Ambit Cement

CEMENT
November 2016
Operating
Leverage
What are you playing?

Research Analysts:
Nitin Bhasin
nitin.bhasin@ambit.co
Tel: +91 22 3043 3241
Achint Bhagat, CFA
achint.bhagat@ambit.co
Tel: +91 22 3043 3178
Parita Ashar, CFA

parita.ashar@ambit.co
Tel: +91 22 3043 3223
Financial
Leverage
Demand
Growth
Cement
CONTENTS
SECTOR
What are you playing? 3
Coverage summary ..4
When the going remains tough 5
How to play the theme? 14
The operating leverage framework 15
The efficiency framework .18
Financial leverage (FL) framework .20
Pricing discipline here to stay ..23
Regional pricing dynamics ...25
Valuations: The low hanging fruit is gone 30
COMPANIES
UltraTech (SELL): Even hope doesnt last forever 37
Shree Cement (SELL): Can the champion keep at it? .47
Dalmia Bharat (BUY): Converting mass to muscle ..59
Orient Cement (BUY): Not a bad deal! .93
November 09, 2016
Ambit Capital Pvt. Ltd.
Page 2
Cement
POSITIVE
THEMATIC
November 09, 2016
What are you playing?
Summary of recommendation
Pricing has improved across India (8%/5% over last 6m/12m);

consolidation by UTCEM, approaching end of cement capex cycle, and
focus of companies to deleverage B/S could be the key reasons. Rather
than investing in demand recovery plays (whilst demand always
disappoints), investors should focus on companies with efficient variable
cost structure and higher scope of operating leverage (OL) and financial
leverage (FL). With sector trading near peak valuations, rising fuel costs
amid weak demand should create BUYing opportunities. We initiate
Dalmia Bharat (BUY; 16% upside) and reiterate high conviction on
Orient Cement (BUY; 28% upside); two names standing out on OL/FL
framework. Amongst large caps, we prefer Ambuja for relatively
attractive valuation a reasonable cost structure and exposure to good
markets like North/Central India. We turn SELLers on UTCEM and
Shrees valuation perplexes us.
UTCEM
SELL
3,972
0.3
12.7
ACC
BUY
1,722
14.2
8.1
9.8
Upside EV/EBITDA
(%)
(FY19)
TP
BUY
273
11.6
DBL
BUY
2,353
16.2
9.1
SRCM
SELL
17,231
1.6
12.4
ORCMNT
BUY
216
26.4
6.2
Source: Company Ambit Capital research
Operating leverage scope

Unabsorbed overheads (Rs/tonne)
500
400
300
200
100
Financial leverage scope

2
Net Debt Equity (x)
1.5
1
0.5
Research Analysts
Nitin Bhasin
+91 22 3043 3241
Achint Bhagat, CFA
+91 22 3043 3178
Parita Ashar, CFA
+91 22 3043 3223
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
ACEM
ACC
SRCM
UTCEM
TRCL
ICEM
ORCMNT
-1
DBL
0
-0.5
How long can unexpected benefits last?

Earnings disappointment in 2QFY17 was a timely reminder that sustaining
pricing growth requires cement companies to control their market share
aspirations. Power & fuel cost windfall is largely wiped out post the 80%
increase in petcoke costs since Mar-16. Building in 6-7% pricing growth and 23% cost increase, we expect 30% EBITDA CAGR over FY16-18 for the
companies under coverage. Our estimates are marginally higher than
consensus with little room of upgrades unless pricing surprises positively.
Valuation what are you paying for?
The significant outperformance of the cement sector in the last six months
leaves little valuation headroom in stocks such as UltraTech and Shree (trading
at a 40-70% premium to 5-year average EV/EBITDA). Mid-cap stocks with scope
to play operating and financial leverage make better plays for a 2-3 year
holding period. Orient Cement is our top mid-cap pick followed by Dalmia
Bharat; their low cost structures can help them gain markets share as leaders
like UTCEM balance profitability and market share aspirations when debt and
unutilised capacities are set to come on board.
JKLC
UTCEM
JKCE
SRCM
ACC
ACEM
TRCL
ICEM
DBL
ORCMNT
JKLC
Demand growth narrative becoming stale; check through OL/FL filter

A sub-optimal utilisation level for the industry (~68% in FY16) has resulted in
Rs200/tonne unabsorbed fixed overheads. Orient/Dalmia have Rs346/Rs430
unabsorbed overheads and offer maximum scope of operating leverage as
utilisation improves. The sectors D/E has increased to 1.3x in FY16 (0.3x in
FY09); Orient Cement and Dalmia (1.3x and 1.6x FY16 D/E) offer maximum
scope of deleveraging as cumulative FCF over FY16-18 will be 30-35% of their
current net debt. JK Lakshmi is another decent play and Ambuja ranks better
than other pan-India players on the OL/FL framework.
Rating
ACEM
JKCE
Demand remains as unpredictable as ever but pricing to the rescue

The four-year wait for a cement demand recovery (4% CAGR over FY13-16
lowest in two decades) is likely to extend for another year (~5% in FY17).
Rural/retail consumers remain on the sidelines despite the good monsoon and
no major growth in industrial capex. Recognising this limitation (and to fix their
B/S), cement companies have given up the market share chase, which is driving
pricing improvement across regions. Consolidation, exit of volume-focused
players (such as Jaypee), and fading cost windfall (petcoke) will help sustain
pricing. After three years of weak pricing, we expect 5-7% realisation growth
over FY17-19; prices have already recovered from lows.
Company
Cement
Coverage summary
Exhibit 1: Valuation summary
CMP
TP Upside Rating
MCap
MCap
(Rs
bn)
EV/Tonne (X)
(Rs)
3,959
3,972
0.3
SELL 1,086 16,280 23.5
19.6
16.0
24
20
16
13
245
273
11.6
BUY
486
7,279 29.7
16.9
12.6
9.8 15,317 10,181
9,860
9,558 33.7
20.2
15.1
11.7
ACC
1,508
1,722
14.2
BUY
283
4,243 17.7
14.0
10.2
8.1
9,003
8,186
7,946
7,946 22.7
18.0
13.1
10.4
DBL
2,025
2,350
16.1
BUY
180
2,694 15.3
13.1
10.7
8.9
9,661
9,615
9,615
9,615 17.4
14.7
11.7
9.8
16,963 17,231
1.6
SELL
591
8,855 43.2
20.4
16.4
12.4 23,741 21,420 19,314 15,545 44.7
20.6
16.4
12.5
26.4
BUY
35
525 25.8
12.5
7.4
15.2
9.0
7.6
Ambuja
Shree
Orient
171
216
FY16
FY17E
Target EV/EBITDA (X)
(Rs)
UltraTech
(%)
EV/EBITDA (X)
(US$
FY16 FY17E FY18E FY19E
mn)
FY18E
FY19E FY16 FY17E FY18E FY19E
12.7 16,569 15,616 15,616 15,616
6.2
5,907
5,907
5,907
5,907 30.8
Source: Ambit Capital research, Company, Bloomberg
Exhibit 2: Operational assumptions summary

Cement despatches
(mn tonnes)
Utilisation
Realisation (Rs/tonne)
Cost/tonne
EBITDA (Rs/tonne)
FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
UltraTech
48.3
51.3
55.9
62.7
75
76
80
90 4,936 4,847 5,140 5,447 4,035 3,824 3,984 4,149
956 1,082 1,215 1,360
Ambuja
21.6
21.5
22.8
24.9
75
71
73
77 4,321 4,387 4,711 5,041 3,659 3,578 3,662 3,791
708
857 1,083 1,286
ACC
23.5
24.4
25.9
27.7
78
77
77
81 4,868 5,033 5,342 5,663 4,346 4,326 4,409 4,523
647
790 1,021 1,204
DBL
12.8
15.0
17.1
18.8
51
60
68
75 5,138 5,073 5,270 5,515 3,796 3,756 3,814 3,898 1,233 1,222 1,310 1,430
Shree
14.2
21.8
26.9
30.8
63
86
96
95 3,966 4,244 4,456 4,723 2,982 2,953 3,011 3,032
927 1,285 1,291 1,443
Orient
4.4
6.0
7.0
7.2
55
75
88
90 3,399 3,501 3,816 3,930 3,000 2,881 2,909 2,887
398
620
907 1,043
Exhibit 3: Financial Summary

Revenues (Rs bn)
EBITDA (Rs bn)
EBITDA margin
PAT (Rs bn)
EPS
UltraTech
Ambuja
ACC
241.1 251.8 290.8 345.2 46.2
55.5
67.9
85.2 19.2
22.1
23.4
24.7 21.8
27.8
37.5
50.4
95.5 108.3 126.3 15.3
20.2
24.7
32.0 16.1
21.2
22.8
25.3
8.6
12.2
17.1
23.0
5.2
6.1
118.0 124.9 140.6 158.6 15.3
19.3
26.4
33.3 13.0
15.4
18.8
21.0
5.9
8.1
12.8
17.9
39.2
51.0
76.0 102.8
10.1
23.2
48.6
82.4 123.1
94.6
DBL
64.4
74.8
87.5 100.3 15.8
18.4
22.4
26.9 24.5
24.5
25.6
26.8
1.9
4.0
6.8
Shree
55.7
92.2 115.8 137.9 13.2
28.0
34.8
44.5 23.7
30.3
30.0
32.3
4.5
13.4
18.4
Orient
15.1
21.1
3.8
6.4
7.6 12.2
18.0
24.0
26.7
0.6
0.8
2.5
26.8
28.4
1.8
79.4 101.4 136.6 183.8

8.6
11.6
23.5 131.2 385.5 529.1 675.5

3.3
3.0
4.0
12.4
16.3
Exhibit 4: Ratios
RoCE (%)
RoE (%)
Revenue growth (%)
EBITDA growth (%)
PAT growth (%)
UltraTech
10
12
14
11
13
15
18
16
19
10
20
22
25
28
35
34
Ambuja
(5)
13
17
(21)
32
22
29
(35)
42
41
34
ACC
10
13
16
11
15
19
13
13
26
37
26
(13)
30
49
35
DBL
12
14
10
15
19
83
16
17
15
162
16
22
20 1,981
109
69
49
Shree
19
22
24
19
23
25
(14)
66
26
19
(2)
112
24
28
(14)
66
26
19
Orient
13
15
21
22
(2)
40
27
(40)
107
69
18
NA
33
206
32
November 09, 2016
Page 4
Cement
When the going remains tough

For the last three years, investing in cement stocks has been based on hopes of a
cyclical demand recovery and capacity utilisation improvement, resulting in a domino
effect on pricing, EBITDA/tonne and RoCE. Although we questioned the magnitude of
demand recovery, we turned BUYers on the cement sector in Mar-16 inspired by
Edward Chancellors book, Capital Returns, citing that the end of the capex cycle will
drive the performance of the cement sector. Since then the stock prices of frontline
cement companies have increased by 20-50% though demand growth, as in the last
half a decade, has been weaker than expected (1HFY17: 4.5%). Firm pricing was the
key driver of stock prices as it offset the adverse impact of P&F cost (petcoke cost have
increased by 80% in last 8 months).
We believe the best way to play the sector today is to invest in cost-efficient
companies with the ability to gain market share, thereby driving operating leverage
and financial leverage (debt repayments as FCF generation picks up). Orient Cement
and Dalmia Bharat stand out on this framework when we also bring valuations into
the picture.
Demand waiting in vain

Projecting cement demand in India through correlation with GDP is becoming more
and more of an academic exercise and has failed to yield accurate results for five
consecutive years. Moreover, since data availability on key demand components such
Cement demand has failed to
as rural housing, infrastructure spends is scanty, it is also difficult to do a bottom-up
recover in India
demand projection. Whilst we expect 6% volume growth in FY17, we believe that
volume growth could be 100bps lower than our initial expectations; volume growth
has been 4.5% YoY in YTDFY17 (vs 1.5% in the same period last year). Note in the
two exhibits below that: (a) cement volume growth has been lower than the ten-year
mean for four consecutive years and (b) volume growth over FY13-16 has been the
lowest in the last two decades.
Exhibit 5: Cement demand growth has been lower than median growth for the last
four years
14%
India - Cement volume growth
12%
10%
8%
6%
4%
2%
FY16
FY15
FY14
FY13
Median growth
YTDFY17
YoY volume growth
FY12
FY11
FY10
FY09
FY08
FY07
FY06
0%
Source: Company, Ambit Capital research
November 09, 2016
Page 5
Cement
Exhibit 6: Cement demand CAGR over FY14-16 has been lowest in the last two
decades
3-yr Demand CAGR
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
Demand CAGR FY96-16
Monsoon impact: Limited benefits in FY17, wait for FY18

Rural incomes have been severely impacted due to poor monsoons in the last two
years. Whilst the current higher-than-normal monsoon led to rising hopes of a
demand recovery in 2HFY17, we believe benefits of a better monsoon will come
through only next year. As per our economy teams interaction with a leading agri
expert, rural demand is unlikely to see runaway growth even if the summer monsoon
is normal. As the country has suffered two back-to-back droughts, the expert
highlighted that a good summer monsoon (i.e. spread over June-Aug 2016) will not
be enough to lift rural demand meaningfully. If the summer monsoon is normal and
is spread evenly, the first leg of improvement in purchasing power will materialise
only from Sept 2016 as this is when the summer crop is harvested. Moreover,
improvement in rural incomes is first likely to translate into deleveraging and higher
demand for staples. If the winter crop is also abundant, by March 2017 one can
expect initial signs of a pick-up in spending on durable goods and big-ticket items.
We reiterate our view that volume growth is unlikely to exceed 6-7% in FY17. We
believe that any benefits of a good monsoon will only take shape in FY18.
Infrastructure construction: Road and railways doing well, private capex
remains tepid
The government has increased allocation for two key infrastructure sectors, roads and
railways, by 58% and 24% respectively. Roads currently consume roughly 5mn tonnes
of cement in India. This could double in FY17 if execution picks up, contributing
~150bps to overall cement volume growth. While the overall allocation to railways
has increased by 24%, the increase in the civil expenditure has increased by 63% YoY
in FY17. Moreover, spending on public infrastructure capex, specifically in states such
as AP-Telangana can further fuel infrastructure-led volume growth rates.
Higher allocation for rural welfare schemes could add 150-200bps to volume
growth
In the recent Budget, the Government increased allocation for rural welfare schemes
(IAY, PMGSY and MNREGA) by Rs20bn. This would directly/indirectly impact rural
housing notwithstanding the benefits of a normal monsoon. Our calculations suggest
that these schemes could add 160bps to overall cement demand growth in
India in FY17. Whilst we do not hear of any major rural demand pick-up yet, we
believe spending on rural welfare schemes should pick up in 2HFY17, which will
result in improved cement demand in rural areas.
November 09, 2016
Page 6
Cement
Exhibit 7: If implementation of rural schemes are as planned, volume growth could
increase by 150-160bps
Government schemes
FY12
MNREGA
FY13
310
FY14
FY15
FY16
FY17
303
330
325
337
385
-2.3%
9.0%
-1.6%
3.8%
14.2%
124
138
187
196
136
197
Central allocation
95
105
143
148
95
150
State allocation
29
33
44
48
41
47
11.2%
35.4%
4.7%
-30.6%
44.4%
89
98
100
101
190
-54.1%
10.4%
1.6%
1.4%
88.1%
YoY growth
IAY
YoY growth
PMGSY
193
YoY growth
Total (` bn)
628
YoY growth
530
615
620
574
772
-15.6%
16.1%
0.8%
-7.4%
34.4%
Cement consumption calculation

MNREGA (assuming 5% cement intensity)
16
15
17
16
17
19
IAY (assuming 30% intensity)
37
41
56
59
41
59
PMGSY (assuming 10% intensity)
19
10
10
10
19
Total cement consumption (` bn)
72
66
82
85
68
97
Cost/bag
275
294
296
302
285
302
Cement consumed (mn tonnes)
13.1
11.2
13.9
14.1
11.9
16.1
-15.0%
25.0%
0.8%
-15.4%
35.3%
growth contribution to India cement demand
-0.9%
1.2%
0.0%
-0.8%
1.6%
growth contribution to rural cement demand
-2.2%
3.0%
0.1%
-2.1%
4.0%
growth
Source: Budget documents, Ambit Capital research
Costs no more windfall gains

In FY16, variable costs for the cement sector dropped by 13% YoY mainly on account
of a sharp reduction in power and fuel cost (-23% YoY; largely on account of lower
costs of petcoke). Petcoke price reduced by 40% from the peak in Aug-14 till Feb-16;
however, since then price has risen by ~80% (as on Sep-16), which is likely to wipe
away power and fuel cost windfall saving that the sector was enjoying. Our checks
suggest that a US$10 increase in petcoke price leads to a Rs50-60/tonne increase in
power and fuel cost, which implies that the overall P&F cost is likely to increase by
Rs150-180 per tonne by 4QFY17 (once the low-cost inventory runs out).
Our checks with cement companies and fuel traders suggest that petcoke is still
~15% cheaper than coal given the sharp increase in international petcoke prices.
However, linkage coal and petcoke are now at the same level, thereby cement
companies have started shifting towards petcoke.
Exhibit 8: Sharp increase in Indonesian coal prices making petcoke the preferred fuel
Indonesian coal prices (US$)
Indonesian coal prices RHS (Rs)

3,200
3,000
2,800
2,600
2,400
2,200
2,000
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
60
55
50
45
40
35
30
November 09, 2016
Page 7
Cement
Exhibit 9: P&F cost dropped sharply in FY16 due to steep
decline in petcoke prices
Exhibit 10: however, petcoke prices have risen sharply

since then
(Rs)
1,200
30%
1,000
20%
6,000
800
10%
5,500
600
0%
5,000
400
-10%
200
-20%
-30%
7,000
Source: Company, Ambit Capital research. The chart above depicts costs for
37 companies
Sep-16
Jun-16
Mar-16
Dec-15
YoY growth (RHS)
Sep-15
3,000
FY16
Jun-15
P&F cost/tonne
FY15
3,500
Mar-15
FY14
4,000
Dec-14
FY13
4,500
Sep-14
FY12
Petcoke cost Rs/tonne
6,500
Source: Company, ICMW, Ambit Capital research
Pricing discipline sustained

With no major upcoming capacity additions, we do not think that companies will fight
for market share by aggressively cutting prices. Post a sharp decline in FY16, cement
prices have improved in most parts of India (barring East India). We explain pricing
movement in detail in a later section. UltraTech mentioned in its 2QFY17 conference
call that cement prices have improved and are likely to remain firm for the balance
part of FY17.
Exhibit 1: Pricing discipline sustained during the quarter
(Rs/ 50kg bag)
360
340
320
300
South
280
North
260
West
240
Central
220
East
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
Mar-15
May-15
Jan-15
Sep-14
Nov-14
Jul-14
May-14
Jan-14
Mar-14
Sep-13
Nov-13
Jul-13
May-13
Jan-13
Mar-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Mar-12
Sep-11
Nov-11
Jul-11
May-11
200
Source: Primary Checks, Ambit Capital research
November 09, 2016
Page 8
Cement
Super-cycle is at least two years away

After a 5% volume growth in FY17 and 8% in FY18, we build in 10% volume growth
in FY19 and FY20. Assuming 40mn tonne capacity expansion until FY20 (based on
announced plans), capacity utilisation could increase to ~90% by FY20. This implies
that some regions will be operating at 100% utilisation and capacity announcements
would pick up only in FY19.
Exhibit 11: Demand super-cycle will commence in FY19
30%
100%
90%
20%
80%
10%
70%
FY20E
FY19E
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
0%
60%
50%
-10%
Rolling 3-year cement capacities CAGR
Rolling 3-year cement despatches CAGR
Cement price growth
Annual capacity utilisations (RHS)
Source: Company, Ambit capital research
November 09, 2016
Page 9
Cement
Implications of the end of the capex cycle

In our Mar-16 thematic, we opined that the capex cycle of the Indian cement industry
is ending and would lead to: (a) no major capacity additions for the next few
years: Our checks suggest ~40mn tonnes will be commissioned over FY16-20;
~10% of existing capacity, implying 2-3% annual growth; (b) shift from market
share maximisation to deleveraging: We expect a more rational behavior from
players to fix their levered balance sheets (apart from the top 2-3 unlevered players),
(c) pricing growth: We note that prices have improved across India in the last six
months and our checks suggest that the recent price hikes are likely to sustain as
leaders such as UltraTech rationally balance prices and market share; and (d) RoCE
improvement and deleveraging: The capital employed base of the sector will
shrink as the debt (taken for expansions) is repaid.
Capacity addition is tapering

Cement capacity addition pace in India is likely to decelerate materially, as per our
checks with companies and equipment vendors. Note in the exhibit below that the
capacity addition rate (capacity commissioned/last years installed capacity) is the
lowest in the last two decades.
Exhibit 12: Capacity addition pace has decelerated materially
Capacity
2020E
2019E
2018E
2017E
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2003
2002
5%
2001
100
2000
10%
1999
200
1998
15%
1997
300
1996
20%
1995
25%
400
1994
(mn tonnes)
500
Capacity addition rate (RHS)
Exhibit 13: Announced capacity additions by Indian cement companies

Company
State
Region
FY17
JK Lakshmi
Gujarat
West
1.35
JK Lakshmi
Chhattisgarh
East
Birla Corp
Rajasthan
North
UltraTech Cement
Rajasthan
Ambuja Cement
West Bengal
Ambuja Cement
Rajasthan
ACC
FY18
FY19
FY20
1.0
1.5
5.5
North
0.9
Chhattisgarh
East
2.5
Shree Cement
Chhattisgarh
East
Shree Cement
Karnataka
South
Emami Cement
Chhattisgarh
East
Emami Cement
West Bengal
East
Wonder Cement
Maharashtra
West
Mangalam Cement
Uttar Pradesh
Central
JSW Cement
Maharashtra
West
Bhavya Cement
Andhra Pradesh
Burnpur Cement
West Bengal
4.5
Total addition
Installed capacity at
the start of the year
% addition
2.8
4
3
4.0
2
3
0.75
1.2
1.15
2
9.5
5.0
18.2
8.5
420
430
434
453
2.3
1.2
4.2
1.9
Source: Company, Ambit Capital research, Media sources
November 09, 2016
Page 10
Cement
Top-5 players (barring Shree) have limited bandwidth for further expansions
The exhibits below show that six players accounted for 60% of the overall capex of the UltraTechs mega acquisition of
Indian cement sector over FY09-15. Of these, Shree is the only player planning Jaypees 22mn tonne capacity
reinvestments in greenfield/brownfield expansion. UltraTechs mega acquisition of limits its ability to re-invest
Jaypees 22mn tonne capacity limits its ability to re-invest; ACC and Ambuja have no
major expansion aspirations due to the global mandate of Lafarge-Holcim to curtail
expansion. Jaypee will exit the business.
Exhibit 14: Top-5 players accounted for 70% of sector capex
in FY02-08
Capex split (FY02-08)
Exhibit 15: The proportion has fallen to 60% of overall

capex over FY09-15
Capex split (FY09-16)
UltraTech ,
Rs79.6bn;
25%
Others,
Rs18bn;
31%
UltraTech,
Rs154bn;
18.1%
Others,
Rs62bn;
41%
Ramco,
Rs20bn; 6%
JPA,
Rs137bn;
16.1%
JPA,
Rs65bn;
20%
Ambuja,
Rs25.6bn;
8%
ACC,
Rs30.5bn;
10%
Ambuja,
Rs68bn;
8.0%
Exhibit 16: Capacity share
Exhibit 17: ..of the top players
Others,
44%
UltraTech,
17%
Holcim*,
18%
Others,
50%
Holcim*,
20%
Source: CMA, Ambit Capital research
Exhibit 18: receded in the last decade
UltraTech
, 15%
UltraTech
, 19%
India , Ramco , Jaypee,

4%
5%
7%
Shree,
Rs69.5bn
8.1%
ACC,
Rs76bn;
8.9%
Jaypee,
8%
Ramco ,
5%
FY05
Shree ,
FY10
5%
Holcim*,
15%
Others,
52%
Dalmia ,
4%
Shree ,
6%
Jaypee ,
6%
FY16
Consolidation for the first time in a decade

The exhibit below shows that the capacity share of the top-3/5 groups has declined
over the last decade. While the top-5/3 cement groups accounted for 57%/47% of
capacity in FY02, they dropped to 51%/44% in FY08 and 48%/38% in FY15.
However, post the takeover of Jaypees capacities by UltraTech, the capacity share of
the top-5/3 players is likely to increase to 55%/43%.
November 09, 2016
Page 11
Cement
Exhibit 19: Top 3/5 groups have lost market share over a period of time
60%
57%
55%
50%
55%
51%
49%
47%
45%
44%
38%
40%
43%
35%
Top-5 groups
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
30%
Top-3 groups
Source: Company, CMA, Ambit Capital research
Exhibit 20: Order of companies for calculation of fragmentation

Rank FY02
FY03
ACC
UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech
UltraTech ACC
Ambuja
Ambuja
FY04
ACC
FY05
ACC
FY06
ACC
FY07
ACC
FY08
FY09
ACC
ACC
FY10
FY11
FY12
FY13
ACC
ACC
ACC
ACC
Jaypee
Group
Jaypee
Group
Jaypee
Group
FY14
ACC
ACC
Ambuja
Ambuja
Ambuja
Ambuja
Jaypee
Group
Shree
Shree
Dalmia
Dalmia
Dalmia
Ambuja
Ambuja
Ambuja
Ambuja
Ambuja
Jaypee
Group
Jaypee
Group
Jaypee
Group
Jaypee
Group
Jaypee
Group
Ambuja
Ambuja
Ambuja
Jaypee
Group
ICEM
ICEM
ICEM
ICEM
ICEM
ICEM
ICEM
Dalmia
Dalmia
India
India
India
Ramco
Ramco
Ramco
ICEM
FY17E
ACC
Ambuja
FY16
ACC
Ambuja
Jaypee
Group
FY15
Exhibit 21: The last few M&A transactions suggest credible consolidation in India
Size
Valuation (US$)
(In MT)
In mn
% of industry
capacity*
FY06
15
100
10.7%
FY06
18
200
12.9%
Mysore
FY07
2.1
119
1.3%
My Home
FY08
3.2
128
1.7%
Vicat
Bharathi
FY10
NA
1.9%
JPA
Andhra Cement
FY11
1.5
57
0.5%
Dalmia
Calcom
FY12
1.7
85
0.6%
Dalmia
Adhunik
FY13
1.5
65
0.4%
CRH
Jajajyothi
FY14
3.2
70
0.9%
UltraTech
JPA (Gujarat)
FY14
4.8
127
1.4%
Shree
JPA (Panipat)
FY14
1.5
40
0.4%
Dalmia
JPA (MP)
Heidelberg
(GU in Maharashtra)
FY14
2.1
75
0.6%
FY14
0.6
50
0.2%
Acquirer
Target
Year
Holcim
Ambuja
Holcim
ACC
Heidelberg
CRH
Concluded
JSW
On-going
UltraTech
JPA
FY15
22
110
5%
Birla Corp
Reliance Cement
FY16
5.6
140
1.4%
Nirma
Lafarge
FY17
11
NA
2.5%
Orient
Jaypee
FY17
4.2
98
1%
November 09, 2016
Page 12
Cement
RoCE recovery and deleveraging

Two major outcomes of cash flow diversion from capacity expansion to reducing
capital employed will be: (a) de-leveraging: Note that in the previous demand
cycle, the leverage of the peers dropped sharply; and (b) RoCE uptick: After six years
of continued decline, the sectors RoCE will recover with the end of the capex cycle;
note the sharp RoCE uptick in the previous demand cycle (FY05-09).
Exhibit 22: Sector RoCE in FY16 is near the bottom
40%
35%
30%
30%
25%
20%
20%
15%
10%
10%
5%
0%
RoCE
EBIT Margin (RHS)
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
0%
EBITDA Margin (RHS)
November 09, 2016
Page 13
Cement
How to play the theme?

