Inc/(Dec) in Cash -1,317 3 -518 427 1,000 -327 1,032 1,453Add: Opening Balance 2,204 888 890 127 356 1,768 1,440 2,473Closing Balance 887 890 372 554 1,356 1,440 2,473 3,925

March 2016 85

March 2016Update | Sector: Cement

Orient Cement

BSE SENSEX S&P CNX CMP: INR147 TP: INR170 (+15%) Buy25,330 7,715

Stock Info Bloomberg ORCMNT IN Equity Shares (m) 204.9 52-Week Range (INR) 199/129 1, 6, 12 Rel. Per (%) 5/-2/1 M.Cap. (INR b) 27.3 M.Cap. (USD b) 0.4 12M Avg Val (INR M) 24 Free float (%) 62.5

Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 14.3 19.0 23.8 EBITDA 1.5 3.6 5.8 PAT 0.3 0.9 2.1 EPS (INR) 1.3 4.3 10.3 Gr. (%) -86.4 227.9 141.6BV/Sh (INR) 46.6 47.3 57.6 RoE (%) 2.8 9.1 19.6 RoCE (%) 3.7 9.4 15.0 P/E (x) 114.8 35.0 14.5 P/BV (x) 3.2 3.1 2.6 EV/EBITDA (x) 29.3 12.7 7.5 EV/Ton (USD) 85 87 81

Shareholding pattern (%)

As On Sep-15 Jun-15 Sep-14

Promoter 37.5 37.5 37.5

DII 31.5 30.8 29.6

FII 6.3 6.1 4.8

Others 24.7 25.7 28.1

FII Includes depository receipts

Stock Performance (1-year)

Cost efficient play on west-south recovery RoCE of new plant critical; growth ambition might hurt balance sheet

Recent sub-normalcy an outcome of pricing adversity and teething trouble ORCMNT’s recent operating weakness (EBITDA bottomed at INR200/ton in 3QFY16) was attributable to (a) demand-price adversity in Maharashtra (55-60% mix) and (b) sub-normal start-up cost structure and higher OPC mix in new plant atKarnataka (25-30% higher) due to low utilization (26-27% in 3Q), which negated thebenefits of improvement in existing operating efficiencies.

Moats make ORCMNT’s cost structure peer-leading Despite weak branding and lower realizations, its profit resilience emerges from the following: (a) its three plants, located in the form of a ‘golden triangle’, address one consolidated market, (b) niche marketing strategy of penetrating rural and semi-urban markets through a network of loyal dealers makes it difficult for completion to match ORCMNT’s service and reach in these markets, (c) high PPC mix (80% v/s 50-60% for the markets in which ORCMNT operates, and (d) lower lead distance of 300-330km due to proximity to both input resources (Singareni Coal Mines at 40km; fly ash within 100km) and end-market.

Replicating the cost critical hurdle While legacy benefits of logistics would be lower at its new plant at Karnataka, we note that the plant is more efficient, with (a) single vertical roll mill kiln, (b) lower energy consumption (fuel consumption of 680kcal/ton v/s 700-740kcal/ton for existing plants; power consumption of 70kwh/ton v/s 76kwh/ton for existing plants), and (c) end-market Hyderabad is only at 180km. Benefits of linkage coal (45% mix) would subside with impending auction. Gradual shift to pet coke, railway siding and captive power plant (CPP) at new plant (50MW including waste heat recovery), and uptick in utilization should re-instate cost advantage.

Growth headroom created; tide to turn in favor, as West picks up 3mt greenfield at Gulbarga (Karnataka) (1.6x scale-up) aids impetus to growth from FY17. We expect 20% volume CAGR over FY16-18, assuming utilization at 40% in FY17 and 55% in FY18. Revival outlook is strong in Maharashtra and Telengana. For RoCE-breakeven, the new plant needs 12-15% price rise v/s 3QFY16.

Growth ambition might hurt balance sheet We like ORCMNT for its cost efficiency and recovering market mix (Maharashtra and Telengana). But its aim for 15mt capacity by 2020 (could be inorganic-heavy) remains a risk to balance sheet comfort. In our view, ORCMNT can expand 25-30% (2-3mt; evaluating in MP) in the next 3-4 years without hurting net debt/EBITDA. We value the stock at INR170/share (EV of USD90/ton and 8x FY18E EBITDA). Buy.

120

145

170

195

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

Orient CementSensex - Rebased

Orient Cement

March 2016 86

Exhibit 1: Strategic plant locations makes freight competent


Exhibit 2: Maharashtra market is core dependency (%)


Exhibit 3: One of the cost leaders historically (INR/ton)


Exhibit 4: Cost and utilization sub normal in new plant


Exhibit 5: Efficient cost structure among southern peers

INR/ton Ramco

Orient ICEM Dalmia

Direct Cost 1,597 1,437 1,899 1,597

Direct cost as % of Realization 32 41 38 32

Indirect cost 934 747 1,020 895

Indirect cost as % of Realization 19 22 21 18


Exhibit 6: Realizations (INR/ton) weaker than peers


South 32%

Maha-rashtra

55%

MP, CHGR, GUJ 13%

1,000

2,000

3,000

4,000

5,000

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Cost range of universe ORIENT