We devise a framework to ascertain the best plays amongst the top-10 cement
companies are well placed to play the end of the capex cycle. We use four key
parameters: (a) Operating leverage (OL) better absorption of unabsorbed
overheads as capacity utilisation scales up; (b) Efficiency - control on variable cost,
one of the most important parameters to judge a cement franchise; (c) financial
leverage (FL) the capacity to shrink the size of the balance sheet through debt
repayment as free cash flow generation picks up, driving earnings recovery; and (d)
market presence exposure to markets where pricing is likely to remain strong and
threat of new competition is limited.
We rank companies in each of these parameters (details below) and find Orient
Cement and Dalmia Bharat as the most favorable plays on the operating and
financial leverage theme. Pan-India players such as UTCEM and ACC rank low due to
limited scope of operating and financial leverage playing out and lower cost
efficiency as compared to regional players.
Exhibit 23: Orient Cement ranks best on our framework for cement companies
OL
Efficiency
FL
Pricing
Overall
Ranking
DBL
10
SRCM
JKLC
ACEM
10
TRCL
JKCE
ACC
10
10
10
Company
ORCMNT
UTCEM
ICEM
Source: Ambit Capital research
November 09, 2016
Page 14
Cement
The operating leverage framework

A prolonged period of weak demand and rising capacity not only impacted
realisation but also led to a sharp increase in unabsorbed overheads in the cement
industry. The two charts below highlights the following:
Operating leverage in the previous cycle Note that fixed costs as a % of

sales receded significantly in the previous demand cycle to 13.4% of sales in FY07
(at the peak of the cycle) as against 18.7% in FY01 and remained stable until
FY10. From FY10, fixed cost as a % of sales started rising (increased to 17.4% of
sales in FY16) as utilisation levels dropped.
Sharp increase in unabsorbed overheads Unabsorbed overheads

(measured as the difference between fixed cost/tonne and fixed costs/installed
capacity) has increased sharply to Rs190/tonne in FY16, which could reverse as
utilisation ramps up. Note that a 5% increase in utilisation could improve
fixed cost absorption (and lead to unitary EBITDA expansion) by
~Rs40/tonne.
Exhibit 24: Fixed costs of the industry have increased sharply owing to poor absorption
(Rs/tonne)
800
20%
18%
600
16%
400
14%
200
12%
10%
FY01 FY02
FY03 FY04
FY05 FY06 FY07
Fixed cost/tonne
FY08 FY09 FY10
FY11 FY12 FY13
Fixed cost/installed capacity
FY14 FY15
FY16
Fixed costs/sales (RHS)
Exhibit 25: Unabsorbed overheads have increased significantly as capacity utilisation dropped
(%)
(Rs/tonne)
250
105
100
200
95
150
90
100
85
80
50
75
Unabsorbed fixed costs/tonne
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
70
Capacity utilisation (RHS)
November 09, 2016
Page 15
Cement
Finding maximum scope for operating leverage (OL)

The exhibit below suggests that the scope of maximum operating leverage is in two
types of companies:
Under-utilised capacities companies such as Orient Cement, Dalmia Bharat and
OCL India whose capacity utilisation is low due to recently added capacities and
absorption will improve as utilisation scales up; and
Presence in beaten down markets companies with presence in beaten down
markets due to which realisation dropped, inflating the fixed costs as a proportion of
sales companies such as Ambuja, Shree, Prism are the main examples here.
Lastly, note that high fixed costs could also be a function of inherent inefficiencies
and hence there could be limited operating leverage scope in such companies; ACC
being an example.
Exhibit 26: Companies that have recently added capacities have a high proportion of fixed costs as a % of sales
22%
FC as a % of sales (FY16)
20%
20%
20%
19%
20%
17%
16%
16%
16%
15%
15%
15%
14%
14%
JKLC
23%
ICEM
25%
13%
12%
10%
5%
UTCEM
Century
JKCE
TRCL
Bcorp
Shree
HEID
Prism
OCL
DBL
ACEM
ACC
Orient
Kesoram
0%
Exhibit 27: Companies such as ACC are inherently inefficient on fixed cost management
FY11
FY12
FY13
FY14
FY15
FY16
Change over
FY11-16 (bps)
ACC
21%
20%
17%
19%
20%
20%
(53)
ACEM
13%
14%
14%
18%
18%
20%
679
Bcorp
15%
16%
14%
15%
14%
16%
87
Century
14%
15%
14%
13%
13%
13%
(44)
DBL
16%
14%
16%
19%
22%
20%
441
HEID
17%
18%
22%
18%
15%
16%
(104)
JKCE
14%
13%
13%
15%
14%
15%
29
JKLC
12%
11%
11%
11%
12%
14%
153
Kesoram
10%
12%
13%
15%
20%
23%
1,250
MGC
10%
10%
10%
12%
11%
13%
343
OCL
12%
14%
15%
18%
18%
19%
750
NA
NA
14%
17%
17%
22%
784
PRSC
15%
15%
16%
17%
16%
17%
177
SGC
6%
6%
7%
8%
10%
11%
452
Shree
11%
9%
12%
14%
14%
16%
482
ICEM
16%
14%
14%
15%
15%
14%
(117)
TRCL
11%
11%
13%
13%
14%
15%
428
UTCEM
14%
10%
11%
11%
12%
12%
(117)
Fixed expenses as a % of sales
ORCMNT
November 09, 2016
Page 16
Cement
Ranking the players on the OL framework

Through the framework below we try to find companies wherein the scope for
operating leverage is the maximum as demand and pricing improve in India. We
ascertain the same based on: (a) fixed cost as a % of sales and the increase over
the years which will sieve companies whose fixed cost absorption has deteriorated
due to lack of sales growth as pricing in the target markets is weak; and (b) scope of
per tonne savings which will be realised as utilisation scales up.
Orient Cement ranks the best on the framework as the companys fixed costs are at
22% of sales in FY16 as against 14% in FY14 due to weak pricing in Maharashtra and
AP and increase in overheads for the Karnataka plant. As utilisation improves in
Karnataka and pricing improves in core markets, there is significant scope of
operating leverage playing out for the company.
Dalmia Bharat ranks second; its fixed costs improved sharply as the company
invested in a professional management, improving processes, and overheads
increased with capacity addition. In this company, too, operating leverage could
improve EBITDA margin as utilisation improves.
Ambuja ranks third since the companys fixed costs as a % of sales increased by
~700bps over the last six years due to weak volume growth and pricing in core
markets. This should resolve given improved pricing in North and Central India and
with pick-up in volumes (4-5% growth) in the next few years as surprisingly, despite
significant under-utilisation, it appears that UltraTech offers limited scope of
operating leverage, given that the companys fixed costs as a % of sales have
remained stagnant over the last five years, leaving little room for improvement. Even
when the company absorbs Jaypees capacities, we do not see significant
improvement in fixed cost absorption since Jaypees capacities will take time to scale
up and fixed costs will be high in the initial years.
Lastly, fast growing companies such as Shree will offer operating leverage
benefits since strong volume growth will help better absorption of fixed costs.
Exhibit 28: Ranking the top-10 cement companies on operating leverage framework
Utilisation
FC as a %
of sales
Change in FC over
FY11-16 (bps)
Fixed cost/Installed
Capacity
Fixed cost/
Volume
Scope of
savings
Ranking
ORCMNT
55%
22%
784
426
771
346
DBL
54%
20%
441
513
943
430
ACEM
73%
20%
679
614
845
231
TRCL
60%
15%
428
421
698
277
SRCM
73%
16%
482
472
643
171
ACC
77%
20%
(53)
785
1,019
234
ICEM
56%
14%
(117)
410
734
325
JKCE
72%
15%
29
528
729
201
JKLC
82%
14%
153
409
499
90
UTCEM
77%
12%
(117)
443
572
130
10
Company
November 09, 2016
Page 17
Cement
The efficiency framework

Control on variable costs is one of the most important efficiency parameters for
cement companies. Whilst a few companies such as Shree Cement and Orient
Cement have historically managed costs exceptionally, others like Dalmia Bharat
have managed to reduce variable costs sharply in the last few years.
Note in the exhibit below that although variable cost of the sector has reduced over
the years, majority of the savings have been driven by lower power and fuel cost led
by a sharp decline in fuel cost (especially petcoke).
Exhibit 29: Whilst P&F cost has dropped significantly, other variable costs continue to rise
(Rs/tonne)
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
FY01
FY02 FY03
P&F cost
FY04 FY05 FY06

VC (ex-p&f)/tonne
FY07 FY08 FY09 FY10 FY11

YoY growth - VC/tonne (RHS)
FY12 FY13 FY14 FY15 FY16

VC (ex- p&f YoY growth) RHS
YoY growth - VC-ex-freight/tonne (RHS)
Exhibit 30: Variable costs as a % of sales have dropped due to savings in power and
fuel cost
Variable costs as a
% of sales
FY11
FY12
FY13
FY14
FY15
FY16
TRCL
65%
60%
61%
71%
66%
55%
DBL
65%
62%
62%
66%
61%
56%
OCL
67%
72%
62%
66%
66%
61%
Shree
64%
64%
61%
63%
65%
61%
ACEM
62%
62%
60%
64%
64%
65%
ACC
60%
62%
64%
66%
68%
66%
NA
NA
65%
68%
63%
67%
ICEM
72%
65%
67%
73%
70%
67%
UTCEM
67%
68%
67%
70%
70%
69%
HEID
72%
76%
81%
79%
69%
70%
JKCE
72%
67%
68%
73%
73%
71%
Sagar
79%
77%
87%
92%
79%
73%
Bcorp
65%
69%
71%
77%
76%
76%
Prism
74%
78%
77%
79%
77%
76%
JKLC
74%
69%
68%
74%
73%
76%
Century
73%
77%
77%
77%
79%
78%
Mangalam
77%
73%
71%
80%
79%
82%
Kesoram
85%
90%
82%
80%
77%
92%
Orient
November 09, 2016
Page 18
Cement
Ranking the players on the efficiency framework

We ascertain the efficiency of Indian cement companies based on the variable costs
incurred per tonne and the change in the same over the last five years.
Unsurprisingly, Shree Cement trumps all peers both in terms of VC/tonne and the
change over the last few years. Orient Cement and Dalmia Bharat fare reasonably
well on the framework. Amongst the pan-India players, Ambuja ranks the best
followed by UltraTech. ACC ranks poorly due to high costs and no major cost
reductions in the last few years.
Exhibit 31: Shree ranks the best on our efficiency framework
VC/tonne
(FY16)
Rank
on
VC/tonne
VC/tonne
FY11-16
CAGR
Rank
on VC/tonne
CAGR
Overall
Rank
Shree
2,099
-7%
Orient
2,230
-1%
Dalmia Bharat
2,630
-1%
Ramco
2,808
2%
JK Lakshmi
2,814
2%
Ambuja
2,837
3%
UltraTech
3,227
3%
ACC
3,284
5%
ICEM
3,920
10
3%
JK Cement
3,694
5%
10
10
Company
Exhibit 32: Variable cost split for the ranking above (FY16)
Company
RM Cost
per tonne
P&F cost
per tonne
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
ACC
771
1,004
1,142
367
3,284
2,142
Shree
563
531
574
431
2,099
1,525
Dalmia Bharat
888
649
767
325
2,630
1,863
JK Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
JK Cement
983
1,078
1,087
547
3,694
2,607
Orient
473
902
722
133
2,230
1,508
India
779
1,088
906
1,146
3,920
3,014
November 09, 2016
Page 19
Cement
Financial leverage (FL) framework

Continuous reinvestments for expansions amid the demand downcycle meant that the
sectors leverage rose sharply. Whilst the net debt/equity for the entire sector rose to
1.3x in FY16 as against 0.9x in FY08, the leverage for the players, excluding the top5, increased to 3x in FY16 as against 1.1x in FY08. As explained in an earlier section,
the cyclical upturn drives deleveraging for the sector and could lead to a shift of debt
to equity value for companies which are levered today but have the capability (and
intent) of deleveraging as their earnings/FCF improve. The chart below does not
include debt for Jaypees assets since the debt for the cement business is not
determinable from the financials of Jaypee associates. Given high D/E of Jaypee, the
sectors leverage would have appeared higher if we were to include Jaypees debt.
Exhibit 33: The leverage of the sector has increased sharply in the last six years
(X)
4.5
3.5
2.5
1.5
Net Debt/Equity
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
0.5
Net Debt/Equity (Ex top-5)
The chart below shows that interest/EBITDA of the sector has risen sharply 60% of
EBITDA in FY16 as against 10% in FY08. For the manufacturers (excluding top-5), the
interest/EBITDA increased to 110% in FY16 as against 16% in FY08.
Hence,
deleveraging could drive meaningful earnings improvement for the sector.
Exhibit 34: The leverage of the sector has increased sharply in the last six years
120%
100%
80%
60%
40%
20%
0%
FY04
FY05
FY06
FY07
FY08
FY09
Interest/EBITDA
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Interest/EBITDA (ex-top 5)
November 09, 2016
Page 20
Cement
Exhibit 35: Regional players that have recently added capacities have the highest leverage
(X)
3.0
D/E
Int/EBITDA (RHS)
100%
2.5
80%
2.0
60%
1.5
40%
1.0
20%
0.5
ACC
ACEM
Shree
Bcorp
UTCEM
TRCL
Sagar
OCL
MGC
ICEM
HEID
Orient
JKLC
JKCE
Prism
Dalmia
Century
0%
Exhibit 36: The leverage of several companies has increased materially, leading to poor interest coverage
Company
Interest/EBITDA (%)
D/E (X)
FY11
FY12
FY13
FY14
FY15
FY16
FY11
FY12
FY13
FY14
FY15
FY16
ACC
7%
5%
9%
7%
6%
4%
0.1
0.1
0.0
0.0
ACEM
3%
3%
3%
4%
3%
6%
0.0
0.0
0.0
0.0
0.0
0.0
Bcorp
12%
15%
16%
33%
26%
29%
0.5
0.5
0.5
0.6
0.5
0.5
Century
18%
40%
55%
50%
74%
78%
1.6
2.1
2.7
3.2
3.1
2.6
Dalmia
64%
27%
37%
68%
72%
46%
0.7
0.6
1.1
1.4
2.7
2.2
HEID
4%
6%
16%
303%
43%
46%
1.0
1.2
1.7
1.5
1.2
JKCE
43%
28%
25%
43%
51%
56%
1.2
1.0
0.9
1.8
2.0
2.0
JKLC
33%
26%
19%
26%
27%
73%
1.0
1.0
1.1
1.3
1.5
1.7
Kesoram
100%
-419%
165%
200%
587%
-214%
3.1
5.2
8.8
10.5
61.1
13.3
MGC
3%
3%
4%
16%
42%
95%
0.0
0.4
0.7
0.7
0.9
OCL
20%
36%
18%
23%
21%
15%
1.0
0.8
0.8
0.7
1.1
0.8
Orient
NA
0%
6%
7%
5%
30%
NA
0.2
0.4
1.1
1.3
Prism
31%
61%
75%
152%
83%
73%
1.1
1.3
1.8
2.0
2.1
2.1
Sagar
43%
30%
72%
2250%
39%
34%
1.1
0.8
0.8
0.9
0.5
0.8
Shree
20%
14%
12%
9%
9%
6%
0.9
0.8
0.3
0.3
0.2
0.1
ICEM
35%
35%
39%
70%
63%
49%
0.8
0.9
0.9
1.1
1.1
1.0
TRCL
23%
17%
18%
34%
27%
17%
1.6
1.3
1.1
1.2
1.0
0.7
UTCEM
11%
6%
5%
9%
13%
11%
0.5
0.5
0.5
0.4
0.5
0.5
November 09, 2016
Page 21
Cement
Ranking the players on the FL framework

We rank the cement companies based on their capability to deleverage, which is not
to say that we like companies where leverage is high but companies where leverage
increase is on account of capacity addition (and not because of poor capital
allocation) and management has the intent to improve its balance sheet. We also
ascertain which companies have the least capital employed/tonne, which implies that
as utilisation scale-up and debt repayment will drive a sharp RoCE recovery.
Orient Cement ranks the best on the below framework since the companys leverage
increase has been to fund recent expansions in Karnataka and the company will be
able to reduce debt as FCF generation ramps up from its capacities. Secondly, it has
one of the lowest capital employed/tonne levels in the industry, which keep RoCE
higher than similar sized peers.
Exhibit 37: Orient Cement and Dalmia Bharat rank on top of the FL framework
Company
Leverage
CE/tonne
Scope
Overall Rank
ORCMNT
DBL
10
JKLC
ICEM
JKCE
TRCL
ACC
10
SRCM
UTCEM
ACEM
10
10
Exhibit 38: Parameters of our ranking scheme

Net Debt/Equity
(FY16)
Net Debt/EV
(FY16)
CE/tonne
(FY16)
Cumulative
FCF/DEBT (FY16)
ORCMNT
1.2
0.2
2,883
30%
DBL
1.6
0.3
5,147
25%
JKLC
1.5
0.3
3,759
24%
ICEM
1.0
0.4
4,068
22%
JKCE
1.7
0.3
4,594
24%
TRCL
0.7
0.1
4,415
33%
ACC
(0.2)
(0.0)
2,738
-146%
SRCM
0.1
0.0
3,668
404%
UTCEM
0.3
0.1
4,283
55%
ACEM
(0.5)
(0.1)
3,487
-52%
Company
November 09, 2016
Page 22
Cement
Pricing discipline here to stay

In our Mar-16 thematic, we highlighted that cement manufacturers will strive to
maintain pricing discipline given the persisting demand weakness amid the need to
service debt and interest commitments. In the last six months, prices have improved
in North, Central and West India and we expect elevated pricing to be maintained
over the next couple of years.
Exhibit 39: Periods of strong pricing have led to earnings upgrades historically
30%
Strong pricing; earnings upgrades
25%
Weak pricing;
earnings downgrades
20%
15%
10%
5%
0%
-5%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
-10%
Pricing growth
Ranking the regions

We rank the Indian regions from a cement pricing standpoint. We use the following
filters to evaluate the pricing dynamics of a specific region:
Capacity utilisation: Capacity utilisation and behavior of players are the two most
important fundamental determinants of pricing growth. Periods of high utilisation
have historically led to strong pricing. Central India has the highest utilisation
currently (80% in FY16) and we expect its utilisation level to remain the highest
amongst Indian regions over the next 3-4 years. Similarly, North Indias utilisation
will remain higher than most other Indian regions. Note that though utilisation based
on production capacity is high for certain regions like West India, it ranks lower than
Central and North India since surrounding regions like South India have significant
overcapacity, which impacts pricing in this region too. Even if a region is operating at
high capacity utilisation, influx of manufacturers from other regions or quick scaling
up of a cost efficient manufacturer (Shree in North) can distort pricing growth.
Fragmentation: Central India is the most consolidated cement market in India,
followed by North. Unsurprisingly, South ranks the worst due to overcapacity in AP.
East used to be a consolidated market, but in recent years the market has become
highly fragmented due to continued capacity expansion by new entrants in the
region.
Capacity addition: Usually, a region with significant increase in new capacities
witnesses pricing volatility as new plants cut prices to scale up utilisation. We do not
see scope for any major capacity expansions in Central India. East India is likely to
see the maximum capacity increase given continued expansions in Chhattisgarh by
players such as Shree, Emami etc.
Demand growth: We ascertain the likelihood of demand growth in the region in the
next few years on the basis of our channel checks. Demand growth is likely to be
strong in Central and North India as the governments projects such as roads and
DFCC are executed given that these two regions have the highest exposure to these
contracts. Moreover, Central India is a retail cement market wherein demand growth
is highly dependent on rural income. An above-average monsoon will improve rural
income, driving demand in the region. West is likely to be a slow growing market
given that it is highly dependent on institutional real estate, which continues to
struggle in large cities such as Mumbai and Pune.
November 09, 2016
Page 23
Cement
Pricing premium: Through this metric we ascertain markets where pricing is at a
premium compared to the all-India average. South India has the most premium
pricing thanks to strong discipline displayed by manufacturers in Tamil Nadu. East
has the second-highest price levels; however, the premium is now waning with rising
competition. Cement prices in Central India are lower than the all-India average.
Exhibit 40: Central India appears to be the best region for the cement market
Capacity utilisation
(FY16)
Fragmentation
(FY16)
Capacity additions
(FY16-19)
Demand
growth
Pricing premium
(vs India)
Overall Rank
Central
North
West
East
South
Region
Ranking the players on market exposure

Based on the market exposure of the cement companies, we believe Ambuja is the
most favorably placed given exposure in North and Central India both markets are
highly consolidated with no major capacity additions. Whilst South Indian cement
companies currently enjoy the highest unitary EBITDA due to elevated pricing, we see
limited room for further pricing growth, thereby limiting unitary EBITDA expansion.
Exhibit 41: Ambujas exposure to North and Central India will benefit the company as
and when pricing growth recovers in these regions
Company
Central
North
West
23%
25%
22%
JKCE
70%
10%
JKLC
80%
ACEM
SRCM
South
East
Rank
22%
20%
75%
2
20%
25%
ACC
18%
22%
22%
18%
20%
UTCEM
11%
21%
31%
18%
19%
ORCMNT
10%
55%
35%
10%
90%
ICEM
TRCL
DBL
10%
85%
15%
40%
50%
10
November 09, 2016
Page 24
Cement
Regional pricing dynamics

South India strong pricing but weak demand
Prices remain stable led by discipline: Cement prices in South India have
remained elevated (higher than pan-India average) over the last two years as pricing
discipline remained strong in states such as Tamil Nadu and Kerala. Whilst prices in
AP have been volatile due to the demand weakness and increased supply post
capacity addition by Orient and Dalmia Bharat, our recent checks suggest that
cement prices have improved by ~15% as against the lows of April-16. Moreover, we
hear that cement demand in AP continues to expand at ~20% for the last six months
(albeit on a low base of last year) driven by pick-up in organised real estate
construction and investments by the Telangana government in irrigation projects.
Exhibit 42: Cement prices in South India have remained heady over the last two years
South (Price/50kg bag)
370
350
330
310
290
270
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
250
South
High fragmentation due to AP: Presence of large limestone reserves in South

Indian states (AP, Karnataka and Tamil Nadu) led to sharp increase in capacities in
the heydays of the Indian cement industry. However, weak demand amid high
capacity commissioning led to significant overcapacity. Also, several small- and midsize manufacturers (1mn-5mn tonnes) have presence in South India and have a
reasonable brand in their micro markets, which makes South India the most
fragmented region in India.
Exhibit 43: South
fragmented...
India
is
highly
Exhibit 44: and
dominated
ACC ,
9.7%
ICEM,
15.2%
November 09, 2016
Others,
32.9%
Chettina
d, 14.2%
ACC ,
10.0%
Dalmia,
8.2%
UTCEM,
17.2%
Others,
30.6%
Chettina
d, 11.8%
Ramco,
11.3%
ICEM,
11.7%
cement
Capacity share:FY18
UTCEM,
14.0%
UTCEM,
12.1%
Ramco,
Dalmia, 8.1%
5.5%
Exhibit 45: regional

manufacturers
Capacity share:FY16
Capacity share:FY09
Others,
35.2%
by
ACC ,
9.3%
Dalmia,
9.7%
Chettina
d, 10.9%
Ramco,
11.3%
ICEM,
10.9%
Page 25
Cement
Exhibit 46: High fragmentation in AP is a key reason for pricing disruption
(mn tonnes)
100
100%
82
80
80%
60
60%
37
40
34
40%
20%
20
0%
AP
Overall capacity (LHS)
TN
Share of Top-3
Karnataka
Share of Top-5
Our view on pricing in South India: Whilst cement prices in South India have been
elevated we note that it has been supported by pricing discipline given high leverage
necessitated maintaining pricing in the absence of demand growth. We do not expect
scope for further price hikes in the region, and if demand remains weak, there is a
chance that prices may reduce.
North India getting consolidated

After a sharp correction in 2HFY16, cement prices recovered in FY17 and have
remained firm in the last 6-7 months. Although demand has remained weak, we
believe that with rising consolidation of capacities pricing discipline has improved.
UltraTech and Shree now account for 40% of the overall capacity in the region and
have a major bearing on the overall pricing dynamics. Our checks suggest that the
fight for market share has receded and incumbents are focusing on holding on to
pricing, especially with rising fuel costs further diluting cost savings.
Exhibit 47: Cement prices in North India have sharply rebounded
330
North (Price/50kg bag)
280
230
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
180
North (Price/50kg bag)