3046 3900

81%

26%

Old plant New plant

Cost (INR m) Utilization (%)

3,96

6

3,86

6

3,88

0

2,85

0

DALM

IA

ICEM

MCE

M

ORI

ENT

Orient Cement

March 2016 87

Exhibit 7: EBITDA (INR/ton) on the lower end in FY16, led by dismal pricing in Maharashtra


Exhibit 8: Capex to keep gearing high




Exhibit 10: Trend in EV/EBIDA


Exhibit 11: Scenario Analysis ORIENT Base case Bull case Bear case


Volume 4.14 5.22 6.10 5.30 6.31 5.14 5.91

Growth 26% 17% 28% 19% 24% 15%


Growth 5% 7% 9% 11% 1% 3%

EBITDA 1,504 3,551 5,760 4,340 7,841 2,785 3,869

Net Debt 15,452 15,846 17,495 15,199 15,808 16,474 19,069

EV/EBITDA 29.6 12.8 7.5 10.4 5.3 16.6 11.6

Target price for EV/EBITDA

7.5 136 215 64

8.5 170 265 88

9.5 192 292 101


50250450650850

1,0501,2501,450

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Profit Range ORIENT

-0.22.5 10.6 15.4 16.0 17.0

0.0 0.3

1.1

1.6 1.7 1.5

FY13 FY14 FY15E FY16E FY17E FY18E


160

58

15

0

40

80

120

160

Mar

-13

Jun-

13Au

g-13

Oct

-13

Dec-

13M

ar-1

4M

ay-1

4Ju

l-14

Sep-

14N

ov-1

4Ja

n-15

Apr-

15Ju

n-15

Aug-

15O

ct-1

5De

c-15

Mar

-16

EV/ton (US$) MaxAvg Min

2.0

16.1

0

8

16

24

32M

ar-1

3Ju

n-13

Aug-

13O

ct-1

3De

c-13

Mar

-14

May

-14

Jul-1

4Se

p-14

Nov

-14

Jan-

15Ap

r-15

Jun-

15Au

g-15

Oct

-15

Dec-

15M

ar-1

6

EV/EBDITA(x) Peak(x)Avg(x) Min(x)

Orient Cement

March 2016 88

Exhibit 12:

Exhibit 13:


Exhibit 14:

Exhibit 15:


Exhibit 16:

Source: MOSL, Company Chapter Title

Chapter Sub Title… Chapter Subhead … This is Text Style…

Financials and Valuations Income Statement (INR Million) Y/E Mar 2013 2014 2015 2016E 2017E 2018E

Net Sales 14,844 14,302 15,353 14,312 19,025 23,846

Change (%) 8.1 -3.7 7.4 -6.8 32.9 25.3

Total Expenditure 11,829 12,237 12,403 12,808 15,474 18,086

% of Sales 79.7 85.6 80.8 89.5 81.3 75.8

EBITDA 3,015 2,065 2,950 1,504 3,551 5,760

Margin (%) 20.3 14.4 19.2 10.5 18.7 24.2

Depreciation 561 564 473 809 1,314 1,565

PBT bef. EO Exp. 2,486 1,532 2,512 266 957 2,806

EO Expense/(Income) 0 0 0 0 0 0

PBT after EO Exp. 2,486 1,532 2,512 266 957 2,806

Tax Rate (%) 35.0 34.1 22.5 0.0 9.0 25.0

Reported PAT 1,617 1,010 1,948 266 871 2,105

PAT Adj for EO items 1,617 1,010 1,948 266 871 2,105

Change (%) -32.0 -37.5 92.8 -86.4 227.9 141.6

Margin (%) 10.9 7.1 12.7 1.9 4.6 8.8

Net Profit 1,617 1,010 1,948 266 871 2,105

Balance Sheet (INR Million) Y/E Mar 2013 2014 2015 2016E 2017E 2018E

Equity Share Capital 205 205 205 205 205 205

Total Reserves 7,363 8,083 9,551 9,337 9,489 11,594

Net Worth 7,567 8,288 9,755 9,542 9,694 11,798

Deferred Liabilities 1,293 1,266 1,250 1,160 921 921

Total Loans 1,489 3,286 11,057 15,907 16,407 20,407

Capital Employed 10,350 12,840 22,063 26,609 27,022 33,126

Gross Block 12,766 12,934 13,174 29,974 32,617 33,667

Less: Accum. Deprn. 4,228 5,300 5,192 6,001 7,316 8,880

Net Fixed Assets 8,538 7,635 7,981 23,972 25,302 24,787

Capital WIP 397 3,897 13,194 1,894 1,250 5,000

Total Investments 875 875 875 875 875 875

Curr. Assets, Loans&Adv. 4,391 3,774 4,161 3,239 3,740 6,962

Inventory 869 713 1,099 784 938 1,307

Account Receivables 765 647 832 588 782 980

Cash and Bank Balance 1,699 816 427 455 561 2,912

Loans and Advances 1,059 1,598 1,802 1,412 1,459 1,764

Curr. Liability & Prov. 3,261 2,773 3,594 2,817 3,591 3,944

Account Payables 2,649 2,442 3,130 2,353 3,127 3,593

Provisions 612 331 464 464 464 351

Net Current Assets 1,130 1,001 567 422 149 3,018

Appl. of Funds 10,350 12,840 22,063 26,609 27,022 33,126

Orient Cement

March 2016 89

Financials and Valuations Ratios Y/E Mar 2013 2014 2015 2016E 2017E 2018E

Basic (INR)

EPS 7.9 4.9 9.5 1.3 4.3 10.3

Cash EPS 10.6 7.7 11.8 5.2 10.7 17.9

BV/Share 36.9 40.5 47.6 46.6 47.3 57.6

DPS 2.0 1.5 1.5 2.0 3.0 3.0

Payout (%) 29.5 47.5 24.4 179.2 54.7 0.0

Valuation (x)

P/E 30.2 15.7 114.8 35.0 14.5

Cash P/E 19.4 12.6 28.4 14.0 8.3

P/BV 3.7 3.1 3.2 3.1 2.6

EV/Sales 2.0 1.8 3.1 2.4 1.8

EV/EBITDA 14.1 9.5 29.3 12.7 7.5

EV/Ton (USD) 89 86 85 87 81

Dividend Yield (%) 1.0 1.0 1.3 2.0 2.0

Return Ratios (%)

RoE 21.4 12.7 21.6 2.8 9.1 19.6

RoCE 29.5 16.3 16.4 3.7 9.4 15.0

Working Capital Ratios

Asset Turnover (x) 1.4 1.1 0.7 0.5 0.7 0.7

Inventory (Days) 21.4 18.2 26.1 20.0 18.0 20.0

Debtor (Days) 10.3 8.1 9.2 6.0 6.3 6.5

Leverage Ratio (x)

Current Ratio 1.3 1.4 1.2 1.1 1.0 1.8

Debt/Equity 0.2 0.4 1.1 1.7 1.7 1.7

Cash Flow Statement (INR Million) Y/E Mar 2013 2014 2015 2016E 2017E 2018E

Oper. Profit/(Loss) before Tax 1,501 2,477 695 2,236 4,196

Interest/Dividends Recd. 175 176 150 175 175

Depreciation 564 473 809 1,314 1,565

Direct Taxes Paid -522 -564 -90 -325 -702

(Inc)/Dec in WC 754 -45 -173 -379 519

CF from Operations 964 2,607 1,737 3,780 4,715

EO expense 0 0 0 0 0

CF from Operating incl EO 964 2,607 1,737 3,780 4,715

(inc)/dec in FA -3,161 -10,117 -5,500 -2,000 -4,800

Free Cash Flow -2,197 -7,509 -3,763 1,780 -85

(Pur)/Sale of Investments 90 0 0 0 0

CF from investments -3,071 -10,117 -5,500 -2,000 -4,800

Issue of Shares 70 -120 0 0 0

(Inc)/Dec in Debt 1,797 7,771 4,850 500 4,000

Interest Paid -144 -141 -580 -1,454 -1,565

Dividend Paid -360 -360 -479 -719 0

CF from Fin. Activity 1,363 7,150 3,791 -1,673 2,435

Inc/Dec of Cash -744 -359 28 106 2,351

Add: Beginning Balance 1,699 816 427 455 561

Closing Balance 816 456 455 561 2,912

March 2016 90

March 2016


Prism Cement


Stock Info Bloomberg PRSC IN Equity Shares (m) 503.4 52-Week Range (INR) 134/56 1, 6, 12 Rel. Per (%) 20/-9/-14 M.Cap. (INR b) 41.1 M.Cap. (USD b) 0.6 12M Avg Val (INR M) 53 Free float (%) 25.1 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 57.3 62.8 72.2 EBITDA 3.3 5.5 7.8 PAT -0.2 1.6 3.5 EPS (INR) -0.4 3.2 6.9 Gr. (%) -119 -969 114 BV/Sh (INR) 19.8 23.0 29.2 RoE (%) -1.8 15.0 26.3 RoCE (%) 7.6 15.5 22.5 P/E (x) -221.7 25.5 11.9 P/BV (x) 4.1 3.6 2.8 EV/EBITDA(x) 18.0 10.4 7.0 EV/Ton(USD) 109 88 77 Shareholding pattern (%)


Promoter 74.9 74.9 74.9

DII 6.5 6.7 8.1

FII 8.6 9.7 6.0

Others 10.0 8.7 11.1


Prioritizing profitability over growth Medium-term play on central market recovery