Exit of two large players will benefit peers: While Jaypee will exit North India
after acquisition by UltraTech, another large player, Binani Cement (7% capacity
share in FY15), is facing working capital constraints and might reduce operations,
leading to improvement in the regions capacity utilisation. Capacity share of the top3 players is likely to increase to 52% in FY18 from 49% currently.
November 09, 2016
Page 26
Cement
Exhibit 48: Market share of
Exhibit 49: top-3 players to rise
Capacity share:FY09 Shree,
Capacity share:FY18
Capacity share:FY16
Shree,
23.7%
Shree,
21.9%
19.3%
Others,
19.2%
Others,
27.1%
Others,
30.2%
ACC,
12.5%
JKLC,
9.1%
ACC,
5.9%
ACC,
6.6%
UTCEM,
10.3%
Binani,
12.7%
Exhibit 50: further by FY18
ACEM,
17.0%
UTCEM,
15.8%
Binani,
7.0%
JKLC,
7.3%
Binani,
6.3%
ACEM,
11.3%
JKLC,
8.6%
ACEM,
10.2%
UTCEM,
18.2%
Our view on pricing in North India: Increasing consolidation in North India, no

major capacity expansions, and high leverage of mid-sized players such as JK
Lakshmi and JK Cement would lead to better pricing in North India. We expect
cement prices to increase at ~6% in North India in FY17 and FY18.
Central India a good market to be in

Central Indias pricing paradox high consolidation (75% capacity with top-5 players)
and capacity utilisation (85% in FY15 as against Indias 70%) but weak pricing (8-10%
lower than the India average over FY13-15) will be resolved with the impending
change in supply structure. UltraTechs mega acquisition means that a volumefocused tier II brand (Jaypee) will be replaced by a tier I brand, leading to better
pricing discipline and unitary EBITDA expansion for incumbents. Strong pricing
improvement in Central India is likely to be one of the key drivers of overall pricing
growth in India. Post significant capacity additions over FY11-15, no major capacities
have been commissioned in the last 18 months and no major additions are likely in
the next 2-3 years. Whilst demand growth was in mid-single digits over the last few
years, volume growth is likely to accelerate over the next few years. Central India is
largely dependent on agricultural income and the strong monsoons should help
improve agri income; sugar output has been strong; 17 out of 23 NHAI contracts
awarded last year passes through Central India.
Exhibit 51: Cement prices in Central India have improved in recent months
Central (Price/50kg bag)
330
310
290
270
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
250
Central
Exit of Jaypee bodes well for the sector: Jaypee accounted for 25% of capacities
installed in Central India and, hence, had a significant impact on pricing in the
region. Since Jaypee is a volume-focused player, pricing in Central India remained
low. The acquisition will make UltraTech the leader in the region with a 30% capacity
share, which should lead to better pricing.
November 09, 2016
Page 27
Cement
Exhibit 52: Exit of Jaypee..
Exhibit 53: will lead to
Capacity share:FY09
HEID,
4.8%
Capacity share:FY18
Capacity share:FY16
HEID,
11.6%
Jaypee,
28.1%
Others,
14.8%
Exhibit 54: better pricing discipline
ACC ,
14.2%
Jaypee,
23.5%
Others,
12.6%
ACC ,
11.6%
Century,
12.0%
UTCEM,
13.5%
UTCEM,
13.0%
Prism,
12.6%
Jaypee,
5.4%
Others,
24.2%
Century,
10.7%
HEID,
9.0%
Prism,
14.0%
Century,
13.7%
Prism,
10.8%
UTCEM,
30.7%
ACC ,
9.1%
Our view on pricing in Central India: Cement prices in Central India should
remain elevated in the next few years given the improving supply structure and pickup in demand. Central India has one of the highest capacity utilisation levels
amongst the Indian regions and overall utilisation here will reach ~90% by FY19,
thereby supporting pricing growth.
East India a premium market losing its sheen

East India has been one of the most favoured markets for cement companies given
that it has been a cement deficit market; this helped the companies in commanding
premium pricing. However, with the entry of several manufacturers from other
regions (Shree and JK Lakshmi) and new entrants like Emami Cement, the premium
pricing of the market has started to wane and has dropped sharply in states like
Chhattisgarh.
Exhibit 55: East India losing its pricing premium
East
(Price/50kg bag)
400
350
300
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Apr-14
Jun-14
250
East
Exhibit 56: Entry of new players..
Exhibit 57: has increased
Capacity share:FY09
Shree,
0.0%
Others,
19.8%
UTCEM,
23.5%
Shree,
9.5%
Exhibit 58: fragmentation

Capacity share:FY18
Capacity share:FY16
Others,
10.5%
UTCEM,
23.3%
OCL,
6.4%
ACEM,
14.6%
November 09, 2016
Lafarge,
18.4%
OCL,
12.7%
UTCEM,
20.0%
Shree,
14.0%
ACC,
12.1%
ACC,
17.3%
Others,
16.5%
ACEM,
12.9%
Lafarge,
19.0%
ACC,
14.2%
OCL,
11.7%
Nirma*,
14.0%
ACEM,
9.6%
Source: Company, Ambit Capital research.

Lafarges assets have been acquired by Nirma
Page 28
Cement
Our view on pricing in East India: Although demand growth in East India has
been higher than most other Indian regions, the rising prominence of volume focused
players such as Shree, JK Lakshmi and now Orient Cement will lead to weak pricing
in the market. Pricing growth in East will be the lowest amongst Indian regions.
West India incipient signs of pricing recovery

West India had been one of the most severely impacted cement markets in the last
two years given significant impact of weak monsoon in rural Maharashtra and sharp
decline in new residential construction in urban Maharashtra. Moreover, with
commissioning of new capacities of Orient, Century Textiles and Dalmia, pricing
dropped sharply (10% below the five-year mean). However, prices have increased
last month by ~15% as fight for market share receded and our checks suggest that
price hikes are likely to sustain in the next few quarters.
Exhibit 59: Cement prices have dropped sharply in West India although prices have
increased in the last two months
West
(Price/50kg bag)
340
320
300
280
260
240
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
220
West
Dispatches from nearby states make Maharashtra extremely fragmented:

Prima facie, West India looks a fairly consolidated market with UltraTech, ACC and
Ambuja as the clear leaders (together account for 2/3rd of installed capacity).
However, West India receives cement from several nearby states like AP, Karnataka
and Madhya Pradesh, which has fragmented the market and led to pricing volatility.
Exhibit 60: UltraTech
and...
Exhibit 61: ..Holcim group companies

have majority..
Capacity share:FY09
Century,
7.1%
Others,
17.6%
Capacity share:FY16
Century,
4.2%
ACEM,
23.3%
ACC ,
8.8%
share
Capacity share:FY18
Others,
19.9%
Others,
25.3%
UTCEM,
38.9%
UTCEM,
48.2%
ACC ,
3.8%
Exhibit 62: capacity

Maharashtra
UTCEM,
34.2%
Century,
7.8%
ACEM,
28.3%
ACC ,
7.8%
ACEM,
24.9%
Our view on pricing in West India: We expect the recent price hike to sustain but
do not expect any major growth thereon given that demand recovery will again lead
to rising dispatches from states like AP, thereby restricting price increases.
November 09, 2016
Page 29
in
Cement
Valuations: The low hanging fruit is gone

In our Mar-16 thematic, we highlighted that valuation for the sector has reverted to
near the long-term mean at a time when earnings expectations are not overly
optimistic, pricing has limited room for disappointments, and costs have been
declining. However, since then the frontline stocks have rallied by 20-50%, leaving
little valuation headroom; costs have increased sharply due to increase in petcoke
price, which means further expansion in EBITDA is dependent on sustained price
hikes. A disappointing 2QFY17 performance has meant that estimates of most
cement companies have been reduced by 8-10%, and if demand weakness persists,
there is a likelihood of further cuts.
Frontline stocks (especially UltraTech and Shree) trade at a 40-60% premium to their
five-year average EV/EBITDA at a time when earnings continue to disappoint.
Note in the exhibit below that the sector EBITDA estimates (top-5 companies) were
upgraded over May-Aug-16 as pricing improved; however, post the 2Q results, we
notice that EBITDA estimates have been downgraded marginally.
Exhibit 63: Sector EV/EBITDA multiples have re-rated sharply
(x)
16
Sector EV/EBITDA
14
12
10
8
6
4
EV/EBITDA
Oct-16
May-16
Dec-15
Jul-15
Feb-15
Sep-14
Apr-14
Nov-13
Jun-13
Jan-13
Aug-12
Mar-12
Oct-11
May-11
Dec-10
Jul-10
Feb-10
Sep-09
Apr-09
Nov-08
Jun-08
Jan-08
Aug-07
Mar-07
Oct-06
Avg EV/EBITDA
Source: Bloomberg, Ambit Capital research. Sector multiples includes UTCEM, ACEM, ACC, Ramco and Shree Cement
Exhibit 64: Post the 2Q results, EBITDA estimates have been downgraded
EBITDA (Rs bn)

135
170
165
130
160
155
150
FY17
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
125
FY18
Source: Bloomberg, Ambit Capital research. Sector multiples includes UTCEM, ACEM, ACC, Ramco and Shree
Cement
November 09, 2016
Page 30
Cement
UltraTech for passive investors

When all think alike, then no one is thinking.
Walter Lippman
UltraTechs reputation of being the proxy play to the cyclical cement demand recovery
has meant that valuation has had little meaning in the last three years and
irrespective of earnings disappointments, its valuation continued to expand. Given
that demand recovery appears further delayed and cost savings will peter out due to
the increase the petcoke prices, we see little room for positive earnings surprise for
the next few quarters. Moreover, the stock trades at a 15x FY18E EBITDA at a 40%
premium to its 5-year average, which we find difficult to justify. We downgrade the
stock to SELL. We do not think that in a market growing at 5-6% the company can
grow materially ahead of the market and also enjoy pricing growth; we expect the
company to at best grow in line with the industry (or even behind) to support pricing.
On EV/tonne (ex-Jaypees plants), the stock trades at US$240/tonne, at a 70%
premium to replacement cost and five-year average, which appears too expensive to
generate investment returns.
Lastly, unlike the mid-cap players, we do not see significant scope of operating or
financial leverage playing out for the company and paying expensive valuations just
to play volume growth is not reason enough to buy the stock.
Exhibit 65: UTCEM is trading at a
cross-cycle average valuations
40% premium to
Exhibit 66: UTCEM is trading at US$240/tonne, a 70%

premium on replacement cost
(X)
20
(USD)
230
16
200
12
170
140
110
4
80
EV/EBITDA
Average EV/EBITDA
EV/Tonne
Source: Company, Bloomberg, Ambit Capital research
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
50
Apr-10
Average EV/EBITDA
Exhibit 67: EBITDA estimates have been cut marginally in YTDFY17

EBITDA (Rs mn)
60,000
74,000
73,500
73,000
72,500
72,000
71,500
71,000
70,500
70,000
59,000
58,000
57,000
56,000
FY17
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
55,000
FY18 (RHS)
November 09, 2016
Page 31
Cement
Ambuja our preferred large-cap play

Amongst large caps, Ambuja is best placed to play the following themes: (a) pricing
recovery; exposure to markets such as North, Central and West India where prices
have improved significantly; and (b) operating leverage; revenue growth acceleration
will aid fixed cost recovery (fixed costs increased to 20% of sales in CY15 as against
13% in CY10). Valuation isnt expensive at 12.3x one-year forward EV/EBITDA, a 10%
premium to its five-year average EV/EBITDA and a 30% discount to UltraTech.
Moreover, we believe risk of estimate downgrades due to weak demand is low for
Ambuja given that no major growth expectation has been built in by consensus.
Exhibit 68: Ambuja is trading close to its five-year average
EV/EBITDA..
One-yr fwd EV/Tonne
Five-year average EV/EBITDA
Five-year average EV/Tonne
Aug-16
Apr-16
Dec-15
Apr-15
One-yr fwd EV/EBITDA
Aug-15
Dec-14
Aug-14
Apr-14
Dec-13
Apr-13
Aug-13
Dec-12
Aug-12
Apr-12
Apr-11
Aug-16
50
Dec-15
Apr-16
Aug-15
80
Dec-14
Apr-15
4.0
Aug-14
110
Dec-13
Apr-14
8.0
Aug-13
140
Dec-12
Apr-13
12.0
Apr-12
170
Aug-12
16.0
Apr-11
200
Aug-11
Dec-11
20.0
Dec-11
(USD)
Aug-11
(X)
Exhibit 69: and a marginal 15% premium to 5-year

average EV/tonne
Exhibit 70: Ambuja is one of a few companies whose estimates have been upgraded
EBITDA (Rs mn)
29,000
27,000
25,000
23,000
21,000
19,000
17,000
CY16
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
15,000
CY17
Source: Bloomberg, Company, Ambit Capital research
November 09, 2016
Page 32
Cement
ACC little steam left

Whilst we highlighted that ACC as a credible idea to play the valuation/expectation
arbitrage in our thematic note published in Mar-16, that gap has been closed. Sharp
volume decline in the recent quarter raises questions on the companys ability to
grow volumes. Moreover, the company does not have the most efficient cost structure
(highest unitary costs amongst top-5 cement companies), which will hinder unitary
EBITDA expansion. The stock trades at 13x one-year forward EV/EBITDA, a 30%
premium to its five-year average. On EV/tonne, the stock trades at US$140, in-line
with current replacement cost and a 20% premium to its five-year average EV/tonne.
Exhibit 71: ACC trades at a 30% premium to its five-year
average EV/EBITDA
Exhibit 72: ACC trades at a 20% premium to its five-year

average EV/Tonne
15
150
13
130
11
110
70
50
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
90
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
One-yr fwd EV/EBITDA (X)

5-yr average EV/EBITDA
One-yr fwd EV/Tonne (US$)

5-yr average EV/Tonne
Exhibit 73: ACCs estimates were cut after the recent results
17,500
22,500
EBITDA (Rs mn)
CY16
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
20,000
Jul-16
15,000
Jul-16
20,500
Jun-16
15,500
Jun-16
21,000
May-16
16,000
May-16
21,500
Apr-16
16,500
Apr-16
22,000
Apr-16
17,000
CY17
November 09, 2016
Page 33
Cement
Shree its all in the price

Shree is the most expensive cement stock in the world. The stock trades at 17.5x oneyear forward EV/EBITDA (based on consensus estimates), which is at a 70% premium
to its five-year average. On EV/tonne, the stock trades at US$274/tonne, a 77%
premium to its five-year average. The stock trades at a 10% premium to UltraTech
(more than 3x Shrees size) on EV/EBITDA and a 15% premium on EV/tonne. Whilst
Shrees superior profitability and continued reinvestments make a case for its
premium valuations, we believe current valuations are too expensive to generate any
meaningful investment returns. Our TP of Rs17,231 implies 12.5x FY19E EV/EBITDA
by building in best case earnings. We have upgraded our target price by 34%,
factoring in higher long-term reinvestment than we had built in previously.
Exhibit 74: Shree is trading at a 70% premium to five-year
average EV/EBITDA
Exhibit 75: ..and
(x)
(US$)
25
400
20
300
15
77%
premium
on
EV/tonne
6-yr EV/EBITDA
5-yr avg EV/EBITDA
EV/tonne
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Apr-11
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
100
Apr-11
Sep-11
200
10
5-yr avg EV/Tonne
Shrees FY17 and FY18 EBITDA estimates have been upgraded by 14% and 23%
respectively due to strong pricing in North India and benefits accrued from low-cost
petcoke usage. With prices stabilising and petcoke costs having increased sharply, we
do not see scope for further earning upgrades.
Exhibit 76: Sharp earning upgrades by consensus led by strong pricing in North India
28,000
35,000
EBITDA (Rs mn)
27,000
33,000
26,000
31,000
25,000
29,000
24,000
27,000
23,000
22,000
Apr-16
25,000
May-16
Jun-16
Jul-16
FY17
Aug-16
Sep-16
Oct-16
Nov-16
FY18 (RHS)
November 09, 2016
Page 34
Cement
Rationale for our exit multiple assumptions

We ascertain exit multiples for the stocks under our coverage based on scale, capacity
to grow volumes and EBITDA, and efficiency (which reflects in RoIC). We present a
brief view on exit multiples of the cement companies under our coverage.
Shree Cement 12.5x FY19 EV/EBITDA: We ascribe the highest exit multiple to
Shree amongst our covered companies given its continuously increasing scale
alongside high utilisation and unmatched cost and capital efficiency. To arrive at our
implied valuation multiple, we build in 19% EBITDA CAGR over FY18-28.
UltraTech 12x FY19 EV/EBITDA: Our implied valuation for UTCEM is marginally
lower than Shree. Whilst UltraTech offers scale and pan-India exposure, its lower
multiple is a function of less-than-ideal cost efficiency and capital discipline. To arrive
at our implied valuation multiple, we build in 17% EBITDA CAGR over FY18-28.
Ambuja 11x CY18 EV/EBITDA: Our implied valuation for Ambuja is at a discount
to Shree and UltraTech due to lower scale and limited reinvestments for growth.
However, it is at a premium to ACC due to superior cost efficiencies and profitability.
Whilst UltraTech offers scale and pan-India exposure, its lower multiple is a function
of less-than-ideal cost efficiency and capital discipline. To arrive at our implied
valuation multiple, we build in 13% EBITDA CAGR over CY17-27.
Dalmia Bharat 9.5x FY19 EV/EBITDA: Our implied valuation for Dalmia is lower
than players such as UTCEM and Shree due to lower RoCE due to high-cost
expansion and high leverage, which could be a risk if demand adversity continues.
We build in 18% EBITDA CAGR over FY18-28.
ACC 9x CY18 EV/EBITDA: Our implied valuation for ACC is the least amongst the
top-5 cement companies due to no major reinvestments and market share losses and
lowest unitary EBITDA amongst the top-5 players. To arrive at our implied valuation
multiple, we build in 11% EBITDA CAGR over CY17-27.
Orient Cement 7.5x FY19 EV/EBITDA: Our implied valuation for Orient is lower
than other covered companies due to lower scale/unitary EBITDA and high leverage.
Exhibit 77: Exit multiples for the stocks under coverage Shree at a deserved
premium
Implied EV/EBITDA (FY19)
14.0
12.5
12.0
12.0
11.0
9.5
10.0
9.0
7.5
8.0
6.0
4.0
2.0
SRCM
UTCEM
ACEM
DBL
ACC
ORCMNT
November 09, 2016
Page 35
Cement
Exhibit 78: Relative valuation of Indian cement companies
Capacity
Rating
(mn tonnes)
FY17
Advt
EV/EBITDA
6m
Mcap
FY18
(Rs
bn)
P/E
EV/tonne
(x)
(x)
US$ US$
mn mn FY17 FY18 FY17 FY18
CAGR (FY16-18)
Rs
ROE
Interest/EBITDA
(%)
(x)
Sales EBITDA EPS

FY17
FY18
FY17 FY18
FY15
FY16
Our estimates for Covered companies

UltraTech
69.6
69.6
SELL 1,090 16,365 13.9
22.3 14.2
47
25 15,689 15,689
11
29 42
11
18
13
11
Shree Cement **
26.6
29.5
SELL
593
8,901
3.4
20.4 16.4
44
32 21,420 19,314
26
43 74
20
23
Ambuja
31.7
32.7
BUY
487
7,317 10.3
16.9 12.6
39
28 10,181
9,860
27 29
ACC
34.1
34.1
BUY
284
4,265
7.8
14.0 10.2
30
20
8,186
7,946
32 39
11
15
Ramco Cements **
13.5
13.5
UR
147
2,209
1.9
14.1 12.0
29
22
9,787
9,787
13
13 10
15
17
27
17
Orient Cement
8.0
8.0
BUY
35
527
0.7
12.2
7.2
42
14
5,779
5,779
33
87 102
21
30
25.0
25.0
BUY
182
2,708
2.0
13.1 10.7
42
25
9,615
9,615
17
19 88
10
15
72
46
UltraTech
69.6
69.6
SELL 1,090 16,365 13.9
19.2 15.4
35
27 15,748 15,748
15
22 35
14
16
13
11
Shree Cement **
26.6
29.5
SELL
593
8,901
21.5 17.4
36
29 22,405 20,202
21
43 92
23
23
Large cap
Grasim^
3.4
NA
NA
NR
430
6,403 10.6
5.4
13
11
11
20 30
12
13
13
11
Ambuja*
31.7
32.7
BUY
487
7,317 10.3
21.5 16.3
6.5
34
26 13,797 13,374
14
31 34
10
12
ACC*
34.1
34.1
BUY
284
4,265
7.8
17.6 13.0
37
25
7,912
16 38
12
Ramco Cements **
13.5
13.5
SELL
148
2,209
1.9
14.0 12.4
24
20 12,445 12,445
12
11 15
18
19
27
17
Dalmia Bharat #@
25.0
25.0
NR
182
2,708
2.0
12.4 10.7
Century Tex#
12.8
12.8
NR
110
1,644 15.1
8.0
8.0
NR
52
771
JK Cement
10.8
10.8
NR
64
Jk Lakshmi Cement
11.0
11.0
NR
55
10.5
10.5
NR
6.7
6.7
7,912
Mid cap
Prism Cement #
46
9,545
16
19 70
13
72
46
NA 11,668 11,668
NA
NA NA
NA
74
78
37
16
8,957
8,957
12
43 NA
12
24
89
79
10
29
16
8,485
8,485
15
31 149
12
19
47
52
9.2
42
18
6,230
6,230
23
65 NA
18
26
71
8.3
19
14
5,417
5,417
16
55 64
11
13
26
29
8.1
7.3
16
14
7,733
7,733
11 29
20
20
21
25
16.1
NA
148
0.7
12.7
9.0
959
0.5
12.8
825
0.9
13.4
61
904
1.3
11.0
NR
54
808
0.4
30
9,545
Small Cap
Birla Corp #
OCL India
Orient Cement
8.0
8.0
BUY
35
527
0.7
14.4
8.7
40
15
5,942
5,942
30
73 95
19
30
India Cements
18.5
18.5
NR
48
720
9.7
8.2
7.2
19
13
4,333
4,333
12
13 63
10
62
48
Heidelberg India
6.0
6.0
NR
31
467
0.6
11.9
9.3
30
17
6,416
6,416
12
28 115
11
16
43
46
Mangalam Cement
3.5
3.5
NR
130
0.4
8.6
6.6
15
10
3,392
3,392
18
103 NA
10
14
42
97
Sagar Cement
3.5
3.5
NR
13
188
0.3
7.8
6.9
25
10
4,092
4,092
32
47 61
17
41
29
November 09, 2016
Page 36
UltraTech
SELL
UTCEM IN EQUITY
November 09, 2016
Even hope doesnt last forever
Cement
Another round of earnings downgrades?

UTCEMs FY17 and FY18 EBITDA have been downgraded by 15% in the last one
year. In our estimates, we build in an 6%/9% volume growth in FY17/ FY18, 6%
pricing growth and 4% cost increase in FY18; our estimate imply 25% EBITDA
CAGR over FY16-18, -5% over FY13-16. Our estimates already build in most of
the demand pricing positives and we see little scope for upgrades. expectations.
Catalyst
Volume growth to track market

volume growth of 6%/9% in FY17/18
Rising P&F costs eating into benefits

of pricing from 4QFY17
Performance (%)
160
140
120
100
SENSEX
UTCEM
Source: Bloomberg, Ambit Capital Research
Too much price to pay for not having enough options

UltraTechs valuation has remained elevated due to the TINA rhetoric, since no
other company is considered credible enough to play infrastructure/capex
recovery in India. Justifying a meaningful investment return will require building
in unrealistic long-term growth assumptions (we already build in 17% CAGR over
FY18-28) for our implied valuation of 12x FY19 EV/EBITDA.
FY14
FY15
FY16
FY17E
FY18E
FY19E
202,798
229,362
241,074
251,757
290,809
345,162
38,179
41,950
46,178
55,539
67,949
85,235
EBITDA margin (%)
18.8
18.3
19.2
22.1
23.4
24.7
EPS (`)
78.2
73.4
79.3
101.3
136.6
183.7
RoCE
10.1
9.1
8.3
10.0
11.9
14.2
RoIC
14.5
11.3
9.7
11.5
13.9
16.4
EV / EBITDA (x)
28.6
26.6
23.6
19.6
16.0
12.8
Operating Income (` mn)

EBITDA (` mn)
Nitin Bhasin
+91 22 3043 3241
Key financials
Y/E Dec (` mn)
Research Analysts
nitinbhasin@ambit.co
Achint Bhagat, CFA
+91 22 3043 3178
achintbhagat@ambit.co
Parita Ashar, CFA
+91 22 3043 3223

Nov-16
80
Sep-16
Whilst cement prices have improved in YTDFY17 and we expect pricing growth to
sustain, sharp increase in petcoke costs will wipe out ~`180 of EBITDA/tonne
from 4QFY17 onwards. UTCEMs aggressive expansions/acquisitions have
resulted in a sharp increase in the companys capital employed (CE/tonne:
`5,500 in FY18), which will keep RoCEs lower at 15% compared to other panIndia manufacturers till FY20; we assume 90% utilisation by FY20 for the group.
GREEN
AMBER
RED
Aug-16
Limited levers to unitary EBITDA and RoCE expansion
Accounting:
Predictability:
Earnings Momentum:
Jun-16
Cement demand growth rate in India continues to disappoint (4% in 1HFY17).