Growth headroom limited, but market mix strong: Given 84% capacity utilization and limited expansion plans, PRSC’s cement business offers limited scope for growth outperformance. However, it has an advantage in terms of market mix (North MP, East UP, and Bihar) – low supply visibility, high consolidation and better regional growth visibility. Benefits of various measures – higher pet coke mix, blending, and better power efficiency have begun percolating through improved profitability (FY16E EBITDA/ton to increase by ~INR120/ton despite 1% decline in pricing). TBK segment – return of cost competitiveness taking longer: Despite strong brand (19% share in organized market), the drag in PRSC’s TBK (tiles, bath and kitchen) segment profitability has been an overhang. Operational issues (disruption in energy supply and cost), which led to severe cost inflation in the past, are behind – PRSC has installed three coal gassifiers, drilled onshore micro gas wells in Andhra Pradesh, and put in place connectivity of natural gas in Karnataka. Yet margins are taking longer to improve (2-3% now v/s the normal 6-8%) due to (a) weak demand, (b) delay in premiumization plan (shift in product mix towards vitrified tiles). Profitability and balance sheet strength to get strategic priority over growth: Operational overhangs of the past are now behind. Strategy would ride on prudent capital allocation and cost competitiveness to normalize profitability. Conversion of cash on the back of limited capex should drive deleveraging. We expect net debt/EBITDA to reach 1.8x (net D/E of <1x) by FY18 v/s 5.7x (1.9x) now, before PRSC enters its next expansion cycle. Medium-term play on central market recovery: Our SOTP value for PRSC is INR95/share (EV of USD90/ton, and 8x FY18E EBITDA, 5x FY18E RMC EBITDA and 8x FY18E TBK EBITDA). PRSC remains a near-term play on Central India recovery, though long-term growth is likely to lag peers. We maintain Buy.

50

75

100

125

150

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

Prism CementSensex - Rebased

Prism Cement

March 2016 91

Exhibit 1: Utilization headroom limited due to lower expansion plan


Exhibit 2: Market mix skewed in central and east which offer healthy growth outlook


Exhibit 3: Profitability to improves as cost levers percolate


Exhibit 4: Non-cement business 50% capital employed (%)


Exhibit 5: Leading market share in TBK (%)

FY15E Rev.

(INR b)

Margins (%)

Asset turn-

over (x)

Gr. CAGR (FY12-

15)

Market share

HRJ 22.1 3.5 1.8 9.6% 19%

Kajaria 21.7 16.3 2.6 19.5% 19%

Somany 15.4 7.5 3.6 18.3% 13%


Exhibit 6: RoCE (%) breakup in different businesses: TBK profitability remain a drag


2.0 2.0 2.0 5.6 5.6 7.0 7.0 7.0 7.0 7.0 7.0

122 114 146

61

93

68 73

80 78 83 89

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Capacity (mt) Utilization (%)

MP 29%

East UP 49%

Bihar 20%

CHGRH 2%

1,500

2,500

3,500

4,500

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Cost/t Cement EBITDA/ton

54% 58% 50% 51% 51% 52% 63%

35% 33% 36% 36% 37% 37%

30%

10% 8% 9% 8% 7% 6% 7% 5% 5% 5% 5%

FY10 FY11 FY12 FY13 FY14 FY15 FY16E

Cement TBK RMC Insurance

12%

19%

27%

10%

12%

24%

11%

6%

20%

2% 4%

18%

13%

3%

15%

Cement TBK RMC


Prism Cement

March 2016 92

Exhibit 7: Trend in EBITDA (INR b)


Exhibit 8: Prudent capital management key to de-leveraging





Source: MOSL, Company Exhibit 11: Scenario Analysis PRISM Base case Bull case Bear case


Volume 5.47 5.79 6.25 5.90 6.48 5.69 6.02

Growth 6% 8% 8% 10% 4% 6%


Growth 5% 8% 9% 12% 1% 4%

EBITDA 3,332 5,477 7,833 6,832 11,033 4,156 4,883

Net Debt 18,994 16,247 14,064 16,198 13,029 17,536 17,442

EV/EBITDA 17.8 10.4 7.0 8.3 4.8 14.0 11.9

TP for EV/EBITDA

7 88 137 38

8 95 147 42

9 113 172 53


3.6

1.7 1.3 1.6 0.3

1.9 2.5

3.6

1.8

1.6 1.2 0.7

0.5

0.4 0.5

1.3

0.4

0.6

0.6 0.5

0.4 0.3

0.3

0.5

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

RMC TBK Cement

-0.8

0.0

0.8

1.5

2.3

-12

0

12

24

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E


264

111.3

114.7 40.2

-50

20

90

160

230

300

May

-02

Jun-

03

Jul-0

4

Aug-

05

Aug-

06

Sep-

07

Oct

-08

Oct

-09

Nov

-10

Dec-

11

Jan-

13

Jan-

14

Feb-

15

Mar

-16

EV/ton (US$) Max Avg

24.9

11.1

1.7 -1.0

7.0

15.0

23.0

31.0

39.0

May

-02

Feb-

03N

ov-0

3Au

g-04

Apr-

05Ja

n-06

Oct

-06

Jun-

07M

ar-0

8De

c-08

Sep-

09M

ay-1

0Fe

b-11

Nov

-11

Jul-1

2Ap

r-13

Jan-

14Se

p-14

Jun-

15M

ar-1

6


Prism Cement

March 2016 93

Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 33,606 44,808 47,427 49,443 55,718 57,252 62,790 72,156 Change (%) 18.4 33.3 5.8 4.3 12.7 2.8 9.7 14.9 EBITDA 3,115 2,388 2,342 1,199 2,621 3,332 5,477 7,833 EBITDA Margin (%) 9.3 5.3 4.9 2.4 4.7 5.8 8.7 10.9 Depreciation 1,133 1,473 1,598 1,766 1,368 1,400 1,465 1,561 EBIT 1,982 915 744 -567 1,252 1,932 4,012 6,271