Despite having access to large unutilized capacities (75% utilisation in FY16),
UltraTech failed to gain market share. Over FY12-16 its volume CAGR of 5%
tracked industry. In 1Q/2QFY17, UTCEM posted volume growth of 6%/1%, as
against industry growth of 5.6%/3.7%, indicating market share loss to support
pricing in weak market. Market share loss could be on account of: (a) ensuring
industry stability as it takes on Jaypee capacities and pushes for higher utilisation
in FY18, and (b) lack of cost advantage for competing more effectively.
Flags
May-16
Demand growth falters; UTCEM unlikely to gain market share
`1,073/US$16.1
`924.1/US$13.9
`3,958
`3,972
0%
Mar-16
Changes to this position: STABLE
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Feb-16
Competitive position: STRONG
Recommendation
Dec-15
The never ending hope of a cement demand recovery has led to

continuous re-rating of UTCEM, despite 20-30% EBIDTA miss in each of
the last four years. Failure to gain market share amid continued demand
growth challenges (~5% in FY17) will keep volume growth muted (6-9%
in over FY17/18); onus to maintain pricing discipline will mean UTCEM at
best can track market volumes unless India grows beyond 10%. Sharp
increase in P&F costs will dilute benefits of pricing by ~`180/t in FY18
(4% overall cost impact in FY18). Moreover, UTCEMs CE/t is one of the
highest in the industry (`5,500) and its consolidated RoCE will remain
sub-15% till FY20. Stock trades at 16x one-yr forward EBITDA, a 40%
premium to its five year average leaving little room for positive earnings
surprise Our TP implies 12x FY19 EBITDA.
Nov-15
CHANGE IN STANCE
Is scale enough?
UltraTechs scale leadership is yet to reflect in its financial performance as
despite significantly increasing its installed capacities (to 68mn tonnes in
FY16 as against 52mn tonnes in FY13), the company has managed to only
marginally improve its market share (to 16.7% in 1HFY17 as against 16.2%
in FY13). The company does not display variable cost efficiencies of the
industry leader and its fixed costs (as a% of sales) have remained constant
leaving little hope and scope of operating leverage playing out. A large
proportion of cost savings in the last one year was driven by reduction in
petcoke prices and increasing use of petcoke in the fuel mix. Now, we believe
these benefits will start to wane from 4QFY17, given the sharp increase in
petcoke prices in the last six months.
No major market share gains

UltraTechs volume growth has only been marginally better than the industry growth
rate of 4-6% over the last four years, despite a 35% increase in its installed capacity
(against 20% increase in installed capacity of the industry). Given that the smaller
players have also significantly increased their capacities, we do not think that
UltraTech will be significantly able to increase its market share over the next few UltraTech has failed to improve
years and hence its volume growth will remain in the range of 5-9% over FY17-18 market share materially, despite
(similar to industry growth rates). Any material change in costs structure can help it in continuous capacity additions
gain material market share as it brings Jaypee capacities on line.
Exhibit 1: No major increase in market share
10.0%
17.5%
8.0%
17.0%
6.0%
16.5%
4.0%
16.0%
2.0%
0.0%
15.5%
FY13
FY14
UTCEM
FY15
Industry
FY16
1HFY17
Market share (RHS)
November 09, 2016
Page 38
Cost benefits are behind

Sharp decline in petcoke price was one of the main reasons for the cost savings for
UltraTech. Overall costs for the company declined by 4% in FY16 on account of 17%
decline in power and fuel costs. Given the steep rise in petcoke prices, we expect a
`180/tonne increase in power and fuel costs in FY18. Hence, we do not see any
scope of a sharp reduction in operating costs for the company. We build in a 4%
increase in operating costs.
Exhibit 2: Costs likely to increase
Exhibit 3: due to sharp increase in p&f costs/tonne

(`/tonne)
1,100
1,050
1,000
950
900
850
800
750
700
(`/tonne)
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
4,300
4,200
4,100
4,000
3,900
3,800
3,700
3,600
FY13
FY14
FY15
Costs/tonne
Increase in petcoke costs will wipe

out `180 of power and fuel cost
savings
15%
10%
5%
0%
-5%
-10%
-15%
-20%
FY13
FY16 FY17E FY18E

Costs growth (RHS)
FY14
FY15
FY16 FY17E FY18E
P&F/tonne
P&F growth (RHS)
Not a great play on the OL/FL theme

UltraTech ranks ninth on our framework mentioned in the thematic section, since,
Limited scope to play operating and financial leverage: we do not expect
UTCEMs volume growth to be significantly higher than the industry growth rate and
hence there is little scope of playing operating leverage. Note that the companys
fixed costs as a % of sales are already fairly low (12.5% of sales in FY16 as against
industry average of 17%), hence margin expansion through better fixed cost recovery
is limited. Even after acquisition of Jaypees assets, the companys peak net
Debt/Equity is likely to be a marginal 0.6x and hence there is limited scope of an EV
shift from debt to equity, as and when the super-cycle plays out.
Not the most cost efficient: UltraTechs cement manufacturing cost is higher than
several regional players and pan-India peers such Ambuja. In our view, low cost
production aids market share gains (Shree being a prime example) as the
manufacturers can out-price peers.
Exhibit 4: UTCEMs variable costs are higher than regional peers
RM Cost
per tonne
P&F cost
per tonne
India
779
JK Cement
983
ACC
771
1,004
1,142
367
3,284
2,142
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
Jk Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
Dalmia Bharat
888
649
767
325
2,630
1,863
Orient
473
902
722
133
2,230
1,508
Shree
563
531
574
431
2,099
1,525
Company
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
1,088
906
1,146
3,920
3,014
1,078
1,087
547
3,694
2,607
November 09, 2016
Page 39
Financial assumptions
Volumes: We build in 6% volume growth in FY17, assuming that the company grows
in line with the industry. For FY18, we expect the company to grow 100bps higher
than the industry and build in 9% volume growth.
Assumptions for Jaypee assets: We assume a 60%/68% utilisation level for
Jaypees assets in FY18/FY19
We have assumed the best case both for volumes and realization and see little scope
for any upgrades.
Realisation: We build in a marginal realization growth in FY17 (+2%) but build in
strong growth in FY18 (+6%), since the companies are now more focused on holding
on to the price hikes, given no major new capacity additions.
Costs: Whilst sharp reduction in power and fuel costs in 1HFY17, will result in a 5%
YoY decline in overall costs in FY17 a sharp increase in FY18 will lead to a unitary
cost increase of 4%.
Unitary EBITDA and RoCE: Higher realization will lead to unitary EBITDA increasing
to `1,243 in FY18 as against `1,082 in FY17. Our estimates imply 14% unitary
EBITDA and 25% EBITDA CAGR over FY16-19. Pre-tax RoCE is likely to increase to
21% in FY19 as against 11% in FY17.
We assume `700/`1,000 unitary EBITDA for Jaypees assets in FY18/FY19.
Exhibit 5: Standalone financial assumptions for UltraTech (ex-Jaypee)
Key assumptions (Standalone)
Actuals
Assumptions
Growth (%)
FY15
FY16
FY17E
FY18E
FY14
FY15
FY16
FY17E
FY18E
44.9
48.3
51.3
55.9
2.7
8.8
7.6
6.3
9.0
75
75
76
80
(407)
25
15
56
446
Realisation*
5,047
4,936
4,873
5,167
(1)
(2)
(1)
Operating Costs*
4,199
4,035
3,845
3,984
(4)
(5)
910
956
1,082
1,243
(20)
(2)
13
15
229,362
241,074
252,858
292,365
13
16
Operational parameters* (mn tonnes unless

specified)
Grey Cement sales
Capacity utilisation (%)
Per tonne analysis (`)
EBITDA*
Financials (` mn unless specified)
Net revenues
EBITDA
41,950
46,178
55,539
69,505
(18)
10
10
20
25
EBITDA margin (%)
18.3
19.2
22.0
23.8
(439)
(54)
87
281
181
EBIT margin (%)
13.3
13.8
16.3
18.8
(485)
(29)
46
252
247
28,863
30,587
39,155
54,339
(27)
28
39
12.6
12.7
15.5
18.6
(528)
(110)
10
280
310
20,147
21,764
27,800
38,581
(19)
(6)
28
39
8.8
9.0
11.0
13.2
(259)
(179)
24
197
220
73.4
79.3
101.3
140.6
(19)
(6)
28
39
RoCE (%)
9.1
8.3
10.0
12.2
(342)
(106)
(75)
165
219
ROIC (%)
11.2
9.5
11.4
14.1
(725)
(195)
(165)
184
271
0.9
0.9
0.9
0.9
(23)
(13)
(9)
CFO
40,829
43,323
39,550
52,339
(9)
26
(9)
32
Capex
25,679
20,359
6,913
7,052
(32)
16
(21)
(66)
FCF
15,151
22,965
32,637
45,288
235
48
52
42
39
Adjusted PBT
Adjuste PBT margin (%)
Adjuste PAT
Adjuste PAT margin (%)
EPS (`)
Ratios
CE Turnover (X)
Cash flows
November 09, 2016
Page 40
Exhibit 6: Implications of the assumptions

Particulars
EBITDA
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
42,207
46,845
38,179
40,850
46,179
55,539
69,505
89,523
CAGR/Avg
FY12-15 FY15-18
2%
25%
Unitary EBITDA
1,036
1,152
925
910
956
1,082
1,243
1,429
-2%
14%
RoIC (Pre-tax)
28.1%
29.1%
18.8%
16.0%
13.6%
16.3%
20.1%
24.3%
21.1%
18.6%
RoCE (Pre-tax)
20.5%
19.5%
13.1%
12.8%
11.7%
14.1%
17.2%
21.0%
16%
16%
Exhibit 7: Summary of our assumptions for Jaypee

Particulars
Assumptions
FY18
FY19
FY20
FY19
FY20
11.6
13.3
15.3
15%
15%
47,747
58,203
70,280
22%
21%
700
1,000
1,300
43%
30%
Volume
Sales
EBITDA/tonne
EBITDA
Growth
8,114
13,331
19,930
64%
50%
Pre-tax RoCE
(0)
299
398
Post-Tax RoCE
11
16
19
451
348
Ambit vs consensus
Exhibit 8: Our estimates are lower than consensus
Consensus
Ambit
Divergence
FY17
265,851
252,858
-5%
FY18
315,413
292,365
-7%
FY17
56,965
55,539
-3%
FY18
71,294
69,505
-3%
FY17
31,197
27,800
-11%
FY18
39,805
38,581
-3%
Revenue (` mn)
EBITDA (` mn)
PAT (` mn)
Comments
Our estimates are lower than consensus as we expect
weak volumes and no major market share gains
Our EBITDA estimates are lower than consensus due to

building in sharp increase in power and fuel costs
Lower EBITDA leads to our PAT being lower-thanconsensus in FY17
Exhibit 9: Our estimates of the next two quarters assumes best case for the company
Particulars
Actuals (`/tonne)
YoY Change
1QFY17
2QFY17
3QFY17E
4QFY17E
1QFY17
2QFY17
3QFY17E
4QFY17E
12.9
11.18
12.571
14.66802
6%
1%
7%
8%
Realisation
4,793
4,828
4,828
4,925
-2%
-3%
-1%
4%
Realisation ex freight
Total Sales (Mn MT)
3,595
3,688
3,688
3,784
-1%
-2%
0%
7%
Raw materials
687
709
695
750
-3%
-9%
-6%
6%
RM consumed
758
665
695
750
-2%
-8%
2%
2%
89
106
108
110
6%
12%
17%
21%
269
320
309
260
4%
4%
4%
4%
Purch of Trdd Goods

Employee cost
Power& Fuel
Freight & Selling Exp
Other Expenses
EBITDA/tonne
716
787
810
875
-21%
-18%
-11%
17%
1,198
1,140
1,140
1,140
-6%
-6%
-4%
-5%
699
832
791
725
0%
-3%
-5%
-5%
1,103
1,033
1,046
1,133
16%
17%
9%
14%
November 09, 2016
Page 41
UltraTech is for passive investors

When all think alike, then no one is thinking
Walter Lippman
UltraTechs reputation of being the proxy play to the cyclical cement demand recovery
has meant that valuation has had little meaning in the last three years and
irrespective of earnings disappointments, its valuation continued to expand. Given
that demand recovery appears further delayed and cost savings will peter out due to
the increase the petcoke prices, we see little room for positive earnings surprise for
the next few quarters. Moreover, the stock trades at a 15x FY18 EBITDA at a 30%
premium to its 5-yr average, which we find difficult to justify. We downgrade the
stock to SELL. We do not think that in a market growing at 5-6% the company can
grow materially ahead of the market and also enjoy pricing growth; we expect the
company to at best grow in line with the industry (or even behind) to support pricing.
On EV/tonne (ex-Jaypees plants), the stock trades at US$240/tonne a 70%
premium to replacement costs and five year average, which again appears to
expensive to generate investment returns.
Lastly, unlike the mid-cap players, we do not see a significant scope of operating or
financial leverage playing out for the company and paying expensive valuations just
to play volume growth, is not a good enough reason to BUY the stock
Exhibit 10: UTCEM is trading at a 40% premium to crosscycle average valuations
Exhibit 11: UTCEM is trading at US$240/tonne, a 70%

premium on replacement costs
(X)
(USD)
20
230
16
200
12
170
140
110
80
Average EV/EBITDA
EV/Tonne
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Apr-10
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
EV/EBITDA
Oct-10
50
Average EV/EBITDA
Exhibit 12: EBITDA estimates have been cut marginally in YTD FY17
EBITDA (` mn)
60,000
74,000
73,500
73,000
72,500
72,000
71,500
71,000
70,500
70,000
59,000
58,000
57,000
56,000
FY17
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
55,000
FY18 (RHS)
November 09, 2016
Page 42
The table below exhibits that to justify a 10-20% upside from current valuations,
requires investors to exit the stock one year out at 13-14.5x FY19 EBITDA, on EBITDA
estimates that builds in most of the positives, which is not a highly probabilistic
outcome.
Exhibit 13: Expensive implied multiples to justify any meaningful upside
Target Mutiple (X)
Based on FY19 EBITDA and FY18 net

debt
11.0
Target price
3,526
Multiple premium to 5-yr avearge (10.5.0x)

Upside/Downside (%)
11.5
3,682
12.0
3,837
12.5
3,993
13.0
4,148
14.5
4,615
4.8%
9.5%
14.3%
19.0%
23.8%
38.1%
-8.1%
-4.1%
0.0%
4.1%
8.1%
20.3%
Catalysts
Volume growth tracking industry: Investors accept UltraTech to significantly
outpace the industry volume growth and hence ascribe a high multiple. As volume
growth continues to mirror the industry, the valuation premium to play the superlative
volume growth will wane
Rising fuel costs: Sharp rise in petcoke costs will start showing in costs from 4QFY17
onwards, thereby leading to a `150/tonne increase in power and fuel costs. Increase
in fuel costs will eat into majority of the benefits of improved pricing.
Potential Catalysts
These are events which we do not build in our estimates, however if they were to play
out the stock could de-rate materially
Continued demand adversity and further earnings cuts: We build in a 9%
volume growth for UltraTech in FY18 assuming industry demand growth of 8%.
Continued demand adversity could mean that the growth rate in FY18 is lower than
our expectations, thereby resulting in earnings downgrades. Given the expensive
valuations, another year of earning downgrades could lead to de-rating of UTCEMs
rich multiples
Re-investments over and above the Jaypee capacity: We build in no major reinvestments for the next 5 years, barring for the Jaypee capacity. If UltraTech were to
invest further for expansion, irrespective of the demand scenario, it will suppress
RoCE and lead to a de-rating.
Risks
Improved pricing discipline: Whilst prices have improved in recent quarters and
we build in a 6% improvement in FY18 as well, if pricing grows sharper than
expected, it will lead to significant upgrades to our EBITDA estimates.
Exhibit 14: Explanation for the accounting flags
Segment
Score
Comments
Accounting
GREEN
The companys cash conversion cycle is top notch (100% CFO/EBITDA) and we do not note any instance of
cash pilferage or window dressing. This is a common trait in all Indian cement companies
Predictability
AMBER
Predictability of UltraTech is better than Ambuja/ACC and has improved since the management has become
more transparent in recent years and improved the quality of non-financial disclosures
Earnings momentum
RED
Consensus EBITDA estimates for FY18 have been cut by 30% in the last one year given weak pricing
November 09, 2016
Page 43
Exhibit 15: Forensic Score Evolution
Source: Ambit Capital research, Company
November 09, 2016
Exhibit 16: Greatness Score Evolution
Source: Ambit Capital research, Company
Page 44
Balance sheet
Particulars
Share capital
FY15
FY16
FY17E
FY18E
FY19E
2,744
2,744
2,742
2,742
2,742
Reserves and surplus
185,833
204,617
227,641
258,673
300,402
Total Networth
188,577
207,361
230,383
261,415
303,145
74,142
76,607
73,607
68,607
63,607
Loans
Deferred tax liability (net)
27,920
32,274
32,274
32,274
32,274
Sources of funds
290,639
316,241
336,263
362,295
399,025
Net block
209,475
225,327
217,999
210,524
202,900
Capital work-in-progress
20,737
14,156
14,156
14,156
14,156
Investments
52,088
51,081
68,099
68,099
68,099
Cash and bank balances
2,139
22,352
28,141
60,087
103,120
Sundry debtors
12,032
14,149
10,346
11,951
14,185
Inventories
27,514
24,261
27,590
31,869
37,826
Loans and advances
28,005
26,760
27,590
31,869
36,880
Other current assets
160
435
81
94
112
Total Current Assets
69,851
87,957
93,748
135,871
192,123
Current Liabilities
48,481
51,013
44,833
51,788
61,467
Provisions
13,030
11,267
12,905
14,566
16,785
Current liabilities and provisions
61,511
62,280
57,738
66,354
78,252
8,340
25,677
36,010
69,517
113,871
290,639
316,241
336,263
362,295
399,025
FY15
FY16
FY17E
FY18E
FY19E
229,362
241,074
251,757
290,809
345,162
Net current assets

Application of funds
Income statement
Particulars
Revenue
yoy growth
13%
5%
4%
16%
19%
187,411
194,895
196,219
222,860
55,530
41,950
46,178
55,539
67,949
85,235
10%
10%
20%
22%
25%
Net depreciation / amortisation
11,331
12,890
14,241
14,526
14,817
EBIT
30,619
33,288
41,297
53,422
70,418
5,475
5,053
6,760
5,689
5,289
Total expenses
EBITDA
yoy growth
Net interest and financial charges

Other income
PBT
Provision for taxation
Adjusted PAT
yoy growth
Reported PAT
3,718
2,352
4,617
5,040
5,836
28,863
30,587
39,155
52,774
70,966
8,715
8,823
11,355
15,304
20,580
20,147
21,764
27,800
37,469
50,386
-6%
8%
28%
35%
34%
20,147
21,764
27,800
37,469
50,386
EPS diluted (`)
73.4
79.3
101.3
136.6
183.7
DPS (`)
11.0
11.9
15.2
20.5
27.6
November 09, 2016
Page 45
Cash Flow statement

Particulars
PBT
FY15
FY16
FY17E
FY18E
FY19E
28,863
30,587
39,155
52,774
70,966
Depreciation
11,331
12,890
14,241
14,526
14,817
Others
(3,444)
(2,047)
(4,617)
(5,040)
(5,836)
5,475
5,053
6,760
5,689
5,289
CFO before change in WC
42,224
46,483
55,539
67,949
85,235
Change in working capital
91
5,195
(6,182)
(3,222)
(3,539)
Interest paid (net)
Direct taxes paid
(1,486)
(8,355)
(11,355)
(15,304)
(20,580)
CFO
40,829
43,323
39,640
51,083
63,335
(25,679)
(20,359)
(6,913)
(7,052)
(7,193)
Net investments
2,268
(17,017)
Interest received
582
4,617
5,040
5,836
(18,797)
(17,323)
(19,313)
(2,012)
(1,357)
22,162
2,465
(3,000)
(5,000)
(5,000)
16
27
(2)
Interest & finance charges paid
(5,495)
(5,388)
(6,760)
(5,689)
(5,289)
Dividends paid
(2,880)
(2,926)
(4,776)
(6,437)
(8,656)
(22,668)
(5,822)
(14,538)
(17,126)
(18,945)
(636)
20,178
5,789
31,946
43,033
15,151
22,965
32,727
44,032
56,142
Net capex
CFI
Proceeds from borrowings
Change in share capital
CFF
Net increase in cash
FCF
Opening cash balance
2,775
663
22,352
28,141
60,087
Closing cash balance
2,139
20,841
28,141
60,087
103,120
Year to March
FY15
FY16
FY17E
FY18E
FY19E
Revenue growth
13.1
5.1
4.4
15.5
18.7
EBITDA growth
9.9
10.1
20.3
22.3
25.4
PAT growth
(6.0)
8.0
27.7
34.8
34.5
EPS norm (dil) growth
(6.0)
8.0
27.7
34.8
34.5
EBITDA margin
18.3
19.2
22.1
23.4
24.7
EBIT margin
13.3
13.8
16.4
18.4
20.4
Net margin
8.8
9.0
11.0
12.9
14.6
RoCE
9.1
8.3
10.0
11.9
14.2
RoIC
11.3
9.7
11.5
13.9
16.4
RoE
11.2
11.0
12.7
15.2
17.8
Valuation metrics
FY15
FY16
FY17E
FY18E
FY19E
P/E (x)
53.6
49.7
38.9
28.8
21.5
P/B(x)
5.7
5.2
4.7
4.1
3.6
Debt/Equity(x)
0.4
0.4
0.3
0.3
0.2
Net debt/Equity(x)
0.2
0.2
0.0
(0.1)
(0.3)
EV/Sales(x)
4.9
4.5
4.3
3.7
3.2
Ratio Analysis
Valuation Parameter
EV/EBITDA(x)
EV/tonne(`)
26.6
23.6
19.6
16.0
12.8
17,815
16,606
15,651
15,651
15,651
November 09, 2016
Page 46
Shree Cement
SELL
SRCM IN EQUITY
November 09, 2016
Can the champion keep at it?
Cement
Shree surprisingly replicated in East India the levels of efficiency and

profitability it enjoys in the North. However, the pace of expansion is
more surprising (40mn tonnes in FY20E from 25mn in FY16); its low-cost
focus continues to support industry leading volume growth (22% in FY16)
and market share gains. Whilst we got the stock call wrong, justifying
upsides on current valuations (16.5x FY18E EBITDA; US$275/t) imply 25%
CFO CAGR over the next decade, a tall task. As Shree becomes a national
player using its seemingly unlimited reinvestment capabilities, it cannot
defy industry limitations; we estimate 75mn tonnes by FY28 and 95%
utilisation. We model an extremely bullish 20% CFO CAGR over FY18-28,
similar to FY06-16, leaving little scope for positive surprises. We
downgrade FY17/18 estimates for weak volumes and rising fuel cost but
upgrade TP by 34% to `17,231 (12.5x FY19E EBITDA).
Changes to this position: POSITIVE
Shree has set the bar high

After establishing leadership in North India, Shree created a strong franchise in
East and achieved lowest cost for capacity creation (<US$100/tonne) and
production within two years. It will continue to add brownfield/greenfield
capacity with its strong CFO (FY17-20: `132bn) and expand regional presence.
Management clearly communicates and delivers on capital allocation/efficiencies
promises, a trait uncommon amongst Indian cement companies.
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`591/US$8.9
`223.9/US$3.4
`17,050
`17,231
1%
Flags
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
GREEN
Catalyst
Demand
weakness
leading
to
downgrades to volume growth
assumptions in FY18
Rising costs diluting unitary EBITDA
from 4QFY17 onwards
Performance (%)
160
Downgrading estimates to account for rising costs

Strong pricing and low-cost petcoke led sharp increase in unitary EBITDA (`1,286
in 1HFY17 vs `755 in 1HFY16). However, weak demand, sharp increase in
petcoke price and significant drop in merchant power tariffs will impact EBITDA
by 5%/6% in FY17/FY18. Assuming a quick ramp-up of upcoming capacities, we
build in a strong 18%/40% EBITDA/unitary EBITDA CAGR over FY15-18 and 23%
RoCE in FY18 (one of the highest in the cement industry)
140
120
100
SENSEX
SRCM
Can it beat the strongest consumer franchises?

Justifying a meaningful upside requires us to build in unrealistically high growth
assumptions, which neither Shree nor legendary consumer names like Asian
Paints and Pidilite managed to achieve in the last decade. Cements capital
intensity and limited pricing power should be compared to consumer brands with
pricing power and brand flanking possibilities. Volume growth is a key risk but
that can create excess capacities, a typical commodity characteristic.
Key financials
Year to March
Net Revenues (` mn)
Operating Profits (` mn)
Net Profits (` mn)
Diluted EPS (`)
RoE (%)
P/E (x)
EV/EBITDA (x)
Research Analysts
FY15
64,536
13,439
4,618
132.6
9.2
128.6
42.9
FY16
55,678
13,203
4,572
131.2
8.0
129.9
43.2
FY17E
92,188
27,954
13,429
385.5
20.0
44.2
20.4
FY18E
115,839
34,770
18,434
529.1
23.2
32.2
16.4
FY19E
137,933
44,485
23,534
675.5
24.7
25.2
12.4
Nitin Bhasin
+91 22 3043 3241
Achint Bhagat, CFA
+91 22 3043 3178

Nov-16
Sep-16
Aug-16
Jun-16
May-16
80
Mar-16
With rising scale/regional exposure, Shree will start finding it difficult to sustain
capacity addition more than the industrys volume growth (8% CAGR over next
decade); we are still building in 10% for Shree. Its low capacity cost advantage
could reduce with rising cost of procuring limestone and limited distress
inorganic opportunities. Whilst efficiency focus will help Shree gain market share
as institutional demand mix increases (infra demand), it will be at the cost of
EBITDA/tonne which is an imminent risk for the industry.
Feb-16
but how long can Shree keep at it?
Dec-15
Competitive position: STRONG
Recommendation
Nov-15
CHANGE IN STANCE
Shree Cement
Setting and sustaining high standards

Shree Cement has set industry standards in capacity expansion, volume
growth, and cost/capital efficiencies and, hence, has consistently been the
most profitable cement company in India. After establishing supremacy in
North India, it managed to replicate the same level of efficiency in East India,
establishing itself as the market leader in Bihar and a close No2 in
Chhattisgarh within a year and a half of launch. Moreover, it has no plans of
slowing down expansion and, based on our recent interaction, management
will increase installed capacity to 40mn tonnes by FY20 from 25mn tonnes in
FY16. Whilst there is no denying the quality of Shrees franchise, the key
question is that as the company gains scale and expands its regional
presence it will be difficult to grow significantly ahead of the industry whilst
maintaining profitability.
Expansion ahead of industry

Shrees capacity addition rate was almost double the rate of the industry over FY1016 12% CAGR vs 6% for the industry. Moreover, we believe the companys capacity
addition will remain significantly higher than the industry over FY16-20; we expect
13% CAGR for Shree vs a marginal 2% for the industry. We believe Shree will account
for ~35% of overall capacity addition of the industry over FY16-20.
Shree will account for ~35% of the

overall capacity addition of the
industry over FY16-20
Exhibit 1: Shree has consistently added capacity ahead of industry

(mn tonnes)
50
50%
40
35.5
30
24
21.5
20
12
13.5
13.5
26.6
39.5
29.5
30%
20%
15.5
13.5
40%
10%
10
0%
0
FY10
FY11
FY12
FY13
Capacity
(LHS)FY14
FY15
FY16
FY17E
FY18EGrowth
FY19E FY20E
SRCM
capacity
Industry capacity growth

Exhibit 2: The company has consistently reinvested in expansion

(` mn)
140%
40,000
120%
30,000
100%
20,000
80%
10,000
60%
40%
0
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
-10,000
20%
0%
CFO
FCF
Capex as a % of CFO (RHS)
November 09, 2016
Page 48
Shree Cement
Regional expansion and market share gains

Shrees expanded its presence in East India and ramped up market share in the first
few years of having established presence in the region. Its market share increased to
7.5% in FY16 as against 5% in FY12 and will further increase to 10% by FY19 helped
by its upcoming capacities. Based on our assumptions, Shree will become the third
largest cement group in India by FY19 (after UTCEM and Holcim group companies).
Exhibit 3: By FY19, Shrees market share is likely to double FY12 levels
(mn tonnes)
40
10.0%
9.0%
30
8.0%
20
7.0%
6.0%
10
5.0%
4.0%
FY12
FY13
FY14
FY15
FY16
Volumes
FY17E
FY18E
FY19E
Market share (RHS)
Sustaining cost efficiencies

Shree has sustained industry leading cost efficiency by controlling variable costs,
including:
1. Power and fuel usage of petcoke (and locking in low-cost forward rate
agreements), maintaining efficiency in unitary power consumption and usage of
waste heat recovery systems to further lower overall cost; and
2. Freight costs controlling lead distance by split grinding stations located close to
target markets, reverse auctions for road transportation, etc. Overall cost is ~25%
lower than the industry average, which helps the company consistently operate at
high utilisation rates as it can undercut peers.
-20%
-25%
1,000
-30%
-35%
FY13
FY14
FY15
Costs/tonne (Shree)
FY16
Costs/tonne industry
Shree Utilisation
Vs industry average (RHS)

FY19E
2,000
FY18E
-15%
FY17E
-10%
3,000
FY16
-5%
4,000
100%
95%
90%
85%
80%
75%
70%
65%
60%
FY15
0%
FY14
5,000
FY13
(`/tonne)
Exhibit 5: Low-cost advantage helps Shree sustain

industry leading utilisation levels
FY12
Exhibit 4: Shrees costs are ~25% lower than the industry

average
Industry utilisation
We ascertain the efficiency of Indian cement companies based on the variable costs
incurred per tonne and changes in the same over the last five years. Unsurprisingly,
Shree trumps peers both in terms of VC/tonne and the change over the last few
years. Orient Cement and Dalmia Bharat fare reasonably well on the framework.
Amongst the pan-India players, Ambuja ranks the best followed by UltraTech. ACC
ranks poorly due to high costs and no major cost reductions in the last few years.
November 09, 2016
Page 49
Shree Cement
Exhibit 6: Shree ranks the best on our efficiency framework
VC/tonne
(FY16)
Rank
on VC/tonne
VC/tonne
FY11-16 CAGR
Rank on VC/
tonne CAGR
Overall
Rank
Shree
2,099
-7%
Orient
2,230
-1%
Dalmia Bharat
2,630
-1%
Ramco
2,808
2%
Jk Lakshmi
2,814
2%
Ambuja
2,837
3%
UltraTech
3,227
3%
ACC
3,284
5%
ICEM
3,920
10
3%
JK Cement
3,694
5%
10
10
Company
Exhibit 7: Variable cost split for the ranking above (FY16)

RM Cost
per tonne
P&F cost
per tonne
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
ACC
771
1,004
1,142
367
3,284
2,142
Shree
563
531
574
431
2,099
1,525
Dalmia Bharat
888
649
767
325
2,630
1,863
Jk Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
JK Cement
983
1,078
1,087
547
3,694
2,607
Orient
473
902
722
133
2,230
1,508
India
779
1,088
906
1,146
3,920
3,014
Company
Capital efficiency helps sustain high RoCE

In the table below, note that Shrees unitary cost of capacity addition (determined by
sum of capex/installed capacities) is one of the lowest in the industry, which helps it
sustain industry leading RoCE (discussed in detail in a later section).
Exhibit 8: Shrees capacity addition costs are the lowest in the Industry
Capacity Addition (mn
tonnes)
Weights
(1)
(2)
Particulars
Integrated
Shree
9.0
Managalam
JK Lakshmi
ACC
Grinding Integrated
Wtd.
Capacity
addition
Grinding
(1) X (2)
9.5
0.3
11.9
1.5
0.3
4.0
1.3
0.3
Combined Wtd Cost

Cost
per tonne
(` mn)
(FY05-16
(` mn)
70,304
5,933
1.5
9,450
6,300
4.4
30,427
6,931
9.5
0.8
0.3
9.7
69,277
7,131
10.7
3.4
0.3
11.7
87,051
7,437
JK Cement
3.5
2.0
0.3
4.1
35,825
8,695
UltraTech
16.0
10.4
0.3
19.1
166,632
8,715
6.0
3.0
0.3
6.9
63,710
9,233
ACEM
Ramco
Source: Company, Ambit Capital research. We assume 0.3 weight for grinding units, since the cost of a grinding
unit is ~30% of the cost of an integrated cement plant
November 09, 2016
Page 50
Shree Cement
Effective communication
Shree has a track record of printing what, in our opinion, is the best annual report in
the Indian cement sector. In its FY16 annual report (https://goo.gl/EeRiTt), Shree
Cement follows its tradition of detailing how it is building competitive advantages,
focusing on core strengths, and maintaining a strict discipline financially.
The annual report is a 231 page document, which starts with exhaustive
commentary from top management (Chairman, Managing Director, Joint
Managing Director, President (Marketing), and President (Works)). We do not
normally see such extensive communication from a companys leadership in
annual reports since in most Indian companies the Chairman/MD/CEO hogs
most of the attention.
The annual report has a theme, Less is more. The companys corporate
philosophy is explained in detail (pages 10 and 11) and more than 40 pages
(pages 20-62) emphasising Shree Cements strategy on specific areas of
conservation, efficiency, innovation, marketing, finance, human resources and
CSR.
We reproduce extracts from the annual report that stood out for us:
On core competency: Specialisation in an exclusive cuisine is always better than
having an ordinary menu of multiple cuisines. That's why at Shree, we deal in Cement
and Power businesses only. We want to remain focused on lesser areas to achieve
better results. [Page 13]
On corporate culture: People and Time are two of the most important resources. A
typical management theory is to have more meetings among people. More meetings,
however, prove to be a major productivity killer. At Shree, we make our meetings truly
count, and cut back on them wherever we can. [Page 15]
On competitive advantage:
Innovations: (a) in raw material use the first Indian company to start using
synthetic gypsum and bed-ash/fly-ash instead of gypsum in power plant (pg19) (b)
reduced margins of heat losses and made the Waste Heat Recovery (WHR)
systems, one of the most effective amongst Indian cement companies, (c) changed
aerofoils to averaging pilot tube which reduced air flow pressure drop by 90% and
installed twin lobe blower system to reduce power consumption further. [Pages 4
and 33]
Distribution: We were among the first companies to embark on the hub and
spoke model, setting up Cement Grinding Units nearer to fly-ash sources and
consuming markets. This approach not only made us competitive by reducing our
costs but also helped us garner higher market share through reduced lead time.
[page 16]
On Financial discipline: At Shree, financial discipline has been the pillar on which
growth has been planned. Irrespective of the external environment, Shree has never
drifted away from its principle of stretching only to the extent which its available
financial means could support. The Company has planned its growth in its own way
without giving in to the temptation of leveraged opportunities during times of abundant
liquidity and hence not getting impacted during times of stretched financial market
conditions. This has helped it survive the fluctuations in the external environment and
navigate its way through it. [Page 53]
November 09, 2016
Page 51
Shree Cement
Changes in assumptions
Volumes: We assume 13.3% volume CAGR over FY16-20, which is significantly
higher than our industry growth assumption of ~8%. We expect volumes to reach
39.5mn tonnes by FY20. The company is likely to maintain utilisation at 90-95% over
the next five years. We increase our volume assumptions for FY18 and FY19 as the
companys capacity expansion (and guidance) has been significantly higher than our
previous expectations.
Realisations: We assume 7% realisation in FY17 and 5% in FY18. We reduce our
realisation assumption marginally to account of weak pricing in East Indian states
such as Chhattisgarh.
Costs: We expect costs to remain flat in FY17 but increase by 5% in FY18 due to a
sharp increase in petcoke cost. The table below summarises our head- wise cost
movement assumptions.
Exhibit 9: Unitary cost assumptions
YoY increase
`/tonne
Particulars
FY17
FY18
FY19
FY17
FY18
FY19
Raw material costs
340
357
375
5.0
5.0
5.0
Employee Costs
256
266
281
4.0
5.5
Power and Fuel costs
483
650
676
(8.0)
3.0
4.0
Freight Costs
801
818
867
2.0
6.0
Other expenses
Total costs
823
774
812
2.0
(6.0)
5.0
2,702
2,835
2,895
(0.4)
4.9
2.1
Unitary EBITDA: We expect EBITDA/tonne of `1,106 and `1,153 in FY17 and FY18
respectively as against `778 in FY19. The increase in unitary EBITDA is largely a
function of pricing improvement.
Exhibit 10: Changes in our assumptions for Shree Cement
Particulars
(` mn unless
mentioned)
Assumptions (New)
Assumptions (Old)
FY17E
FY18E
21.8
26.9
30.8
86.0
96.0
Cement
Realisation
3,771
Operating
costs
EBITDA
Cement sales
Capacity
utilisation (%)
Financials (`
mn unless
specified)
Net Revenues
FY18E
FY19E
FY17E
FY18E
21.8
25.3
26.8
0.0%
6.3%
94.8
86.0
92.6
92.2
0 bps 339 bps
3,976
4,224
3,852
4,094
4,343
-2.1%
-2.9%
2,702
2,835
2,895
2,693
2,775
2,819
0.3%
2.2%
1,106
1,153
1,326
1,231
1,363
1,554
-10.1%
-15.4%
92,188 115,839 137,933 91,861 110,861 123,484
0.4%
4.5%
44,077
-3.4%
-5.3%
EBITDA
EBITDA margin
(%)
27,954
34,770
30.3
30.0
Adjusted PBT
17,906
Adjusted PAT
Gross Block
turnover
FCF
RoCE
Target price
FY19E FY17E
Changes
44,485 28,940
31.5
33.1
26,334
34,107 20,187
31,061
13,429
18,434
23,534 15,140
21,742
0.9
0.9
13,933
12,372
19.4
22.7
17,225
32.3
36,715
0.9
1.0
1.0
-4 bps
-8 bps
17,037 16,295
16,913
21,924
-14.5%
-26.8%
21.5
12,878
25.8
Comments
14.9% We keep our FY17 volume estimate unchanged

but increase FY18 and FY19 volume assumptions
266 bps due to sharper than expected capacity addition
Reduction in realisation assumption as the
-2.8% company will have to sell at a discount to ramp
up new capacities in East India
Increase in operating cost estimates owing to
2.7%
lower power and fuel cost
Change in unitary EBITDA largely driven by
-14.7% lowering of realisation estimates and increase in
cost estimates
11.7%
0.9% Despite sharp cuts in unitary EBITDA, our overall

EBITDA estimate does not change materially due
35.7 -118 bps -310 bps -344 bps to increase in volumes
Reduction in PBT estimates is on account of
38,126 -11.3% -15.2% -10.5% higher depreciation with addition of new
capacities
26,307 -11.3% -15.2% -10.5% Change in PAT is in line with PBT change
0.9
24.5
FY19E
-8 bps Increase capex estimate to account of faster pace

of capacity additions
-22.3%
26.1 -216 bps -315 bps -153 bps

34%
Sharp increase in target price as the companys

reinvestment rate is significantly higher than we
previously envisaged
Source:
November 09, 2016
Page 52
Shree Cement
Will its greatness last till perpetuity?

Assuming Shree does nothing wrong in terms of capital allocation and efficiencies,
the key question to ask is whether its growth bandwagon can last till perpetuity and
whether the industry (which is commoditised) would allow Shree to sustainably grow
and sustain strong profitability. Whilst the current valuations assume so, we believe
that as the companys scale and regional presence expand, it will be difficult to
sustain growth materially higher than industry. Moreover, after a point, adding
capacity will become difficult due to challenges in procuring limestone mines in other
Indian regions to create the same ecosystem it created in North and East India.
Our long-term growth assumptions
Volume we build in 10% volume CAGR over FY18-28. This is 2% higher than
our industry growth assumption of 8%. Whilst the company will have the cash to
reinvest for expansion, we do not think it will be able to continuously redeploy
cash in the cement business because acquiring limestone reserves will be a
challenge and sustaining the pace of addition once scale is established will be
difficult. The only option for the company will be to acquire capacity, but that will
not have tax incentives (as against most greenfield expansions) and Shree will
have to pay a material premium to its current expansion costs.
Unitary EBITDA we assume 9% unitary EBITDA CAGR, which means
EBITDA/tonne will increase to more than double by FY28 from FY18 levels. We
do not think that a higher growth estimate is prudent especially as the
institutional mix increases, limiting the pricing power of the manufacturers.
Scenario analysis: We build in three scenarios, in each of which we increase

volume and unitary EBITDA estimates by 1%. We note that valuation increases by
18%, 34% and 53% under scenario I, II and III. However, note that the valuation
is highly sensitive to increase in unitary EBITDA assumptions and not so much to
increase in volume growth. Justifying a 30% upside requires the company to deliver
23% EBITDA CAGR over FY18-28, which is a tall ask for a company operating in a
commodity and capital intensive industry. Some of the best consumer brands such as
Asian Paints and Pidilite have also not been able to achieve this feat in the last
decade. Even over FY06-16, the company generated only 19% EBITDA CAGR despite
having a significantly lower base in FY06.
Exhibit 11: Scenario analysis by changing long-term volume and unitary EBITDA growth estimates
Particulars
Current
+1%
+2%
+3%
Volume CAGR (FY18-28)
9.7%
10.7%
11.7%
12.7%
Unitary EBITDA CAGR (FY18-28)
8.8%
9.8%
10.8%
11.8%
19.0%
20.8%
22.7%
24.7%
Capacity as on end-FY28
73.5
80.0
87.0
94.6
Volumes as on end-FY28
68.0
74.5
81.5
89.1
17,225
19,441
22,095
25,267
12.0
13.5
15.4
17.6
4%
18%
34%
53%
Current
+1%
+2%
+3%
9.7%
10.7%
11.7%
12.7%
19.0%
19.8%
20.6%
21.4%
73.5
80.0
87.0
94.6
Overall EBITDA CAGR
Target price
Implied EV/EBITDA (FY19)
Upside
Exhibit 12: Scenario analysis by changing only volume assumptions

Particulars
Volume CAGR (FY18-28)
Overall EBITDA CAGR
Capacity as on end-FY28
Volumes as on end-FY28
Target price
Upside
68.0
74.5
81.5
89.1
17,225
17,897
18,618
19,391
4.4%
8.5%
12.8%
17.5%
Source: : Company, Ambit Capital research
November 09, 2016
Page 53
Shree Cement
Exhibit 13: Scenario analysis by changing only EBITDA/tonne assumptions
Particulars
Unitary EBITDA CAGR (FY18-28)
Overall EBITDA CAGR
Current
+1%
+2%
+3%
8.8%
9.8%
10.8%
11.8%
19.0%
Target price
20.0%
17,225
Upside
18,648
4.4%
13.0%
21.0%
20,178
22.3%
22.1%
21,823
32.3%
Ambit vs consensus
Exhibit 14: Our revenue and EBITDA estimates are higher than consensus
Consensus
Ambit
Divergence
FY17E
91,077
92,188
1%
FY18E
106,812
115,839
8%
FY19E
124,991
137,933
10%
FY17E
27,404
27,954
2%
FY18E
33,801
34,770
3%
FY19E
41,059
44,485
8%
FY17E
16,394
13,429
-18%
FY18E
20,427
18,434
-10%
FY19E
25,689
23,534
-8%
Comments
Revenue (` mn)
Our revenue estimates are higher than consensus since we expect
strong volume growth as Shree's new capacities are commissioned
EBITDA (` mn)
Our estimates are higher than consensus as we expect strong
realisation growth
PAT (` mn)
Divergence at PAT level is on account of difference in our and
consensus' depreciation assumptions
November 09, 2016
Page 54
Shree Cement
Valuations: Its all in the price

Shree is the most expensive cement stock in the world. The stock trades at
17.5x one-year forward EV/EBITDA (based on consensus estimates), which is
at a 70% premium to its five-year average. On EV/tonne, the stock trades at
US$274/tonne, a 77% premium to its five-year average. The stock trades at a
10% premium to UltraTech (more than 3x Shrees size) on EV/EBITDA and a
15% premium on EV/tonne. Whilst Shrees superior profitability and
continued reinvestments make a case for its premium valuations, we believe
current valuations are too expensive to generate any meaningful investment
returns. Our TP of `17,231 implies 12.5x FY19E EV/EBITDA by building in best
case earnings. We have upgraded our target price by 34%, factoring in
higher long-term reinvestment than we had built in previously.
Exhibit 15: Shree is trading at a 70% premium to five-year
average EV/EBITDA
(x)
Exhibit 16: ..and a 77% premium on EV/tonne
25
(US$)
400
20
300
15
6-yr EV/EBITDA
5-yr avg EV/EBITDA
EV/tonne
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Apr-11
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
100
Apr-11
Sep-11
200
10
5-yr avg EV/Tonne
Shrees FY17 and FY18 EBITDA estimates have been upgraded by 14% and 23%
respectively due to strong pricing in North India and benefits accrued from low-cost
petcoke usage. With prices stabilising and petcoke costs having increased sharply, we
do not see scope for further earning upgrades.
Exhibit 17: Sharp earning upgrades by consensus led by strong pricing in North India
28,000
35,000
EBITDA (` mn)
27,000
33,000
26,000
31,000
25,000
29,000
24,000
27,000
23,000
22,000
Apr-16
25,000
May-16
Jun-16
Jul-16
FY17
Aug-16
Sep-16
Oct-16
Nov-16
FY18 (RHS)
November 09, 2016
Page 55
Shree Cement
Key catalysts to our SELL stance

Shree reputation of being a high quality and fast growing company has kept its
valuation elevated for the last four years. Since the stock is trading at extremely rich
valuations (16.5x EV/EBITDA), significant earnings disappointments could lead to a
de-rating, which remains a key risk. Also, the stock could go through a time value
correction for the next six months as we do not expect any major positive catalysts for
its earnings.
Other catalysts for a sharp de-rating are:
Increase in petcoke prices diluting cost savings: Whilst the company posted
strong unitary EBTDA in 1HFY17, the sharp increase in petcoke prices will lead to a
decline in EBITDA/tonne. We build in a `200/tonne increase in power and fuel costs
from 4QFY17 onwards.
Volume disappointments with demand weakness persisting: Shrees
continuous capacity expansions means that investors play the stock for volume
growth momentum. If demand weakness persists for longer and manufacturers cut
production to sustain pricing growth, volumes could disappoint and earnings
assumptions would be downgraded, thereby leading to a stock price correction.
Poor performance of the power business: A sharp reduction in the merchant
power tariff rates will lead to significant erosion in the profitability of the power
business. Power accounted for ~10% of overall EBITDA of the company in 1HFY17
and reduction in operating profit from this segment could lead to EBITDA
downgrades.
Key risks to our SELL stance

Faster-than-expected demand recovery and utilisation ramp-up: Sharperthan-expected demand would aid volume growth but more importantly keep prices
stable. We currently build in industry volume growth of 5/8% over FY17/18 and
13%/15% for Shree. Sharper-than-expected demand recovery and volume growth
remain the key risks.
Forensic accounting
Exhibit 18: Explanations for flags on the cover page
Segment
Score
Comments
Accounting
GREEN
In our forensic accounting of 374 companies, Shree Cement ranks 64th. It also is the fourth-best cement
company based on our accounting checks. The only concern on Shree is around volatile depreciation rates
which, however, can be explained by the WDV method that the company follows.
Predictability
AMBER
Shree Cement has always made timely announcements of capacity expansions and has in most cases not
surprised negatively. However, the companys annual reports, unlike many larger and smaller peers, provide
a very detailed view of the managements approach to its business.
Earnings Momentum
GREEN
FY17 and FY18 consensus estimates have seen marginal upgrades in recent months as pricing improved in
North India.
November 09, 2016
Page 56
Shree Cement
Balance sheet
Particulars
FY15
FY16
FY17E
FY18E
FY19E
Share capital
348
348
348
348
348
52,416
61,454
72,074
86,223
103,740
Total Networth
52,764
61,802
72,422
86,571
104,088
9,166
8,630
7,630
5,630
3,630
Loans
(1,952)
(2,634)
(2,634)
(2,634)
(2,634)
Sources of funds
59,979
67,799
77,418
89,567
105,084
Net block
30,043
30,502
40,668
54,151
65,084
5,111
2,645
2,645
2,645
#REF!
16,626
23,662
23,662
23,662
23,662
3,075
2,830
8,029
13,427
21,967
Sundry debtors
4,764
3,286
8,840
11,108
12,849
Inventories
9,189
8,152
12,628
15,234
17,761
Loans and advances
9,230
14,179
13,185
16,568
19,728
256
357
#REF!
26,258
28,448
42,682
56,336
72,304
Current Liabilities
17,168
17,245
27,783
34,910
41,569
Investments
Provisions
Net current assets
892
213
213
213
213
18,060
17,458
27,995
35,123
41,782
8,198
10,990
14,687
21,213
30,523
59,978
67,799
81,661
101,671
121,914
FY15
FY16
FY17E
FY18E
FY19E
64,536
55,678
92,188
115,839
137,933
Income statement
Particulars
Revenue
yoy growth
10%
-14%
66%
26%
19%
Total expenses
51,097
42,475
64,234
81,069
93,448
EBITDA
13,439
13,203
27,954
34,770
44,485
yoy growth
-3%
-2%
112%
24%
28%
Net depreciation
9,248
9,084
10,158
9,378
11,792
EBIT
4,191
4,119
17,796
25,392
32,693
Interest and financial charges
1,206
751
844
688
481
Other income
1,379
1,201
954
1,630
1,895
Adj PBT
4,363
4,568
17,906
26,334
34,107
(255)
(4)
4,476
7,900
10,573
Adjusted PAT
4,618
4,572
13,429
18,434
23,534
-47%
-1%
194%
37%
28%
Consolidated reported PAT
4,263
4,549
13,429
18,434
23,534
EPS (`)
132.6
131.2
385.5
529.1
675.5
EPS diluted (`)
132.6
131.2
385.5
529.1
675.5
14.7
19.6
69.4
105.8
148.6
yoy growth
DPS (`)
November 09, 2016
Page 57
Shree Cement
Cash Flow statement
Particulars
FY15
FY16
FY17E
FY18E
FY19E
PBT
4,008
4,545
17,906
26,334
34,107
Depreciation
9,248
9,084
10,158
9,378
11,792
Others
(874)
(1,008)
(0)
Interest paid (net)
1,206
751
844
688
481
13,588
13,373
28,908
36,400
46,380
(229)
(2,059)
1,501
(1,128)
(770)
Direct taxes paid
(906)
(985)
(4,476)
(7,900)
(10,573)
12,453
10,330
25,933
27,372
35,037
Net capex
(14,886)
(7,348)
(12,000)
(15,000)
(18,000)
Net investments
(32,016)
(8,827)
Interest received
580
469
CFI
(9,969)
(12,623)
(12,000)
(15,000)
(18,000)
(2,832)
(526)
(1,000)
(2,000)
(2,000)
(1,246)
(892)
(844)
(688)
(481)
CFO
Dividends paid
(893)
(1,592)
(2,809)
(4,285)
(6,017)
(2,586)
2,485
(8,735)
(6,973)
(8,498)
(102)
193
5,198
5,399
8,539
411
310
2,830
8,029
13,427
309
502
8,029
13,427
21,967
(2,433)
2,982
13,933
12,372
17,037
FY15
FY16
FY17E
FY18E
FY19E
Revenue growth
9.6
(13.7)
65.6
25.7
19.1
EBITDA growth
(3.3)
(1.8)
111.7
24.4
27.9
PAT growth
(46.8)
(1.0)
193.7
37.3
27.7
(46.8)
(1.0)
193.7
37.3
27.7
20.8
23.7
30.3
30.0
32.3
EBIT margin
6.5
7.4
19.3
21.9
23.7
Net margin
7.2
8.2
14.6
15.9
17.1
RoCE
5.7
6.5
19.4
22.7
24.5
RoIC
10.9
11.2
34.4
40.7
44.8
RoE
9.2
8.0
20.0
23.2
24.7
CFF
FCF
Ratio Analysis
Particulars
EBITDA margin
Valuation Parameter
Particulars
FY15
FY16
FY17E
FY18E
FY19E
P/E (x)
22.3
129.9
44.2
32.2
25.2
P/B(x)
11.3
9.6
8.2
6.9
5.7
Debt/Equity(x)
Net debt/Equity(x)
EV/Sales(x)
0.2
0.1
0.1
0.1
0.0
(0.2)
(0.3)
(0.3)
(0.4)
(0.4)
10
EV/EBITDA(x)
42.9
43.2
20.4
16.4
12.4
EV/Tonne (`)
17,908
23,741
21,420
19,314
15,545
November 09, 2016
Page 58
Dalmia Bharat
BUY
DBEL IN EQUITY
November 09, 2016
Converting mass to muscle
Cement
Dalmias unconventional approach (largely debt, PE funds) in building

multi-regional, large-scale capacities has worked after induction of
reputed professionals transformed the organisation. Variable cost
structure improved by 3% over FY13-16 and so has its positioning in
key markets. Amid a weak-to-moderate demand environment, it will
gain market share but, more importantly, absorb the large fixed costs
built recently (unabsorbed Rs430/t). Rising FCF and deleveraging will
create more equity value given limited reinvestment needs; we
acknowledge a large share has already been captured. Rising petcoke
price and competitive intensity in East will eat into some unitary
EBITDA; but volume growth in South/West should keep earnings growth
high. Our 12-month TP implies 9.8x FY19E EBITDA, closer to Ambuja but
higher than ACC despite materially lower volumes.
Changes to this position: STRONG
Unconventional aggression, now an established platform