Interest 997 1,635 1,903 2,415 2,536 2,509 2,464 2,269 Other Income 312 289 313 363 556 300 600 600 Extraordinary items 10 -28 16 1,341 621 -36 0 0 PBT 1,307 -460 -830 -1,278 -108 -313 2,148 4,603 Tax 349 -160 -235 -462 -255 -103 537 1,151 Tax Rate (%) 26.7 34.7 28.3 36.1 236.7 33.0 25.0 25.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 958 -300 -595 -817 147 -210 1,611 3,452 Adjusted PAT 951 -282 -607 -1,673 996 -185 1,611 3,452 Change (%) -64.0 -129.6 115.3 175.7 -159.6 -118.6 -968.6 114.3


Share Capital 5,034 5,034 5,034 5,034 5,034 5,034 5,034 5,034

Reserves 7,045 6,452 5,864 5,047 5,120 4,911 6,521 9,679

Net Worth 12,078 11,486 10,897 10,081 10,154 9,944 11,555 14,713

Debt 11,890 12,683 16,084 18,333 18,952 19,952 17,952 16,952

Deferred Tax 1,321 1,157 919 452 158 158 158 158




Net Fixed Assets 18,868 19,132 20,094 20,946 20,484 20,972 21,006 22,945

Capital WIP 286 664 839 626 688 300 300 300

Investments 3,543 3,900 3,782 3,473 3,432 3,432 3,432 3,432

Current Assets 10,005 12,577 15,783 16,356 18,824 19,945 20,424 22,096

Inventory 3,713 4,273 4,674 4,622 5,785 6,090 6,122 6,396

Debtors 2,644 3,463 4,779 5,258 5,616 5,921 5,566 5,970

Cash & Bank 599 565 375 525 797 957 1,704 2,888

Loans & Adv, Others 3,049 4,275 5,955 5,952 6,626 6,977 7,031 6,843



Provisions 77 377 434 405 518 555 656 748


Total Assets 25,290 25,326 27,900 28,866 29,263 30,053 29,664 31,822

Prism Cement

March 2016 94


Basic (INR)

EPS 1.9 -0.6 -1.2 -3.3 2.0 -0.4 3.2 6.9

Cash EPS 4.1 2.4 2.0 0.2 4.7 2.4 6.1 10.0

Book Value 24.0 22.8 21.6 20.0 20.2 19.8 23.0 29.2

DPS 1.0 0.5 0.0 0.0 0.0 0.0 0.0 0.5

Payout (incl. Div. Tax.) 61.3 -97.5 0.0 0.0 0.0 0.0 0.0 8.5

Valuation(x)

P/E -24.6 41.3 -221.7 25.5 11.9

Cash P/E 442.0 17.4 33.9 13.4 8.2

Price / Book Value 4.1 4.1 4.1 3.6 2.8

EV/Sales 1.2 1.1 1.0 0.9 0.8

EV/EBITDA 48.6 22.4 18.0 10.4 7.0

Dividend Yield (%) 0.0 0.0 0.0 0.0 0.6

EV/Ton (US$) 0 0 109 88 77


RoE 8.0 -2.4 -5.4 -15.9 9.8 -1.8 15.0 26.3

RoCE 10.5 5.0 4.1 -0.7 6.3 7.6 15.5 22.5

Turnover Ratios (%)

Asset Turnover (x) 1.4 1.7 1.8 1.7 1.9 1.9 2.1 2.3



Leverage Ratios (%)

Net Debt/Equity (x) 0.9 1.1 1.4 1.8 1.8 1.9 1.4 1.0

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 3,115 2,388 2,342 1,199 2,621 3,332 5,477 7,833 Non cash opr. exp (inc) 312 289 313 363 556 300 600 600 (Inc)/Dec in Wkg. Cap. -153 1,190 -2,275 987 -261 -530 1,171 964 Tax Paid -4 -5 -2 -5 -40 103 -537 -1,151Other operating activities -1,124 -420 507 -133 316 -36 0 0 CF from Op. Activity 2,147 3,441 884 2,410 3,191 3,170 6,711 8,246 (Inc)/Dec in FA & CWIP -4,100 -1,983 -2,697 -2,356 -927 -1,500 -1,500 -3,500Free cash flows -1,953 1,458 -1,813 54 2,265 1,670 5,211 4,746(Pur)/Sale of Invt -276 -357 118 262 -1 0 0 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -4,376 -2,340 -2,579 -2,094 -927 -1,500 -1,500 -3,500Inc/(Dec) in Net Worth 12 0 7 0 -74 0 0 0 Inc / (Dec) in Debt 3,875 793 3,401 2,249 618 1,000 -2,000 -1,000Interest Paid -997 -1,635 -1,903 -2,415 -2,536 -2,509 -2,464 -2,269Divd Paid (incl Tax) & Others -587 -293 0 0 0 0 0 -294CF from Fin. Activity 2,303 -1,135 1,504 -166 -1,992 -1,509 -4,464 -3,563Inc/(Dec) in Cash 74 -34 -191 150 272 160 747 1,183Add: Opening Balance 525 599 565 375 525 797 957 1,704Closing Balance 599 565 374 525 797 957 1,704 2,888