Dalmia is one of only two Indian cement players to have expanded capacity
10x or more in last 10 years. Dalmias unconventional approach of debtfunded acquisitions (complete and bolt-on) has made it the 5th largest national
player, one of the top-3 in East India, and with architecture to service 60-65%
of markets. Its sub-optimal utilisation (50% in FY16) is set to improve to 75% by
FY19 from higher market share in South and ramp-up of its Belgaum plant.
`180/US$2.7
`131/US$2.0
`2,025
`2,350
16%
Flags
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
GREEN
Catalyst
25% volume CAGR in South

India/West over FY16-19E
Cost/t ex-P&F to remain flat over

FY16-18E
Halt to capacity expansions over next

2-3 years
Performance (%)
Valuation set to exceed that of past leaders

Over the last 4-5 years, valuations of both Shree, UTCEM have usurped
decade-old brands as former established scale, efficiency and balance sheet
strength. Dalmia is at a similar position as it maximizes available scale and
establishes low costs and improved brand recall. Our TP of Rs2,350 (~25%
contributed by OCL) faces risks of pricing breakdown in South, high competitive
intensity in East India, and higher fixed costs.
SENSEX
DBEL
Research Analysts
Nitin Bhasin
+91 22 3043 3241
Key financials
FY15
35,141
6,025
17.1
1.1
2.1
3.1
37.9
FY16
64,380
15,786
24.5
23.2
1.6
8.2
15.3
FY17E
74,779
18,354
24.5
48.6
1.3
11.6
13.1
FY18E
87,530
22,384
25.6
82.4
1.0
14.6
10.7
FY19E
100,309
26,918
26.8
123.1
0.7
17.2
8.9
Achint Bhagat, CFA

+91 22 3043 3178
Parita Ashar, CFA
+91 22 3043 3178

Nov-16
Sep-16
Jun-16
Aug-16
Increasing capacity and building related ecosystem led to 6% increase in

Dalmias fixed costs over FY14-16. As unutilised capacities are put to use, fixed
cost absorption will improve. Project finance debt (0.7x D.E in FY19 vs 1.6x in
FY16) will be repaid with sharp pick-up in FCF generation (Rs42bn over FY1619; 68% of FY16 debt). Despite only 2% realization increase, strong volume
growth and fixed cost absorption will drive 20% EBITDA CAGR over FY16-19.
May-16
Unutilised capacity, high fixed costs, high leverage all set to reverse
320
280
240
200
160
120
80
Mar-16
With the induction of Mr. Singhi in FY14, Dalmia achieved industry leading cost
efficiencies (variable cost ~12% below industry average) as blending mix
increased to 80% from 71% in FY14, power consumption reduced from
72kwh/t in FY14 to 68kwh/t in FY16; it ranks third-best on our efficiency
framework. Processes have been tightened by hiring of professional
management, which improved branding and logistics.
Feb-16
Professional management drives industry leading efficiencies
Year to March
Operating Income (`
)
EBITDA
(` mn)
EBITDA margin (%)
EPS (`)
Net debt/Equity(x)
RoIC (%)
EV / EBITDA (x)
BUY
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Dec-15
Competitive position: MODERATE
Recommendation
Nov-15
INITIATING COVERAGE
Dalmia Bharat
Snapshot of Company Financials

Profit and Loss
Company Background
Year to Mar (` mn)
FY16
FY17E
Net revenues
64,380
74,779
EBITDA
FY18E
Year Major Event

Began its first cement plant at Dalmiapuram and a first in
southern India
87,530 1939
22,384
15,786
18,354
Depreciation
4,528
5,377
5,525
Interest expense
7,256
8,353
8,163
Adjusted PBT
5,644
6,587
Tax
2,991
1,976
3,291
Reported net profit
1,908
3,997
6,771
24.5
24.5
3.0
5.3
EV/ EBITDA (x)
15.3
P/E on adjusted basis (x)
1976
Developed speciality cement for railway sleepers
1984
Developed speciality cement for oil wells

Expanded cement capacity at Dalmiapuram from 1.5mtpa to
3.5mtpa and thermal power plant of 27MW
10,969 2006
Commissioned 2.5mtpa greenfield plant at Ariyalur (with 27MW

power plant) and 2.5mt at greenfield plant at Kadappa and
second thermal power unit of 18MW at Dalmiapuram.
Acquired 21.7% stake in OCL (2mt on acquisition)
2009
Profit and Loss Ratios

EBITDA Margin (%)
Net profit margin (%)
25.6 2010
7.7
Increased stake in OCL to above 45%
13.1
10.7
2012
Entered North East India by way of inorganic expansion acquired Calcom Cement and Adhunik Cement
87.2
41.6
24.6 2014
Acquired Jaypee Plant in Bokaro (JV with SAIL)

OCL commissioned 1.35mt grinding unit at West Bengal
9,661
9,615
9,615 2015
FY16
FY17E
FY18E Year to March (` mn)
Total Networth
43,308
47,633
55,026
Loans
88,925
86,925
84,925
EV/Tonne (x)
Balance Sheet
Commissioned 2.5mtpa greenfield plant at Belgaum
Cash flow
Year to Mar (` mn)
FY16
FY17E
FY18E
PBT
5,644
6,587
10,969
Depreciation
4,528
5,377
5,525
137,907
140,232
145,625
3,371
(2,132)
(1,417)
Net block
76,117
72,978
71,136
Direct taxes paid
(458)
(1,976)
(3,291)
29,884
29,884
29,884
CFO
18,907
14,247
17,676
Investments
25,752
25,752
25,752
Net capex
(3,852)
(2,238)
(3,683)
27,825
34,397
45,086
Net investments
(13,827)
21,671
22,779
26,235
CFI
(16,704)
(2,238)
(3,683)
4,129
(2,000)
(2,000)
11
(8,607)
(6,390)
(5,889)
(534)
(286)
(286)
CFF
(5,002)
(8,676)
(8,175)
(2,798)
3,332
5,818
FCF
15,055
12,008
13,993
Sources of funds
liabilities
and
Net current assets

6,154
11,618
18,852
137,906
140,232
145,624
Balance Sheet ratios

RoCE
7.2
9.3
11.8
RoE
5.5
9.9
14.9
Net debt (cash)/ Eq (x)
1.6
1.3
1.0
P/B (x)
4.7
4.3
3.7
Utilisation improvement to result in decline in fixed costs/t

1,400
125%
1,200
100%
1,000

Interest & finance charges
paid
Dividends paid
FCF of `42bn over FY16-19E vs negative FCF over FY13-15E

25
2.5
20
2.0
15
November 09, 2016
(5)
Utilisation - RHS
FCF
Capex
FY19E
FY19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
Fixed cost per tonne (Rs)
0.5
FY18E
25%
FY17E
200
1.0
5
FY16
50%
FY15
400
1.5
10
FY14
600
FY13
75%
FY12
800
FY11
Current
provisions
Net debt to Equity (x) - RHS
Page 60
Dalmia Bharat
From a minor to a major

(A)
Capacity building: The journey so far
A carve out of the third-largest business group in the pre-Independence era

Dalmia Bharat Ltd. comprises of the cement business of the Dalmia Bharat Group,
which has business interests in sugar and refractories apart from cement. The Dalmia
Bharat Group was a result of the split of the Dalmia-Jain group in 1948 and was
thereafter run by Mr. Jaidayal Dalmia, one of Indias leading industrialists. At the
time of the split, the Dalmia companies together ranked third among India's major
industrial groups after the Tatas and the Birlas. Post the split, the groups cement
business comprised of 4 cement plants one each in Dalmiapuram, Tamil Nadu
(established in 1939) and Rajgangpur, Odisha (established in 1949) and two plants in
Pakistan (which were sold in 1964).
South and East cement businesses were further split amongst Mr. Jaidayal
Dalmias sons
After
the
demise
of
Mr.
Jaidayal
Dalmia
in
1993,
his
businesses were spilt amongst his sons. The South India cement business
(Dalmiapuram, Tamil Nadu) along with sugar and refractories businesses were
inherited by his sons Jai Hari Dalmia and Yadu Hari Dalmia and came to be known
as the Dalmia Bharat group; whereas the East India cement business (Rajgangpur,
Odisha) came to be known as Orissa Cement Ltd. and was inherited by Ajay Hari
Dalmia, Mridu Hari Dalmia and Raghu Hari Dalmia.
South India: 6x capacity expansion over FY05 to FY10
The South India cement business along with sugar and refractories businesses of Mr.
Jaidayal Dalmia was known as the Dalmia Bharat group and was run by Jai Hari
Dalmia and Yadu Hari Dalmia. In 2004, Yadu Hari Dalmias son Puneet Dalmia
joined the business with a vision to make DBCL a pan-India player from a Tamil
Nadu based player then. He expanded the cement business from 1.5mtpa in FY06 to
9mtpa in FY10 (6x capacity expansion in 5 years) on the back of aggressive capacity
additions across South India. The company added 2.5mt brownfield capacity at its
Dalmiapuram, Tamil Nadu plant and also added 2.5mtpa integrated greenfield
capacities each at Kadapa, AP and Ariyalur, Tamil Nadu. As a result of the
expansions, the company expanded its footprint across all states in South India (from
being a pure Tamil Nadu and Kerala cement player in FY05).
Until FY10, the cement, sugar and refractories businesses were held under a common
entity named Dalmia Cement Bharat Ltd. Thereafter, the sugar businesses was carved
out and listed separately as Dalmia Bharat Sugar and Industries and the cement
business under DCBL was made a subsidiary of Dalmia Bharat Enterprises Ltd. (DBEL
was later renamed Dalmia Bharat Ltd. and has been the listed entity for the cement
business thereafter). Post FY10, the only organic capacity expansion for the company
has been a 2.5mt greenfield expansion at Belgaum, Karnataka (commercial
production started in 4QFY16).
DCBL geographic split moves from

only TN and Kerala to across
South India
FY08
Karnataka
, 9%
Others,
4%
Kerela,
27%
Tamil
Nadu,
60%
FY10
Karnataka
, 13%
Andhra
Pradesh,
10%
Others,
5%
Tamil
Nadu,
46%
Kerela,
26%
November 09, 2016
Page 61
Dalmia Bharat
Acquisitions drive entry in East and North East India

In addition to the greenfield and brownfield capacity additions in South India, the
company opportunistically made inorganic acquisitions of ~5mt in East and North
East regions over FY12-FY14. These include:
Assam: The company acquired ~50% stake in Calcom cement in FY12 for
~`2.4bn and further increased its stake to 76% in FY13. At the time of
acquisition, the company had 1.3mt grinding unit in Lanka and 0.3mt clinker unit
in Umrangshu, which was expanded (in FY15) to 2.1mt of grinding and 1.3mt of
clinker at a capex of ~`5bn. The remaining 25% stake in Calcom Cement is held
by the Bawri family, the erstwhile promoters of Calcom Cement and currently a
court proceeding has been filed by the Bawri family against the Dalmia family.
Meghalaya: DBL acquired 100% stake in Adhunik Cement Ltd., which has a
1.5mt capacity in Meghalaya in September 2012, for an EV of `11bn (US$140/t).
As a part of the current restructuring of the business, Adhunik Cement will be
merged with its 100% parent Dalmia Bharat Ltd.
Jharkhand: DBL acquired 100% stake (in two stages) in Bokaro Jaypee Cement
(a JV between Jaypee and SAIL) which has a 2.1mt grinding unit in Bokaro for an
EV of `11.5bn (US$87/t) and a 30-year slag supply agreement with SAIL and 30year clinker supply agreement with Jaypee Associates. The company was later
renamed Dalmia Cement East and, as a part of the current restructuring of the
business, will be merged with OCL India (at a similar valuation).
Weak demand in South and acquisitions in NE drive slide in utilisation

Although DBLs capacities (ex OCL) increased from 3.5mt in FY08 to 18.2mt by FY16,
effective capacity utilisation for DBLs capacities declined from 94% in FY08 to 51% in
FY16. Whilst the company does not disclose plant/region-wise utilisation, empirical
evidence suggests that utilisation is weak mainly in South India and North East,
whereas utilisation of the Bokaro plant is healthy.
South India (12mt running at sub 50%): Over FY11-16, cement demand has
declined (2-4% p.a.) in Kerala and Andhra Pradesh and flattish in Tamil Nadu,
and Karnataka market has seen a muted 4% demand CAGR. Against the overall
south India market demand remaining flattish, capacities have grown at a 4%
CAGR resulting in further drop in an already weak regional capacity utilisation
(from ~55% in FY10 to ~40% in FY16). In line with industry, DBLs capacity
utilisation in South India (12mt capacity) has also remained ~50%.
North East (3.6mt running at sub 50%): DBLs inorganic expansion (2.1mt in
Assam and 1.5mt in Meghalaya) are running at sub 50% utilisation given NE is a
small market (~7mt demand) and hence, limited potential to increase volumes.
Exhibit 1: DBLs capacity (excl. OCL) increased from 1.5mt to 18.2mt over the last decade
20.0
125%
100%
15.0
75%
10.0
50%
5.0
25%
0%
FY03
FY04
FY05
FY06
FY07
FY08
Capacity
FY09
FY10
FY11
Production
FY12
FY13
FY14
FY15
FY16
Utilisation - RHS
November 09, 2016
Page 62
Dalmia Bharat
The original South India business owners gradually

acquired East India business too
The East India cement business of Mr. Jaidayal Dalmia was known as Orissa Cement
Ltd (renamed OCL India Ltd. in 1996) and was run by his sons Ajay Hari Dalmia,
Mridu Hari Dalmia and Raghu Hari Dalmia. Ajay Hari Dalmia separated from Orissa
Cement in 1999 whereas Raghu Hari Dalmia sold his stake to Yadu Hari Dalmia in
FY06. Thereafter, DCBL acquired ~21% stake in OCL India Ltd. in FY08 (subscribed
to fresh shares) and later acquired another ~20% stake in FY09 by acquiring shares
of Yadu Hari Dalmia, which made OCL an associate of DCBL by FY09 with ~45%
shareholding. Post takeover of OCL Indias control by DCBL, OCL Indias capacity was
also increased from ~4mt in FY09 to 6.7mt in FY14 by way of (a) enhancement of
capacity at Kapilas, Odisha (from 0.35mt to 1.35mt); and (b) greenfield expansion at
Medinipur, West Bengal (1.35mt). Capacity utilisation at OCL has increased to ~84%
in FY16 from 50% in FY14 as the West Bengal capacity ramped up over FY15-16. In
FY16, DCBL acquired further 24% stake in OCL, thereby making it a subsidiary.
Exhibit 2: Capacity utilisation is back to FY13 levels as production ramped up at West Bengal plant
8
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
7
6
5
4
3
2
1
0
FY09
FY10
FY11
FY12
Capacity
FY13
FY14
Production
FY15
FY16
Utilisation - RHS
Overall capacity: 16x increase in the past decade

Post large organic and inorganic expansions over the last decade and acquisition of
majority stake in OCL India, DBLs current consolidated (incl. OCL) cement capacity
stands at ~25mt from ~1.5mt (16x increase over the last decade). With 25mt of
cement capacity, Dalmia Bharat is now the fifth-largest cement company in India with
~6% capacity share. Whilst the company has increased capacity by 16x over the last
decade, volume growth has lagged capacity growth (8x over last decade).
Exhibit 3: DBLs capacity build-up over the years has been a combination of organic and inorganic expansions (mtpa)
Location
State
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
1.5
3.5
3.5
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
1.5
1.5
1.5
1.5
1.3
1.3
2.1
2.1
Capacities of Dalmia Bharat

Dalmiapuram
TN
Kadapa
AP
Ariyalur
TN
Meghalaya
Meghalaya
Lanka
Assam
Belgaum
Karnataka
Bokaro
Jharkhand
1.3
2.5
2.5
2.1
2.1
2.6
Capacities of OCL (associate of DBL over FY09 to FY15, subsidiary from FY16 onwards)
Rajgangpur
Odisha
Kapilas
Odisha
Medinipur
WB
Total
4.0
1.5
3.5
3.5
6.5
4.0
4.0
4.0
4.0
4.0
4.0
4.0
0.4
0.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
9.0
9.0
15.6
17.1
20.0
24.0
25.0
November 09, 2016
Page 63
Dalmia Bharat
(B) Financial Evolution: RoCE

continuous capacity additions
depressed
due
to
Exhibit 4: Evolution of cement business of Dalmia Bharat
70,000
60,000
50,000
40,000
Stagnant volumes;
Investment in
brownfield
expansions drives
RoCE compression
30,000
Ramp up of brownfield
expansion drives 28%
volume CAGR; this
coupled with
Improved margins
drives sharp RoCE
improvement
60%
22% volume CAGR on the back of organic

and inorganic expansion; however
average RoCE merely 7% due to poor
margins and low asset turns (0.5x average
asset turnover ratio given continuous
capacity additions)
50%
40%
30%
20%
20,000
10%
10,000
-
0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Net Revenues (Rs mn)
FY12
FY13
FY14
FY15
FY16
RoCE (pre tax) - RHS
Source: Company, Ambit Capital research; Note: FY04 to FY10 numbers represent the cement segment of DCBL and FY11 to FY16 numbers represent consolidated
numbers for DBL
Phase I (FY04-06) poor pricing power; capex suppresses RoCE

In Dalmias key markets (South India), pricing power remained muted over FY04-06
and, hence, the company delivered EBIT margin of merely 9-13%. On the other hand,
despite ~2.5x increase in capital employed over FY04-06 (rising investments to fund
the 2mt brownfield expansion at Dalmiapuram), volume CAGR was a paltry 9%. This
resulted in a sharp decrease in asset turnover from 1.1x in FY04 to 0.6x in FY06 and
pre-tax RoCE from 14% in FY04 to 8% in FY06.
Phase II (FY07-09) demand-driven volume + pricing growth = high RoCE
FY07-09 was a period of high growth for the South India market as industry demand
itself grew in double digits. This coupled with Dalmias brownfield capacity expansion
at Dalmiapuram in FY07 enabled the company to report a 26% sales volume CAGR
and 56% revenue CAGR over FY07-09. Sharp volume growth improved asset
turnover from 0.66 in FY06 to 0.94 in FY09 and improved pricing environment
increased EBIT margin from 13% in FY06 to 31% in FY09 and RoCE from 8% to 29%.
Phase III (FY10-16) low pricing power + low utilisation = low RoCE; but a
period of building an organisation
Over FY10-16, DBL increased capacity and sales volumes at ~20% CAGR, which kept
capacity utilisation at 50-60% across the seven-year period. However, depressed
cement demand and pricing resulted in decline in DBLs asset turnover from 0.9x in
FY09 to ~0.5x in FY16. This coupled with low EBIT margin (14% average over FY1016 vs 34% over FY07-09) kept pre-tax RoCE muted at average of 7% over FY10-16.
However, with the induction of Mr. Singhi in FY14, DBL achieved industry leading cost
efficiencies (variable cost ~12% below industry average) as blending mix increased to
80% from 71% in FY14, power consumption reduced from 72kwh/t in FY14 to
68kwh/t in FY16; DBL now ranks third-best on our efficiency framework. Processes
have been tightened by hiring of professional management, improving branding and
logistics, all of which have resulted in 3% reduction in variable costs over FY14-16.
November 09, 2016
Page 64
Dalmia Bharat
Exhibit 5: Sources of funds (FY11-16) largely from internal
accruals and loans
Equity
raised
5%
Exhibit 6: Application of funds (FY11-16) largely invested

in capex / acquisitions
Dividend
paid
1%
Cash
1%
Others
1%
Interest paid
25%
Capex
21%
CFO
41%
Loans raised
53%
Current
investments
17%
Non current
investents /
Acquisitions
35%
Exhibit 7: SWOT analysis for Dalmia Bharat the fifth-largest cement company in India
Strengths
Weaknesses
Presently run by Mr Singhi, one of the best professional CEO in the
Low capacity utilisation across South and North East capacities
cement industry; he carries of experience of building Shree Cement

over the last decade
Sharp rise in employee and overhead costs in FY15 and FY16 due to new
capacity additions, branding/advertising and investments in professional
management.
>90% of FY16 power requirements are met through captive power

plants
High net: debt to equity of 1.6x at the end of FY16E
One of the highest cement:clinker ratios in the country (~1.8x) as

~40% of capacity is slag based. This reduces raw material costs.
Power consumed per tonne of cement is one of the lowest in the

industry (~68units per tonne of cement)
Significant usage of Economic fuel (~70-75% of total requirements)

which are cheaper than traditional coal (domestic / imported)
Lead distance of ~300kms vs ~400kms average for the industry

Dominant player in its key markets (>10% market share)
Opportunities
Threats
Untapped limestone reserves with the company could enable setting
A prolonged demand recovery in south India could keep utilisation

levels low for DBL
Rising competition in the east region due to entry of players such as

Shree Cement, JK Lakshmi
Break down of pricing/ production discipline in TN, Kerala impacting

high EBITDA regions presently
up new greenfield plants
Lack of significant capacity additions by the industry over next 2-3

years and resultant increase in pricing power of the industry
DBLs efforts towards branding could drive above industry realisation

growth
Presence across ~20 states in India vs 2 states a decade ago makes

DBL a large all-India player from being a regional players
November 09, 2016
Page 65
Dalmia Bharat
(c) Group restructuring: Finally one consolidated entity

Erstwhile structure of Dalmia Bharat: Dalmia Bharat was the holding company of
Dalmia Cement Bharat Limited (DCBL) and Dalmia Power (DP) with 85% and 100% of
the stake in the companies respectively. Kohlberg Kravis Roberts (KKR) held 15%
stake in the cement entity DCBL (consideration: `5bn in FY11). KKR recently exited its
investment in the cement entity through cash consideration of `6bn and preferential
equity allotment of `6.2bn (7.5% stake in DBL).
Exhibit 8: Structure of Dalmia Bharat
Dalmia Bharat Limited (DBL)
(Listed on NSE & BSE)
KKR
100%
85%
Dalmia Cement Bharat Ltd (DCBL)
Dalmia Power
74%
100%
26%
11.5mt cement capacity in South
Dalmia Power Ventures

Thermal Power of 72MW
100%
Adhunik Cement, Meghalaya
Cement capacity of 1.5mtpa, CPP of 25MW
76%
Calcom promoters
Calcom Cement, Assam
24%
Cement capacity of 2.1mtpa
75%
Public/others
OCL India (Listed)
25%
Cement capacity of 6.7mtpa with CPP of 54MW
100%
Bokaro Plant (Acquired from
Cement capacity of 2.1mtpa

New structure once restructuring is completed: In order to simplify the group
structure, DBL will now be merging into OCL India (a 75% listed subsidiary of OCL).
DBLs 100% subsidiaries Adhunik as well as DCEL (Bokaro unit) will also be merged.
DBL shareholders will be offered 2 shares of the merged entity for every one share
held in DBL. Post-merger, the only cement asset outside of DCBL will be Calcom
Cement (2.1mt capacity in Assam acquired in FY12). Calcom is a 76% subsidiary of
DCBL; the remaining 24% is held by its original promoters, the Bawri family.
Exhibit 9: New corporate structure of Dalmia Bharat
November 09, 2016
Page 66
Dalmia Bharat
Architecture: A diversified player

DBLs organic expansion and inorganic acquisitions have enabled it to diversify from
2 states in FY05 to 21 states by the end of FY16. Thereafter, it opportunistically
started selling volumes in Madhya Pradesh and Uttar Pradesh in 1HFY17.
Exhibit 10: As of FY16, DBL has a presence in 21 states (vs 2 states in FY06)
Of the current capacity of ~25mt,
12.1mt (48%) is based in South India and has been built by way of
greenfield/brownfield expansions by DBL;
~3.6mt (14%) is based in North East India, which are a result of inorganic
acquisitions (acquisition of Adhunik and Calcom); and
~9.3mt (27%) is based in East India (Odisha, Bihar and Jharkhand), of which
6.7mt is held by its subsidiary OCL India Ltd (20% stake acquired in FY09 which
was gradually hiked to 74% by FY16) and remaining 2.6mt in Jharkhand is held
by DBLs 100% subsidiary Dalmia Cement East Bokaro Ltd (DCEBL). DBL, OCL as
well as DCEBL will become one entity after the current restructuring is completed.
All of DBLs grinding capacities across South, East and North East largely produce
blended cement (80%) and DBL has one of the highest cement to clinker ratios in the
industry (1.8x).
November 09, 2016
DBL (incl. OCL) geographic

capacity split (FY16 consolidated)
East,
37%
South,
48%
North
East,
15%
Page 67
Dalmia Bharat
Limestone and clinker: All of DBLs limestone requirements are met via captive
mines, which are located close to its clinkerisation units. Whilst all of DBLs South
and North East plants have clinker units in close proximity, OCL has a central
clinkerisation unit at Rajgaganpur (Odisha), which transports clinker to OCLs
plants in Odisha and West Bengal.
Fly ash/slag: Fly ash for all its plants in South is acquired from nearby power
plants whereas slag for OCLs grinding units is acquired from nearby steel plants
(as there are many steel plants in East). The Bokaro grinding unit has a 30-year
slag supply agreement with SAIL.
Power and fuel mix: DBL has captive power at most of its plants (including
renewal energy but does not have waste heat recovery) and its CPPs were
adequate to meet >90% of DBLs power requirement in FY16. DBL procures
power from the grid only at Bokaro and Assam. In 1HFY17, economic fuels
(petcoke, etc) accounted for 80% of the total fuel requirement (100% in South
India whereas OCL has a linkage with Coal India).
Lead distance: As depicted in exhibit below, most of DBLs key demand markets
are within 50-400km and the average lead distance from its plants is ~300km.
Exhibit 11: Understanding Dalmias plant architecture