March 2016 95

March 2016


The Ramco Cements


Stock Info Bloomberg TRCL IN Equity Shares (m) 238.1 52-Week Range (INR) 427/270 1, 6, 12 Rel. Per (%) 3/29/45 M.Cap. (INR b) 96.4 M.Cap. (USD b) 1.4 12M Avg Val (INR M) 66 Free float (%) 57.7 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 35.1 37.6 42.0 EBITDA 9.8 11.0 12.8 PAT 4.4 5.2 6.5 EPS (INR) 18.4 21.7 27.4 Gr. (%) 80.6 18.1 26.1 BV/Sh (INR) 127.2 145.4 168.2 RoE (%) 15.4 15.9 17.5 RoCE (%) 14.6 16.4 19.6 P/E (x) 22.0 18.6 14.8 P/BV (x) 3.2 2.8 2.4 EV/EBITDA (x) 12.0 10.1 8.1 EV/Ton (USD) 114 104 97 Shareholding pattern (%)


Promoter 42.3 42.3 42.3

DII 26.8 24.5 19.2

FII 11.6 13.7 18.0

Others 19.3 19.5 20.5


Best brand to play South recovery Peak dynamics in place; valuations rich but may enjoy scarcity premium

South recovery gradual; Ramco industry performer While Andhra Pradesh and Telengana are poised for revival, led by government spending, overall growth acceleration would be gradual (3-5% in FY17) due to dampening effect of other states like Tamil Nadu. With <50% utilization (clinker utilization of ~62%), we expect volume growth of 4% in FY17 and 6-7% in FY18.

Highest profitability in the cement pack at this moment At INR1,400-1,500/ton, TRCL’s profitability is the highest in the industry, led by (a) pricing discipline in the South, (b) strongest brand premium and trade mix, (c) 60% exposure to most profitable southern market (Tamil Nadu and Kerala), and (d) regaining of superior cost structure after limestone beneficiation in TN capacity.

What makes cost structure superior? Historically, TRCL is among the lowest cost producers in the South due to (a) fuel flexibility, (b) 90% captive power (to increase from 157MW to 175MW in a year), reducing grind dependency, and (c) strategic plant location. Further benefits would percolate with focus on raising pet coke mix from 25% to 60%. Impurity in limestone had hurt cost in FY14-15 (INR800-1,200/ton costlier import). Beneficiation resolved the issue and raised life significantly from 30 years.

Sub-normalcy in East dispatches and wind power a few drags: “Average” brand positioning in the East coupled with high freight and marketing expenses kept profitability sub-par. Vizak grinding unit would aid INR500-600/ton savings, in our view, led by (a) better reach in Orissa, (b) cheaper fly ash availability, and (c) savings in logistics (clinker instead of cement). Vizak investment at INR3.5b would generate 12% RoCE. Wind Power business (126MW) remains a drag on capital efficiency, with RoCE of 4-5% (10% of capital employed).

Visibility of deleveraging strongest among midcaps Deleveraging has already started, with INR4.4b reduction in net debt over 9MFY16 (~INR23b, 0.7x). With no immediate capex plan (barring 0.5mt of clinker de-bottlenecking), TRCL would generate INR6b-7b of annual FCFE over FY17-18, aiding further reduction ahead.

Peak dynamics in place; valuations rich, but preferred southern play With 10% market share, strong brand/dealer network, superior pricing and industry leading RoCE (15-17% in FY17/18), peak dynamics are already in place for Ramco. With valuation being rich at US$97/ton and 8.1x FY18E EBITDA, Ramco might enjoy scarcity premium for southern play. We value Ramco at INR480 (cement business at an EV of USD110/ton and 9.5x FY18E EBITDA). Buy

200

260

320

380

440

Mar

-15

Jun-

15

Sep-

15

Dec-

15

Mar

-16

The Ramco CementSensex - Rebased

The Ramco Cements

March 2016 96

Exhibit 1: Utilization to improve in line with industry demand; clinker utilizations at 60% now


Exhibit 2: Market mix gaining benefits of southern pricing discipline (%)


Exhibit 3: Cement realization(INR/Ton) one of the best among peers due to strong brand and retail mix


Exhibit 4: After limestone issue in FY15, Ramco regained superior cost structure in FY16 (INR/ton)

Ramco Orient ICEM Dalmia

Direct Cost 1,597 1,437 1,899 1,597

As % of Realization 32 41 38 32

Indirect cost 934 747 1,020 895

As % of Realization 19 22 21 18


Exhibit 5: Best EBITDA/ton among peers


Exhibit 6: Return ratios(%) among the best


10.0 12.5 12.5 12.5 14.5 14.5 14.5 15.5 16.0 16.0

65% 64% 58% 60% 58% 59%

53% 45% 46% 49%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Capacity (mt) Utilization(%)

Tamil Nadu 40%

Kerala 20%

Karnataka 10

Andhra Pradesh

12

East (WB and Orissa) and MHRS

18

3,96

6

3,86

6

3,88

0

2,85

0

DALMIA ICEM MCEM ORIENT

50250450650850

1,0501,2501,450

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Range of EBITDA/ton for MOSL universe RAMCO