Plant
State
FY16
grinding
capacity
Clinker
plant
Type of
Cement
Slag /
Flyash
Power
procurement
Key markets
Lead distance
to reach
markets
South
Dalmiapuram
TN
4.0
Dalmiapuram
PPC
Fly ash
45W CPP
Kadapa
AP
2.5
Kadapa
PPC
Fly ash
40W CPP
Trichy, Kumbakonam, Thanjavur,

Erode, Madurai
Yerraguntla,Khajipeta, Anantapur,
Chennai
Trichy, Perambalur, Chidambaram,
Neyveli
Bellary, Raichur, Bagalkot, Hubli,
Mumbai, Pune
50-200
50-250
Ariyalur
TN
2.5
Ariyalur
PPC
Flyash
27MW CPP
from CPP
Belgaum
Karnataka
2.5
Belgaum
PPC
Slag
40MW CPP
Meghalaya
1.5
PPC
Flyash
20MW CPP
Shillong, Silchar, Guwahati, Imphal 100-350
Assam
2.1
Meghalaya
Umrangshu Transported by
road to Lanka
PPC
Flyash
Grid
Guwahati, Silchar, Jorhat,

Dibrugarh
200-400
Jharkhand
2.6
Rajgangpur
PSC
Slag
Grid
Dhanbad, Ranchi, Durgapur,

Kharagpur, Kolkata
100-300
Rajgangpur
Odisha
4.0
Rajgangpur
PSC
Slag
54MW
Kapilas
Odisha
1.4
Rajgangpur
PSC
Slag
5.5MW solar
WB
1.4
Rajgangpur
PSC
Slag
2.5MW solar
50-100
150-450
North East
Meghalaya
Lanka
East
Bokaro
OCL
Medinipur
Kharagpur, Jamshedpur, Rourkela

Brahmapur, Bhubaneshwar,
Nayagarh, Srikakulam
Kharagpur, Kolkata, Rajpur
Sonarpur
100-400
50-200
50-200
November 09, 2016
Page 68
Dalmia Bharat
DBL: A play on volumes

Utilisation to rise to 75% by FY19E from 50%
Whilst DBL has managed to increase capacity by 16x over FY05-16, volumes
have grown at a lower 8x over FY05-16, driving capacity utilisation down to
50% in FY16 from 100% in FY06. On the back of (a) volume recovery in South
India; and (b) lack of capacity addition plans by DBL, we expect capacity
utilisation to rise to 75% by FY19E from 50% in FY16 (14% volume CAGR).
Lower cost structure in East and South India and availability of new capacities
in Belgaum will enable the company to grow ahead of industry.
Exhibit 12: Capacity utilisation to rise above 55% after 5 years
30
125%
25
100%
20
75%
15
50%
10
25%
5
-
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Capacity
Production
Utilisation - RHS
mainly driven by South India

As discussed earlier, whilst the company does not disclose plant/region-wise
utilisation, empirical evidence suggests that:
The South India capacities of ~12.1mtpa (48% of total) are currently running at
sub 50% utilisation;
The North East capacities of ~3.6mtpa (14% of total) are also running at sub 50%
utilisation; whereas
The East India operations of 9.3mtpa (incl. Bokaro) (27% of total) are running at
healthy utilisation (~70-75%).
Over FY16-19E, we expect DBL to sell incremental ~6mt of volumes, majority of

which (~4mt or 68%) is likely to be driven by South India, increasing capacity
utilisation in the South to ~70% by FY19E vs sub 50% currently. Of the remaining
2mt, ~1.4mt (23%) is likely to be driven by East India and the balance ~0.6mt (9%) is
likely to be driven by North East.
Exhibit 13: Volume growth driven by South India
20
1.4
15
North East
10%
0.5
4.1
10
5
Exhibit 14: Our estimate of FY19E geographical split
South
45%
18.8
12.8
East
45%
0
FY16E
South
East
November 09, 2016
North East
FY19E
Page 69
Dalmia Bharat
South India: The volume driver

Presence of large limestone reserves in South Indian states (AP, Karnataka and Tamil
Nadu) led to sharp increase in capacities in the heydays of the Indian cement
industry. As depicted in the exhibit below, over FY11-16, cement demand declined
(2-4% p.a.) in Kerala and Andhra Pradesh and has been flattish in Tamil Nadu;
Karnataka market has seen a muted 4% demand CAGR. Against the overall South
India market demand remaining flattish, capacities have grown at a 4% CAGR,
resulting in a further drop in an already weak regional capacity utilisation (from
~55% in FY10 to ~40% in FY16).
Post several years of decline in South India, demand has started picking up in
1HFY17 as political stability and government expenditure in key states of
AP/Telangana and Tamil Nadu picks up. Against FY11-16 demand decline of 2-4% in
Kerala and Andhra Pradesh, demand in 1HFY17 has been ~20% in AP and flattish in
Kerala. We expect this momentum to continue and expect demand in South India to
recover to ~7% in FY17, 10% in FY18 and 13% in FY19E. This coupled with negligible
capacity additions (2%) planned over FY16-19E in the region (only 1.15mt by Bhavya
Cement in AP and 3mt by Shree Cement in Karnataka) are likely to improve capacity
utilisation from 38% in FY16 to 50% in FY19.
Exhibit 15: Demand recovery + stable capacity = increase in capacity utilisation [mtpa]
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
AP
48
56
65
74
76
80
81
81
81
82.15
82.15
Karnataka
15
22
24
26
29
31
33
36
36
36
39
TN
27
34
37
37
38
38
38
38
38
38
38
91
113
127
138
144
150
153
156
156
157.15
160.15
AP
22
23
21
21
20
18
16
17
Karnataka
12
13
14
14
15
16
15
16
TN
16
17
19
20
21
20
19
19
10
10
10
63.1
64.7
65.7
64.3
58.9
8
60.1
64.29
70.72
79.92
49.7%
46.9%
45.6%
42.9%
38.5%
38.5%
41.2%
45.0%
49.9%
Capacity
Kerala
Total
Volumes
~1.8mt would be from its new Belgaum plant commissioned in March 2016. It
would sell to Maharashtra, AP and Karnataka (we expect the plant to achieve
~75% utilisation by FY19E, not a big ask given the plant is already running at 4050% utilisation).
~2.2mt incremental volumes from the older capacities (~9.5mtpa spread across
Tamil Nadu and AP).
November 09, 2016
12%
10%
10%
5%
5%
7%
3%
0%
South
In our view, pick-up in overall cement demand in South India coupled with DBLs
presence across markets and ramp-up of new Belgaum plant would enable DBL to
report above industry volume growth in South India. We expect DBL to clock ~4mt
incremental volumes in South India over FY16-19E, of which:
15%
Andhra
Pradesh
We highlight that DBL has presence in all the four states in South India. In 1HFY17,
DBL had a ~7% market share in South India, with Tamil Nadu and Kerala being its
strongest markets (12% market share; refer adjacent callout). With the commissioning
of DBLs new plant in Belgaum in 4QFY16, we expect DBLs market share to rise in
Karnataka and AP/Telangana.
DBL: 1HFY17 market share in

South India
Karnataka
Dalmias presence across markets in South India to help gain market share
Kerala
Total
57.9
61.1
Average
63.6%
54.1%
utilisation
Tamil Nadu
Kerala
Page 70
Dalmia Bharat
But further pricing growth in South India is unlikely

Prices remain stable led by discipline: Cement prices in South India have
remained elevated (higher than pan-India average) for over the last two years as
pricing discipline remained strong in states such as Tamil Nadu and Kerala. Whilst
prices in AP have been volatile due to the demand weakness and increased supply
post capacity addition by Orient and Dalmia Bharat, our recent checks suggest that
cement prices have improved by ~15% as against the lows of April-16. Moreover, we
hear that cement demand in AP continues to expand at ~20% for the last six months
(albeit on a low base of last year), driven by pick-up in organised real estate
construction and investments by the Telengana government in irrigation projects.
Exhibit 16: Cement prices in South India have remained heady over the last two years
South (Price/50kg bag)
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
370
350
330
310
290
270
250
South
High fragmentation due to AP: Presence of large limestone reserves in South

Indian states (AP, Karnataka and Tamil Nadu) led to sharp increase in capacities in
the heydays of the Indian cement industry. However, weak demand amid high
capacity commissioning led to significant over-capacity. Also, several small- and midsize manufacturers (1mn-5mn tonnes) have presence in South India and have a
reasonable brand in their micro markets, which makes South India the most
fragmented region in India.
Exhibit 17: South

fragmented...
India
is
highly
Exhibit 18: and
Capacity share:FY09
dominated
Others,
35.2%
Ramco,
Dalmia, 8.1%
5.5%
Others,
32.9%
ICEM,
15.2%
ACC ,
10.0%
Dalmia,
8.2%
UTCEM,
17.2%
Others,
30.6%
Chettina
d, 11.8%
Ramco,
11.3%
ICEM,
11.7%
cement
Capacity share:FY18
UTCEM,
14.0%
Chettina
d, 14.2%
November 09, 2016
Exhibit 19: regional

manufacturers
Capacity share:FY16
UTCEM,
12.1%
ACC ,
9.7%
by
ACC ,
9.3%
Dalmia,
9.7%
Chettina
d, 10.9%
Ramco,
11.3%
ICEM,
10.9%
Page 71
Dalmia Bharat
Exhibit 20: High fragmentation in AP is a key reason for pricing disruption
(mn tonnes)
100
100%
82
80
80%
60
60%
37
40
34
40%
20%
20
0%
AP
TN
Overall capacity (LHS)
Karnataka
Share of Top-3
Share of Top-5
Our view on pricing in South India: Whilst cement prices in South India have
remained elevated, we note that the same has been supported by pricing discipline,
with high leverage necessitating maintaining pricing in absence of demand growth.
We do not see scope of further price hikes in the region; if demand continues
to remain weak, there is a chance that prices may reduce. Hence, we factor in
only a 0.6% realisation CAGR for South India over FY16-19E.
DBL: 1HFY17 market share in East
India
We expect an incremental ~1.4mt to be sold in East India over FY16-19E, resulting in

further rise in capacity utilisation from ~75% in FY16 to ~92% by FY19E. We
highlight that OCL is present in the premium markets of Odisha, West Bengal, Bihar
and Jharkhand (refer to callout) and, hence, faces lower competition compared to
players based in Chhattisgarh.
18%
21%
13%
North East
9%
Jharkhand
Orissa
14%
East
23%
Bihar
25%
20%
15%
10%
5%
0%
Post takeover of OCL Indias control by DBCL, OCL Indias capacity was also
increased from ~4mt in FY09 to 6.7mt in FY14 by way of: (a) enhancement of
capacity at Kapilas, Odisha (from 0.35mt to 1.35mt); and (b) greenfield expansion at
Medinipur, West Bengal (1.35mt). Capacity utilisation at OCL increased to ~84% in
FY16 from 50% in FY14 as the West Bengal capacity ramped up over FY15-16. In
FY16, DCBL acquired a further 24% stake in OCL, making it a subsidiary and is now
likely to be merged with DBL. Other than OCL, DBL has a 2.6mt grinding unit in
Bokaro, all of which are slag-based capacities.
West
Bengal
East India: Limited scope for volume growth given high

utilisation
Exhibit 21: Capacity utilisation (ex-Bokaro) at all-time high of 92% by FY19E

100%
8
7
80%
6
5
60%
4
40%
3
2
20%
1
0
0%
FY12
FY13
FY14
Capacity
FY15
FY16
Production
FY17
FY18
FY19
Utilisation - RHS
November 09, 2016
Page 72
Dalmia Bharat
East India: Premium pricing losing its sheen

East India has historically been one of the most favored markets for cement
companies given that it has been a cement deficit market, which helped companies in
commanding premium pricing. However, with entry of several manufacturers from
other regions (Shree, JK Lakshmi) and new entrants such as Emami Cement, the
premium pricing of the market has started to wane and has dropped sharply in states
such as Chhattisgarh.
Exhibit 22: East India losing its pricing premium
East
(Price/50kg bag)
400
350
300
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
250
East
Exhibit 23: Entry of new players..

Capacity share:FY09
Shree,
0.0%
Others,
19.8%
UTCEM,
23.5%
Shree,
9.5%

Capacity share:FY18
Capacity share:FY16
Others,
10.5%
UTCEM,
23.3%
OCL,
6.4%
ACEM,
14.6%
Lafarge,
18.4%
OCL,
12.7%
UTCEM,
20.0%
Shree,
14.0%
ACC,
12.1%
ACC,
17.3%
Others,
16.5%
ACEM,
12.9%
ACC,
14.2%
Lafarge,
19.0%
OCL,
11.7%
Nirma*,
14.0%
ACEM,
9.6%

Our view on pricing in East India: Although demand growth in East India has
been higher than most other Indian regions, the rising prominence of volumefocused players such as Shree, JK Lakshmi and now Orient Cement will lead to weak
pricing. Pricing growth in East will be the lowest amongst Indian regions. However,
within the eastern markets, OCL is largely present in Odisha, West Bengal,
Jharkhand and Bihar, which are premium markets compared to Chhattisgarh
and, hence, we expect realisation CAGR of 3% for OCL over FY16-19E.
North East India: Too small a market by itself

North East in itself is a small ~7mt market, where DBL already has ~20% market
share given its inorganic expansion (2.1mt in Assam and 1.5mt in Meghalaya). With
the commission of a new clinker unit at Assam, DBL is now self-sufficient in terms of
clinker. However, given the small size of the market, we expect only ~0.5mt of
incremental volumes from North East over FY16-19E
November 09, 2016
Page 73
Dalmia Bharat
A play on
leverage
operating
and
financial
DBLs volume growth (8x increase over FY06-16) is yet to match up to capacity
growth (16x over FY06-16), which has resulted in sharp increase in fixed
costs/tonne over the last 5 years. As utilisation in South India improves, we
expect improved fixed cost absorption to drive 200bps EBITDA margin
expansion over FY16-19E. We expect EBITDA CAGR of 20% (14% volume, 5%
EBITDA/t) and low capex to generate `42bn FCF over FY17-19E and reduce
net debt:equity to 0.7x by FY19.
(A)
Operating leverage Dalmia ranks second on our

framework given low fixed cost absorption
As discussed earlier, DBLs volume growth (8x increase over FY06-16) is yet to match
up to capacity growth (16x over FY06-16), which has resulted in a sharp increase in
fixed costs over the last 5 years. Fixed costs per tonne increased sharply (2x) as the
company invested in professional management, and overheads increased with new
capacity addition (refer exhibit 23 below).
Exhibit 26: Fixed costs have increased sharply and should reduce with rising scale [`/tonne]
DBL
OCL India
FY11
FY12
FY13
FY14
FY15
FY16
FY11
FY12
FY13
FY14
FY15
FY16
Employee cost
229
267
326
339
396
396
213
245
281
340
330
296
Repairs
108
118
103
131
175
130
166
190
190
189
190
129
14
12
25
35
31
41
37
31
48
88
60
55
Rent
Insurance
10
Professional and Legal fees
40
52
52
59
61
Payment to Auditor
Other Admin exp
54
34
77
115
111
225
Advertisement
Loss on foreign exchange
fluctuation
Other misc expense
30
55
77
110
92
33
56
49
58
87
10
17
13
25
223
142
170
211
250
271
81
69
101
144
152
121
Travel and Conveyance
13
15
21
20
17
Director remuneration
Royalty
Bad debt w/off
Provision for Doubtful debt
14
530
648
794
1,002
941
943
Total
581
625
739
870
1,084
1,002
On the back of our expectations of a sharp pick-up in capacity utilisation over FY1619E, we expect fixed costs as a % of sales to decline to 26% from 31% currently,
driving significant operating leverage and EBITDA margin expansion of ~200bps.
November 09, 2016
Page 74
Dalmia Bharat
Exhibit 27: DBL (ex-OCL) fixed cost as % of sales to decline
from decline from 21% in FY16 to 19% in FY19
(`/tonne)
32%
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
Fixed cost/tonne
Fixed costs as % of sales (RHS)
FY19E
FY18E
FY17E
FY16
FY15
Fixed cost/tonne
Fixed costs as % of sales (RHS)
FY14
1,600
1,400
1,200
1,000
800
600
400
200
FY11
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
FY13
1,400
1,200
1,000
800
600
400
200
-
FY12
(`/tonne)
Exhibit 28: OCLs fixed cost as % of sales to decline from

21% in FY16 to 16% in FY19E
As highlighted in the thematic section, DBL ranks second best in our analysis of 10
key cement companies in India on operating leverage parameters to understand
which companies would be the key beneficiaries when demand and pricing improve
in India. We ascertain the same based on: (a) fixed cost as a % of sales and the
increase over the years which will sieve companies whose fixed cost absorption
has deteriorated due to lack of sales growth as pricing in the target markets is weak;
and (b) scope of per tonne savings which will be realised as utilisation improves.
Exhibit 29: Ranking the top-10 cement companies on operating leverage framework
Company
Utilisation
FC as a % of Change in FC over
sales
FY11-16 (bps)
Fixed cost/Installed
Capacity (`/tonne)
Fixed cost/
Volume (`/tonne)
Scope of
savings
(`/tonne)
Ranking
ORCMNT
55%
22%
784
426
771
346
DBL
54%
20%
441
513
943
430
ACEM
73%
20%
679
614
845
231
TRCL
60%
15%
428
421
698
277
SRCM
73%
16%
482
472
643
171
ACC
77%
20%
(53)
785
1,019
234
ICEM
56%
14%
(117)
410
734
325
JKCE
72%
15%
29
528
729
201
JKLC
82%
14%
153
409
499
90
UTCEM
77%
12%
(117)
443
572
130
10
November 09, 2016
Page 75
Dalmia Bharat
(B)
Financial leverage: Time for deleveraging
Volume growth to drive EBITDA growth

As discussed earlier, halt to capacity additions by DBL over FY16-19E and pick-up in
volumes in South India are likely to increase capacity utilisation to 75% by FY19E vs
50% in FY16. As a result, we expect sharp improvement in DBLs EBITDA profile (20%
CAGR over FY16-19E) and ROIC to increase to 17.2% in FY19 from ~8.2% in FY16.
Exhibit 30: Utilisation
to
rise
to
75%
in
FY19E
30
125%
25
100%
Exhibit 31: EBITDA

improvement
CAGR
of
18%
to
drive
30
20
18
16
14
12
10
8
6
4
2
0
25
20
15
50%
10
25%
0%
Capacity
Production
Utilisation - RHS
EBITDA (Rs bn)
FY19E
FY18E
FY17E
FY16
FY15
FY11
FY19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
10
FY14
15
FY13
75%
FY12
20
RoIC
RoIC (%)
The 3x increase in cement capacity for DBL over FY11-16 has come at the cost of
sharp increase in net debt (up from `13bn in FY11 to `62bn by FY16) as internal cash
flow generation was inadequate to fund organic and inorganic expansions. However,
EBITDA CAGR of 20% over FY16-19E coupled with halt to expansion capex (capex is
restricted to merely maintenance capex) are likely to result in FCF generation of
~`42bn over FY16-19E and reduce net debt from ~`62bn in FY16 to ~`38bn at the
end of FY19E. Significant de-leveraging coupled with improved profitability will (a)
reduce net debt to equity to 0.7x by FY19E from 1.6x in FY16, and (b) improve
interest coverage ratio to 2.6x by FY19E.
Exhibit 32: FCF of `42bn over FY16-19 (vs negative FCF

over FY13-15E) (` bn)
Exhibit 33: to drive significant de-leveraging
25
3.0
20
2.5
2.0
15
1.5
10
1.0
0.5
Capex
November 09, 2016
FCF
Interest coverage (x)
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
(5)
FY11
Net debt: Equity
Page 76
Dalmia Bharat
DBL ranks second on our financial leverage framework
Even on our financial leverage framework, DBL ranks second amongst 18 cement
companies since the companys leverage increase has been to fund recent
expansions in Karnataka and West Bengal and inorganic acquisitions. On this
framework, we rank cement companies based on their capability to deleverage,
which is not to say that we like companies where leverage is high but companies
where leverage increase in on account of capacity addition (and not because of poor
capital allocation and management has the intent to improve the balance sheet). We
also ascertain which companies have the least capital employed/tonne, which implies
that higher utilisation and debt repayment will drive a sharp RoCE recovery.
As highlighted earlier, we expect Dalmias net debt to equity to reduce from 1.6x in
FY16 to 0.7x by FY19 and interest coverage to improve 2.6x by FY19 from 1.6x in
FY16, which make DBL rank no1 on parameters of leverage and scope to deleverage. However, DBL has the highest capital employed/tonne in the industry and,
hence, fares poorly on this key parameter. We highlight in the exhibit alongside that
DBLs capacity additions have been at a capex/tonne ~12% higher than industry
average. This coupled with the fact that DBL has increased capacity by 3x in last 5
years (resulting in sharp increase in debt) result in DBLs capital employed per tonne
being the highest among peers.
Exhibit 34: Orient Cement and Dalmia Bharat rank superior on the FL framework
Company
Gross block per tonne (`)

Company
Gross Block per tonne
Orient Cement
3,432
ACC
3,667
Ambuja
4,051
India Cement
4,426
JK Cement
4,780
Shree Cement
4,999
JK Lakshmi
5,151
UltraTech
5,214
Dalmia Bharat
5,344
Leverage
CE/tonne
Scope
Overall Rank
ORCMNT
DBL
10
JKLC
Ramco Cement
6,278
ICEM
Average
4,762
JKCE
TRCL
ACC
10
SRCM
UTCEM
10
10
ACEM
Exhibit 35: Parameters of our ranking scheme

Net Debt/Equity
Net Debt/EV
CE/tonne
Cumulative
FCF/DEBT
ORCMNT
1.2
0.2
2,883
30%
DBL
1.6
0.3
5,147
25%
JKLC
1.5
0.3
3,759
24%
ICEM
1.0
0.4
4,068
22%
JKCE
1.7
0.3
4,594
24%
TRCL
0.7
0.1
4,415
33%
ACC
(0.2)
(0.0)
2,738
-146%
SRCM
0.1
0.0
3,668
404%
UTCEM
0.3
0.1
4,283
55%
ACEM
(0.5)
(0.1)
3,487
-52%
Company
November 09, 2016
Page 77
Dalmia Bharat
(C)
Efficiency: DBL the third-best in the industry
On our efficiency framework, DBL stands third amongst 18 cement companies behind
Shree and Orient given its below industry power & fuel and freight costs.
Exhibit 36: Dalmia ranks third-best on our efficiency framework
VC/tonne
(FY16)
Rank
on VC/tonne
VC/tonne
FY11-16 CAGR
Rank on VC/
tonne CAGR
Overall
Rank
Shree
2,099
-7%
Orient
2,230
-1%
Dalmia Bharat
2,630
-1%
Ramco
2,808
2%
Jk Lakshmi
2,814
2%
Ambuja
2,837
3%
UltraTech
3,227
3%
ACC
3,284
5%
ICEM
3,920
10
3%
JK Cement
3,694
5%
10
10
Company
Exhibit 37: Variable cost split for the ranking above

RM Cost
per tonne
P&F cost
per tonne
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
ACC
771
1,004
1,142
367
3,284
2,142
Shree
563
531
574
431
2,099
1,525
Dalmia Bharat
888
649
767
325
2,630
1,863
Jk Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
JK Cement
983
1,078
1,087
547
3,694
2,607
Orient
473
902
722
133
2,230
1,508
India
779
1,088
906
1,146
3,920
3,014
Company
Cost efficiencies across raw material, energy and market reach

DBL has been able to achieve this over the last five years due to significant efforts
made by the management towards:
Shielding rise in raw material costs by increasing the blending mix (from 1.4x in
FY11 to 1.8x in FY16)
Reducing power and fuel costs by increasing the ratio of economic fuels from 0%
in FY11 to 74% in FY16
Managing lead distance at ~300kms for DBL vs ~500kms average for the
industry
Exhibit 38: Improving process efficiencies

Dalmia (Consolidated)
OCL
FY14
FY15
FY16
FY14
FY15
FY16
Alternative Fuels
15%
45%
73%
0%
9%
87%
Blended cement
71%
74%
80%
NA
100%
100%
November 09, 2016
Page 78
Dalmia Bharat
Exhibit 39: DBL(ex-OCL) variable costs have been stable to
declining over the last 5 years as increase in raw material
cost was offset by decline in power & fuel cost
(`/tonne)
3,500
3,000
2,500
2,000
1,500
1,000
500
FY19E
FY18E
FY17E
FY16
FY15
FY14
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
FY11
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
62.0%
60.0%
58.0%
56.0%
54.0%
52.0%
50.0%
48.0%
46.0%
44.0%
FY13
3,500
3,000
2,500
2,000
1,500
1,000
500
-
FY12
(`/tonne)
Exhibit 40: OCLs variable costs have also been stable to

declining over the last 5 years as decline in raw material
and power & fuel costs is fully offset by higher freight cost
Total variable costs per tonne

Variable costs as % of sales
Total variable costs per tonne

Variable costs as % of sales
Power & fuel cost: Among the lowest given efficiencies and production of
slag-based cement
By implementing process modifications in its plants, DBL increased the use of
economic fuels (petcoke, carbon black, wood, charcoal, municipal waste and saw
dust among others) resulting in 73% of total fuel consumption in its kiln and captive
power plants being met by these fuels as against 45% in the previous year. The usage
of economic fuel in its Southern units reached ~100%. All kilns and captive power
plants switched to most economic fuels in FY2015-16. Power & fuel cost dropped by
28% in FY16 as the company increased usage of economical fuels and reduced
power consumed/tonne of cement manufactured to 67 units in FY16 as against 74
units in FY15. At OCL, the company increased the usage of petcoke to 87% in FY16
as against 9% in FY15 and reduced power used per tonne of cement produced to 62
units as against 68 units in FY15.
However, petcoke price has increased sharply in the last six months (from
US$40/tonne in Jan-16 to US$80/tonne currently) and we expect power & fuel
cost/tonne to rise by ~10% in FY18E vs FY17E. Management highlighted that it
would make efforts to reduce the impact of power & fuel cost by increasing the use of
alternative fuels from ~5% currently to 8-10%.
Exhibit 41: DBL (ex-OCL) power & fuel cost per tonne and
power and fuel costs as % of revenues
(`/tonne)
1,500
35%
30%
25%
20%
15%
10%
5%
0%
1,000
500
November 09, 2016
unit
and
80
78
76
74
72
70
68
66
64
62
FY11
FY12
FY13
FY14
FY15
FY16
Alternate fuel as % of total

Power (kwh/t)
P&F as % of revenues
per
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY19E
FY18E
FY17E
P&F
FY16
FY15
FY14
FY13
FY12
FY11
Exhibit 42: DBL power consumption

alternate fuel as % of total
Page 79
Dalmia Bharat
Exhibit 43: OCL power & fuel cost per tonne and power
and fuel costs as % of revenues
(`/tonne)
1,000
and
80%
80
60%
75
10%
40%
70
5%
20%
65
0%
0%
60
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
P&F
unit
85
15%
per
100%
20%
500
Exhibit 44: OCL power consumption

alternate fuel as % of total
FY11
FY12
FY13
FY14
FY15
FY16
Alternate fuel as % of total

Power (kwh/t)
P&F as % of revenues
Logistics cost: Low lead distance and improving ancillary infrastructure

DBLs freight cost (`750/tonne) is significantly below the industry average of `9001000/tonne mainly due to rationalising of lead distances. The company highlights
that the lead distance from its plants is less than 300km and it has built ancillary
infrastructure to ensure reduction of overall costs. The group invested in building
railway sidings and conveyor belts at almost all locations and deployed a GPStracking system to ensure faster turnaround for vehicles and improve cost efficiency.
The company is working towards improving efficiencies by: (a) launching app-based
ordering and delivery for dealers; (b) evaluating a captive wagon and fleet model.
Exhibit 45: DBL (Ex-OCL) Freight costs per tonne
Exhibit 46: OCL Freight costs per tonne
(`/tonne)
(`/tonne)
1,000
20%
15%
15%
1,000
10%
November 09, 2016
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY11
0%
Freight cost per tonne
Freight as % of revenues
5%
FY19E
Freight cost per tonne
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
0%
FY11
500
FY13
5%
10%
FY12
500
20%
1,500
Freight as % of revenues
Page 80
Dalmia Bharat
Process efficiencies
Our checks in the industry suggest that Mahendra Singhi was widely respected in
Shree Cement for his employee management and empowerment skills. It appears
that in Dalmia as well he is working towards creating a strong employee culture to
create a long-term sustainable competitive advantage. In the FY16 annual report, the
company explicitly states how it is creating a strong professional workforce. Below are
the key highlights:
Inducted younger employees to bring down the overall employee age to 34 as

against 45 years five years back.
Created a leadership pipeline; conducting an 18-month star programme.