6.1

10.2

14.6

16.4

19.6

12.8

11.2

10.6

13.7

17.7

18.1

9.3

10.8

18.7

23.4

2014 2015 2016E 2017E 2018E

Ramco UTCEM SCRM

The Ramco Cements

March 2016 97

Exhibit 7: Better visibility of de-leveraging on account of strong OCF and limited capex plan


Exhibit 8: Power business a drag on RoCE (%)






Exhibit 11: Scenario Analysis Ramco Base case Bull case Bear case

FY16 FY17E FY18E FY17E FY18E FY17E FY18E Volume 7.03 7.31 7.82 7.45 8.12 7.17 7.53 Growth 4% 7% 6% 9% 2% 5% Realization(INR/t) 5,076 5,226 5,446 5429 5875 5023 5034 Growth 3% 4% 7% 8% -1% 0% EBITDA 9,812 10,952 12,816 12,688 16,813 9,273 9,206

Net Debt 22,314 16,711 10,052 16,530 9,285 17,895 13,390 EV/EBITDA 12.5 10.6 8.4 9.1 6.4 12.6 12.1 TP for EV/EBITDA 8.5 428 574 285 9.5 470 645 324 10.5 536 715 362


16

24 25 28 27 26

29 27

22

17

10

2.1

3.1

3.0

4.5

2.9

2.7

5.6 4.0

2.3 1.5

0.8 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18E

Net debt (INR b) Net Debt/EBITDA(x)

0

5

10

15

20

25


Cement Power Total RoCE

169

70

7 0

50

100

150

200

Mar

-01

Feb-

02Ja

n-03

Nov

-03

Oct

-04

Aug-

05Ju

l-06

Jun-

07Ap

r-08

Mar

-09

Jan-

10De

c-10

Oct

-11

Sep-

12Au

g-13

Jun-

14M

ay-1

5M

ar-1

6EV/ton (US$) Max

16.7

7.6

3.1

0.0

5.0

10.0

15.0

20.0

Nov

-05

Aug-

06

May

-07

Feb-

08

Nov

-08

Aug-

09

Apr-

10

Jan-

11

Oct

-11

Jul-1

2

Apr-

13

Dec-

13

Sep-

14

Jun-

15

Mar

-16


The Ramco Cements

March 2016 98

Exhibit 12:


Exhibit 13:


Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 26,049 32,030 37,884 36,321 35,939 35,078 37,615 42,024 Change (%) -7.0 23.0 18.3 -4.1 -1.1 -2.4 7.2 11.7 EBITDA 6,181 9,163 9,631 5,116 6,622 9,812 10,952 12,816 EBITDA Margin (%) 23.7 28.6 25.4 14.1 18.4 28.0 29.1 30.5 Depreciation 2,208 2,539 2,806 3,063 2,499 2,687 2,778 2,796 EBIT 3,973 6,624 6,825 2,054 4,123 7,125 8,174 10,020

Interest 1,399 1,585 1,785 1,881 1,938 1,796 1,665 1,470 Other Income 399 536 842 1,141 1,379 751 877 1,040 Extraordinary items -16 -1 -5 230 0 0 0 0 PBT 2,957 5,574 5,877 1,543 3,564 6,080 7,385 9,590 Tax 863 1,723 1,846 166 1,141 1,703 2,216 3,069 Tax Rate (%) 29.2 30.9 31.4 10.8 32.0 28.0 30.0 32.0 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 2,094 3,851 4,032 1,377 2,423 4,378 5,170 6,521 Adjusted PAT 2,105 3,852 4,035 1,172 2,423 4,378 5,170 6,521 Change (%) -40.5 83.0 4.8 -71.0 106.8 80.6 18.1 26.1


Share Capital 238 238 238 238 238 238 238 238

Reserves 17,107 20,266 23,470 24,583 26,214 30,039 34,379 39,794

Net Worth 17,345 20,504 23,708 24,821 26,452 30,277 34,617 40,032

Debt 27,912 27,104 26,671 29,000 27,119 24,119 21,119 17,119

Deferred Tax 5,890 6,492 7,164 7,374 8,271 8,271 8,271 8,271




Net Fixed Assets 37,930 41,152 46,029 46,458 48,807 50,317 48,039 45,743

Capital WIP 5,457 5,276 1,480 3,495 2,575 1,000 2,000 3,000

Investments 2,673 2,665 2,658 2,834 3,558 3,558 3,558 3,558

Current Assets 10,988 11,491 14,547 15,899 15,763 16,962 19,955 23,119

Inventory 3,923 4,911 5,948 6,855 5,206 5,492 5,653 5,921

Debtors 1,751 2,079 3,028 3,040 3,802 4,174 4,240 4,211

Cash & Bank 400 475 536 447 618 1,805 4,408 7,067

Loans & Adv, Others 4,913 4,026 5,035 5,557 6,136 5,492 5,653 5,921



Provisions 1,335 1,591 1,873 1,049 1,623 1,703 1,773 1,841


Total Assets 51,147 54,100 57,542 61,195 61,841 62,666 64,006 65,421

The Ramco Cements

March 2016 99


Basic (INR)

EPS 8.8 16.2 17.0 4.9 10.2 18.4 21.7 27.4

Cash EPS 18.1 26.9 28.7 17.8 20.7 29.7 33.4 39.1

Book Value 72.9 86.2 99.6 104.3 111.1 127.2 145.4 168.2

DPS 1.3 2.5 3.0 1.0 1.5 2.0 3.0 4.0


Valuation(x)

P/E 82.2 39.8 22.0 18.6 14.8

Cash P/E 22.8 19.6 13.6 12.1 10.3

Price / Book Value 3.9 3.6 3.2 2.8 2.4

EV/Sales 3.3 3.3 3.4 3.0 2.5

EV/EBITDA 23.7 18.2 12.0 10.1 8.1

Dividend Yield (%) 0.2 0.4 0.5 0.7 1.0


RoE 12.8 20.4 18.3 4.8 9.5 15.4 15.9 17.5

RoCE 10.1 15.4 15.6 6.1 10.2 14.6 16.4 19.6

Turnover Ratios (%)

Asset Turnover (x) 0.5 0.6 0.7 0.6 0.6 0.6 0.6 0.6




Leverage Ratios (%)

Net Debt/Equity (x) 1.6 1.3 1.1 1.2 1.0 0.7 0.5 0.3

Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 6,181 9,163 9,631 5,116 6,622 9,812 10,952 12,816 Non cash opr. exp (inc) 399 536 842 1,141 1,379 751 877 1,040 (Inc)/Dec in Wkg. Cap. 850 155 -2,306 -1,121 1,299 675 -15 -53Tax Paid -824 -1,121 -1,174 44 -244 -1,703 -2,216 -3,069Other operating activities -21 -162 -5 230 0 0 0 0 CF from Op. Activity 6,585 8,570 6,989 5,410 9,057 9,536 9,598 10,735 (Inc)/Dec in FA & CWIP -5,273 -5,419 -3,888 -5,507 -3,550 -3,000 -1,500 -1,500Free cash flows 1,312 3,152 3,101 -97 5,507 6,536 8,098 9,235(Pur)/Sale of Invt -1,785 8 7 -176 -724 0 0 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -7,058 -5,411 -3,881 -5,684 -4,274 -3,000 -1,500 -1,500Inc/(Dec) in Net Worth 16 0 2 15 -378 0 0 0 Inc / (Dec) in Debt 2,247 -808 -434 2,330 -1,881 -3,000 -3,000 -4,000Interest Paid -1,399 -1,585 -1,785 -1,881 -1,938 -1,796 -1,665 -1,470Divd Paid (incl Tax) & Others -346 -692 -830 -279 -415 -553 -830 -1,106CF from Fin. Activity 517 -3,084 -3,047 184 -4,612 -5,349 -5,495 -6,576Inc/(Dec) in Cash 44 75 61 -89 171 1,187 2,604 2,658Add: Opening Balance 356 400 475 536 447 618 1,805 4,408Closing Balance 400 475 536 447 618 1,805 4,408 7,067

THEMATIC GALLERY

http://institution.motilaloswal.com/emailer/Research/AUTO-20150902-MOSL-DB-PG026.pdf

http://institution.motilaloswal.com/emailer/Research/IT-ECOM-20141104-MOSL-SU-PG106.pdf

http://institution.motilaloswal.com/emailer/Research/LOGISTICS-20150309-MOSL-SU-PG116.pdf

http://Institution.motilaloswal.com/emailer/Research/OIL-20140822-MOSL-SU-52PG.pdf

http://institution.motilaloswal.com/emailer/Research/ENGG-Indian%20Defense-201507-MOSL-SU-PG026.pdf

http://institution.motilaloswal.com/emailer/Research/PHARMA-20150330-MOSL-SU-PG150.pdf

http://institution.motilaloswal.com/emailer/Research/BANK-DIGI-20160309-MOSL-SU-PG066.pdf

http://institution.motilaloswal.com/emailer/Research/UTILITIES-METALS-20141211-MOSL-SU-PG036.pdf

http://institution.motilaloswal.com/emailer/Research/INDIA-STRATEGY-3QFY16-20160112-MOSL-RP-PG322.pdf

http://institution.motilaloswal.com/emailer/Research/FINANCIALS-20140303-MOSL-SU-PG076.pdf

SECTOR UPDATES

CEMENT SECTOR GALLERY

http://Institution.motilaloswal.com/emailer/Research/CEM-20150903-MOSL-SU-PG004.pdf

http://Institution.motilaloswal.com/emailer/Research/CEM-20150707-MOSL-RP-PG012.pdf








January 2016 36

Disclosures This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur.

MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors on investments in such business. The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research professionals are paid on the profitability of MOSt which may include earnings from investment banking and other business.

MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest. MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.

Most and it’s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Most and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412

There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities

Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues

Disclosure of Interest Statement Companies where there is interest Analyst ownership of the stock No Served as an officer, director or employee No

A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes

Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Hong Kong: This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.”

Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in Hong Kong. For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Kadambari Balachandran Email : [email protected] Contact : (+65) 68189233 / 65249115 Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: [email protected]

Date post:	30-May-2020
Category:	Documents
Upload:	others
View:	31 times
Download:	0 times

Thematic | March 2016 Cement › AnalystVideo › Pdf › ... · Ultratech Cement 52 Shree Cement...

Documents