Cultural transformation in hiring process from hiring to plug vacancies to building
capabilities and building a knowledge pool.
Single digit attrition rate and almost nil attrition at senior management.
Employee empowerment and building the next line of professional managers,

conducting multiple training programmes and building an employee ecosystem
are critical to the companys long-term plans.
November 09, 2016
Page 81
Dalmia Bharat
Our assumptions and estimates

DBL (ex-OCL): Volume CAGR of 20% to drive 22%
EBITDA CAGR over FY16-19E
Exhibit 48: DBL (Ex-OCL) realisations to remain stable
(`/tonne)
14
80%
6,000
12
70%
60%
5,000
10
4,000
40%
3,000
Volume (mtpa)
1,000
FY19E
FY18E
FY11
FY19E
FY18E
FY17E
FY16
FY15
FY14
0%
FY13
0
FY12
10%
FY11
2,000
FY17E
20%
FY16
FY15
30%
FY14
50%
FY13
FY12
Exhibit 47: DBL (Ex-OCL) 20% volume CAGR to drive

utilization to 68% from ~50% in FY16
Realisation/t
Utilisation - RHS
Exhibit 49: DBL (Ex-OCL) decline in fixed costs offset by

higher power and fuel costs
Exhibit 50: DBL (Ex-OCL) margins to improve on account

of operating leverage
Fixed cost / tonne (Rs)
EBITDA/tonne (Rs)
FY19E
10.0
FY18E
FY17E
15.0
FY16
500
FY15
20.0
FY14
1,000
FY13
25.0
FY12
1,500
FY11
30.0
FY19E
FY18E
FY17E
2,000
Variable cost / tonne (Rs)
November 09, 2016
FY16
FY15
FY14
FY13
FY12
FY11
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
EBITDA margin (%) - RHS
Page 82
Dalmia Bharat
OCL: Volume CAGR of 4% and realization CAGR of 3%

to drive 18% EBITDA CAGR over FY16-19E
Volume (mtpa)
3,500
3,000
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
4,000
FY19E
4,500
FY18E
5,000
FY17E
FY16
5,500
FY15
6,000
FY14
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Exhibit 52: OCL realisations to grow at 3% CAGR (`/tonne)
FY13
Exhibit 51: OCL 4% volume CAGR as OCL already

operates at high utilization
Realisation/t
Utilisation - RHS
Exhibit 53: OCL marginal increase in cost due to rise in

power and fuel cost whereas scope for operating leverage
is minial
Exhibit 54: OCL margins to improve on account of

realization growth of 3% p.a.
30.0
1,400
5,000
1,200
4,000
25.0
1,000
3,000
800
2,000
600
20.0
400
1,000
15.0
200
Fixed cost / tonne (Rs)
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY19E
FY18E
10.0
EBITDA/tonne (Rs)
Variable cost / tonne (Rs)
November 09, 2016
FY17E
FY16
FY15
FY14
FY13
EBITDA margin (%) - RHS
Page 83
Dalmia Bharat
Key assumptions and estimates for DBL (consolidated)

Exhibit 55: Key assumptions and estimates
Particulars
FY15
FY16
FY17E
FY18E
FY19E
17.2
25.0
25.0
25.0
25.0
7.0
12.8
15.0
17.1
18.8
41%
51%
60%
68%
75%
5,006
5,030
4,978
5,125
5,327
Raw Material
751
954
954
979
1,016
Employee
397
396
422
401
393
1,014
690
670
731
771
Comments
Operational Parameters
Capacity (mtpa)
Cement Sales (mtpa)
Capacity Utilisation (%)
We do not factor in any fresh capacity additions by DBL

over the next 3 years. We expect ~6mt of incremental
volumes (14% CAGR) over FY16-19E, of which ~4mt will
be driven by South India, and the balance would be from
East (1.4mt) and North East (0.5mt).
Lack of capacity additions coupled with volume recovery

in South India is likely to drive capacity utilisation up from
~50% in FY16 to ~75% by FY19E.
We expect average blended realisations to grow at a mere

2% CAGR as we expect pricing to remain muted in DBLs
key markets South and East India.
Despite DBLs rising usage of economic fuels such as pet

coke, etc., power and fuel costs are expected to move up
(4% CAGR) on the back of recent rise in pet coke as well
as coal prices
Per tonne analysis (`)

Realisation
Power
Freight
890
815
827
865
906
Other
1,093
952
884
839
813
Operating Cost
4,148
3,796
3,756
3,814
3,898
Employee costs as well as other overhead costs are likely

to remain flattish to declining over FY17-19E on account
of operating leverage as capacity utilisation improves
858
1,233
1,222
1,310
1,430
Overall EBITDA/t to rise at a muted 5% CAGR despite

operating leverage as realisation CAGR is likely to a mere
2% over FY16-19E
Revenue
35,141
64,380
74,779
87,530
100,309
EBITDA
6,025
15,786
18,354
22,384
26,918
We expect 16% revenue CAGR over FY16-19E on the back

of 14% volume CAGR and a muted 2% realisation CAGR
17%
25%
25%
26%
27%
3,309
11,259
12,977
16,859
21,179
9%
17%
17%
19%
21%
Operating leverage is likely to drive EBITDA CAGR of 20%

and EBITDA margin expansion from 25% in FY16 to 27%
in FY19E
(101)
5,644
6,587
10,969
15,954
PBT Margin
0%
9%
9%
13%
16%
Strong cash flow generation over FY16-19E coupled with

lack of capacity additions is likely to drive reduction in net
debt from `62bn in FY16 to `38bn in FY19E.
Adjusted PAT
92
1,908
3,997
6,771
10,119
Adjusted PAT Margin
0%
3%
5%
8%
10%
We expect PAT to increase 5x driven as the benefits of

operating and financial leverage play out.
EPS diluted (`)
1.1
23.2
48.6
82.4
123.1
5,448
18,907
14,247
17,676
20,712
(4,953)
(3,852)
(2,238)
(3,683)
(4,858)
496
15,055
12,008
13,993
15,854
We expect DBL to generate FCF of ~`42bn over FY17-19E

and as capex is restricted to mere maintenance capex.
RoCE (%)
3.0
7.2
9.3
11.8
14.0
RoIC (%)
3.1
8.2
11.6
14.6
17.2
CE Turnover (x)
0.3
0.6
0.7
0.8
0.9
We expect RoIC to improve from ~8% in FY16 to 17% in

FY19E as EBIT margin recovers from 17% in FY16 to 21%
in FY19 and increase in capital employed turnover from
0.6x in FY16 to 0.9x in FY19E.
EBITDA
P&L (` mn)
EBITDA Margin
EBIT
EBIT Margin
PBT
Cash flow statement

CFO
Net capex
FCF
Ratios
November 09, 2016
Page 84
Dalmia Bharat
Ambit vs Consensus
Our sales, EBITDA as well as PBT estimates for FY17 are lower than consensus. This
could be on account of our expectation of weak pricing in south India in FY17
whereas we expect pricing to recover in FY18.
Exhibit 56: Ambit vs Consensus
Particulars
Ambit
Consensus
Divergence
FY2017
74,779
75,878
-1%
FY2018
87,530
86,724
1%
FY2017
18,354
19,191
-4%
FY2018
22,384
22,212
1%
Revenue (` mn)
EBITDA (` mn)
PBT (` mn)
FY2017
6,587
7,755
-15%
FY2018
10,969
10,915
0%
Exhibit 57: Explanation for flags highlighted on the first page

Segment
Score
Comments
GREEN
The company is in the fourth decile of Ambit's forensic accounting framework, which is the zone of Safety.
Moreover in the last five years, the company delivered cumulative CFO/EBITDA of 95%. Key parameter on
which DBL has weak score is Miscellaneous expense as % of Total Revenues.
Predictability
AMBER
For the existing operations, EBITDA/tonne is a function of realisations, which is volatile and difficult to predict
given large overcapacity in the key market DBL operates in. DBL has added scale (16x in last 10 years) by
making several organic and inorganic acquisitions. Further capacity organic / inorganic acquisitions remain
the key uncertainty/risk.
Earnings Momentum
GREEN
FY17/FY18 EBITDA estimates have seen 8-10% upgrades in the past six months, mainly driven by improving
earnings visibility.
Accounting
November 09, 2016
Page 85
Dalmia Bharat
Valuation set to exceed that of past

leaders
Over the last 4-5 years, valuations of both Shree and UTCEM have usurped
decade-old brands and efficiency leaders as they established scale, efficiency
and balance sheet strength. Dalmia is at the cusp of displacing ACC/ACEM as
it maximizes available scale and establishes sustainable low costs and
improved brand recall. Our TP of `2,350 (~25% contributed by OCL) values
DBL consolidated at FY19 EV/EBITDA of 9.8x. Our valuation for DBL (ex-OCL)
stands at 11x FY19E EV/EBITDA as we value FY19 EBITDA at 8.5x for OCL as
well as DBL and incrementally add value of the under-utilised capacity of
~5.7mtpa at US$140/tonne. Risks: Pricing breakdown in South, high
competitive intensity in East India, and higher fixed costs.
DCF-based valuation: Volumes and operating leverage

before capacity creation
We value DBL using a DCF methodology and discount free cash flows to the firm at a
WACC of 13.5%. Our valuation is based on explicit assumptions for the next 10 years
and a terminal growth rate of methodology given that DBL has significant debt.
Our DCF model factors in the following:
We build in sales volume CAGR of 16% over FY16-19E, mainly driven by

improvement in capacity utilisation from ~50% in FY16 to ~75% in FY19E.
Thereafter, we factor in volume CAGR of 5.5% over the DCF period of FY19-28E.
We expect EBITDA margins to rise to ~27% by FY19 vs 25% in FY16 on the back
higher fixed cost absorption that would drive operating leverage. We expect
EBITDA/tonne to rise to ~`1,540 for DBL by FY19 (from `1,467/t in FY16) due to
operating leverage; and EBITDA/t for OCL to increase to `1,202/t vs `934/t in
FY16 (due to cost efficiencies and realization growth). Thereafter, we factor in
EBITDA/t CAGR of 5% over FY19-28E.
Our DCF model values DBL (ex-OCL) at `1,780/share, contributing to ~75% of

the target price. DBLs 75% stake in OCL contributes incremental `575/share
(25% of target price).
Adding the two, we value DBL at `2,350/share one-year forward (16% upside) and
recommend investors to BUY. Our TP implies FY19E EV/EBITDA of 9.8x vs current
FY18 EV/EBITDA of 8.9x. We highlight that post the restructuring, DBL will be merged
into OCL and our post-merger TP remains the same.
Exhibit 58: DCF-based valuation
Particulars
` mn
Total PV of free cash flow (a)
95,989
PV of terminal value (b)
124,135
EV (a) + (b)
220,124
EV (US$ mn)
4,892
Net debt
62,290
Equity value (Dalmia )
157,834
Add: Value of DBL's share in OCL (77% of OCL's valuation)
50,988
Equity value (for Dalmia Shareholders)
208,822
No. of shares
88.8
Value per share
2,350
November 09, 2016
Page 86
Dalmia Bharat
Implied valuation
Our TP of `2,350/share values DBL consolidated at FY19 EV/EBITDA of 9.8x and
EV/tonne of `175/tonne. Our implied valuation for OCL stands at 8.5x FY19
EV/EBITDA, lower than for consolidated entity as capacity utilisation of OCL is higher
(92% in FY19E) and, hence, EBITDA fully captures its earnings potential. Our implied
valuation for DBL (ex-OCL) stands at 11x FY19E EV/EBITDA as we value FY19 EBITDA
at 8.5x and incrementally add value the under-utilised ~5.7mtpa capacity at
US$140/tonne. On a blended basis, our TP implies EV/tonne of US$175, which we
believe is justified as it costs US$130-140/tonne to set up greenfield capacity.
Exhibit 59: Implied valuations of DBL
Cap
Utilisation
Volume
EBITDA/t
Dalmia
68%
12.5
1,544
19,345
OCL
93%
6.3
1,206
7,594
EBITDA Multiple
EV
11.0 212,794
8.5
64,549
Debt
Equity
No of
shares
Value per
share
154,916
89
1,745
55,314
89
Equity Minority
57,877 154,916
(9,311)
73,861
18,546
Total
623
210,231
2,368
Cross-cycle valuation
DBLs stock price has significantly outperformed the Sensex last year (175%
outperformance) mainly due to improving visibility on (a) capacity ramp-up and (b)
sharp increase in EBITDA/tonne at both DBL and OCL. At CMP, the stock trades at
10.7x FY18 EV/EBITDA (on our as well as consensus estimates), a significant premium
to its historical average of 6.9x. We believe a premium to historical multiples is
justified as (a) capacity utilisation in FY18 will be a muted 68% and, hence, FY18
EBITDA does not full reflect earnings potential; and (b) DBL is gradually becoming a
multi-regional player vs a single region player historically and, hence, multiples
should re-rate closer to pan-India peers such as UltraTech as diversification reduces
earnings volatility. On one-year forward EV/tonne, the stock trades at `9,500/tonne,
a premium to its five-year average of `3,450/tonne.
Our target price of `2,350/share implies 9.8x FY19E EV/EBITDA. Whilst we agree that
further re-rating is unlikely, strong EBITDA growth for the next 2-3 years is likely as
capacity utilisation at DBLs South India plants improves (we expect a 20% EBITDA
CAGR over FY16-19E).
Exhibit 60: Dalmia is trading at a premium to its average
EV/EBITDA (x)
Exhibit 61: and in-line with its average EV/tonne
14
12000
12
10000
10
8000
6000
4000
2000
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Mar-14
Aug-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
EV/Tonne
avg EV/EBITDA
November 09, 2016
Mar-16
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
1-yr fwd EV/EBITDA
Apr-11
5 yr avg EV/Tonne
Page 87
Dalmia Bharat
Relative valuation
Post the ~3x increase in share price of DBL over the last one year, DBL now trades at
10.9x FY18 consensus EBITDA, at the higher end of the Indian mid-cap peers a
discount to Ramco which trades at 12.2x FY18 EV/EBITDA but a premium to JK
Lakshmi, JK Cement and Prism which trade at 9-9.5x. We highlight that DBLs
premium to mid-cap peers is justified given DBLs EBITDA is reflective of only ~65%
capacity utilisation whereas JK Lakshmi and JK Cement are at >70-80% utilisation.
Given DBL runs at lower capacity utilisation, investors must also look at DBLs
EV/tonne vs peers as it better reflects DBLs ability to expand earnings without
meaningful capacity additions. On an EV/tonne basis, DBL trades at `9,600/tonne, a
20% discount to Ramco and other large-cap companies such as Ultratech and Shree.
As DBLs capacity utilisation and RoCE improve, we expect valuation multiples to
move closer to that of its larger peers. Our TP of `2,350/share values the company at
an EV/tonne of `10,500/share.
Exhibit 62: Relative valuation of Indian cement companies
Capacity
Rating
(mn tonnes)
FY17
Advt
EV/EBITDA
6m
Mcap
FY18
(`
bn)
P/E
EV/tonne
(x)
(x)
US$ US$
mn mn FY17 FY18 FY17 FY18
`
FY17
FY18
CAGR (FY16-18)
Sales EBITDA EPS
ROE
Interest/EBITDA
(%)
(x)
FY17 FY18
FY15
FY16
Our estimates for Covered companies

UltraTech
69.6
69.6 SELL 1,090 16,365 13.9 22.3 14.2
47
25 15,689 15,689
11
29 42
11
18
13
11
Shree Cement **
26.6
29.5 SELL
593 8,901
3.4 20.4 16.4
44
32 21,420 19,314
26
43 74
20
23
Ambuja
31.7
32.7 BUY
487 7,317 10.3 16.9 12.6
39
28 10,181 9,860
27 29
ACC
34.1
34.1 BUY
284 4,265
7.8 14.0 10.2
30
20 8,186 7,946
32 39
11
15
Ramco Cements **
13.5
13.5
147 2,209
1.9 14.1 12.0
29
22 9,787 9,787
13
13 10
15
17
27
17
0.7 12.2
UR
Orient Cement
8.0
8.0 BUY
7.2
42
14 5,779 5,779
33
87 102
21
30
Dalmia Bharat
25.0
25.0 BUY
35
527
2.0 13.1 10.7
42
25 9,615 9,615
17
19 88
10
15
72
46
UltraTech
69.6
69.6 SELL 1,090 16,365 13.9 19.2 15.4
35
27 15,748 15,748
15
22 35
14
16
13
11
Shree Cement **
26.6
29.5 SELL
36
29 22,405 20,202
21
43 92
23
23
182 2,708
Large cap
Grasim^
NA
NA
NR
593 8,901
3.4 21.5 17.4

5.4
13
11
11
20 30
12
13
13
11
Ambuja*
31.7
32.7 BUY
430 6,403 10.6
487 7,317 10.3 21.5 16.3
6.5
34
26 13,797 13,374
14
31 34
10
12
ACC*
34.1
34.1 BUY
284 4,265
7.8 17.6 13.0
37
25 7,912 7,912
16 38
12
Ramco Cements **
13.5
13.5 SELL
148 2,209
1.9 14.0 12.4
24
20 12,445 12,445
12
11 15
18
19
27
17
Dalmia Bharat #@
25.0
25.0
NR
182 2,708
2.0 12.4 10.7
Century Tex#
12.8
12.8
NR
110 1,644 15.1 16.1
8.0
8.0
NR
52
771
0.7 12.7
JK Cement
10.8
10.8
NR
64
959
Jk Lakshmi Cement
11.0
11.0
NR
55
825
10.5
10.5
NR
61
6.7
6.7
NR
8.0 BUY
Mid cap
Prism Cement #
46
30 9,545 9,545
16
19 70
13
72
46
NA 148
NA 11,668 11,668
NA
NA NA
NA
74
78
9.0
37
16 8,957 8,957
12
43 NA
12
24
89
79
0.5 12.8
10
29
16 8,485 8,485
15
31 149
12
19
47
52
0.9 13.4
9.2
42
18 6,230 6,230
23
65 NA
18
26
71
904
1.3 11.0
8.3
19
14 5,417 5,417
16
55 64
11
13
26
29
54
808
0.4
8.1
7.3
16
14 7,733 7,733
11 29
20
20
21
25
Small Cap
Birla Corp #
OCL India
Orient Cement
8.0
35
527
0.7 14.4
8.7
40
15 5,942 5,942
30
73 95
19
30
India Cements
18.5
18.5
NR
48
720
9.7
8.2
7.2
19
13 4,333 4,333
12
13 63
10
62
48
Heidelberg India
6.0
6.0
NR
31
467
0.6 11.9
9.3
30
17 6,416 6,416
12
28 115
11
16
43
46
Mangalam Cement
3.5
3.5
NR
130
0.4
8.6
6.6
15
10 3,392 3,392
18
103 NA
10
14
42
97
Sagar Cement
3.5
3.5
NR
13
188
0.3
7.8
6.9
25
10 4,092 4,092
32
47 61
17
41
29
November 09, 2016
Page 88
Dalmia Bharat
Key catalysts:
25% volume CAGR in South /West over FY16-19E: We expect DBL to sell
incremental ~6mt of volumes over FY16-19E, majority of which ~4mt (68%) is
likely to be driven by South India; increasing capacity utilisation in the South to
~70% by FY19E vs sub 50% currently on the back of commissioning of new
capacity in Karnataka and demand recovery.
Cost/t ex-P&F to remain flat over FY16-18E: Volume CAGR of 14% over
FY16-19E to drive better absorption of fixed costs. We expect (a) cost/t ex-power
and fuel to remain stable over FY16-18E vs ~10% increase over FY14-16E; and
(b) Operating leverage to drive 200bps EBITDA margin expansion over FY16-19E.
Halt to capacity expansions over next 2-3 years: We expect EBITDA CAGR of
20% over FY16-19E and a halt to capex to result in `42bn FCF over FY17-19E
and reduce net debt:equity to 0.7x in FY19 from 1.6x in FY16
Operating risks to our assumptions
Realisations: We factor prices in South India to remain stable despite weak

utilisation. A 1% decline in prices results in a 4% decline to EBITDA/tonne.
Volumes: We expect demand in South India to increase at ~10% CAGR over

FY16-19E. An increase/decrease of 1% in volumes results in 1%
increase/decrease in EBITDA.
Company specific concerns
High miscellaneous expenses: Miscellaneous expenses increased to

`260/tonne in FY16 as against `152/tonne in FY15 on account of one-off
expenditure due to higher consultancy charges. Management believes that
`500mn (`40/tonne) of the expense to be non-recurring.
Increase in managerial remuneration: Dalmias managerial remuneration

increased by ~150% in FY16 and accounted for 6% of PBT. The increase was in
consonance with a sharp increase in PBT (`5,644mn in FY16 as against a loss of
`162mn in FY15)
Court proceeding filed by original Calcom promoters: Post the restructuring

is completed, the only cement asset outside of DCBL will be Calcom Cement
(2.1mt capacity in Assam acquired in FY12). Calcom is a 76% subsidiary of DCBL
where the remaining 24% is held by its original promoters, the Bawri family.
There is a court proceeding filed by the Bawri family for mismanagement by the
DBL and any adverse verdict could negatively impact DBL.
November 09, 2016
Page 89
Dalmia Bharat
Financial Summary
Income statement (consolidated)
Particulars
Revenue
yoy growth
Total expenses
EBITDA
yoy growth
FY15
FY16
FY17E
FY18E
FY19E
35,141
64,380
74,779
87,530
100,309
17%
83%
16%
17%
15%
29,116
48,593
56,425
65,147
73,391
6,025
15,786
18,354
22,384
26,918
30%
162%
16%
22%
20%
Net depreciation / amortisation
2,716
4,528
5,377
5,525
5,739
EBIT
3,309
11,259
12,977
16,859
21,179
Net interest and financial charges
4,344
7,256
8,353
8,163
7,997
Other income
933
1,642
1,963
2,274
2,772
(101)
5,644
6,587
10,969
15,954
469
2,991
1,976
3,291
4,786
92
1,908
3,997
6,771
10,119
-209%
1981%
109%
69%
49%
Reported PAT
30
1,908
3,997
6,771
10,119
EPS (`)
1.1
23.4
48.9
82.9
123.9
EPS diluted (`)
1.1
23.2
48.6
82.4
123.1
DPS (`)
2.4
2.6
2.6
2.6
2.6
FY15
FY16
FY17E
FY18E
FY19E
162
178
178
178
178
PBT
Adjusted PAT
yoy growth
Balance sheet (consolidated)

Particulars
Share capital
38,289
43,130
47,455
54,848
65,730
Total Networth
38,452
43,308
47,633
55,026
65,908
Loans
84,797
88,925
86,925
84,925
83,425
4,006
5,674
5,674
5,674
5,674
127,254
137,907
140,232
145,625
155,007
Net block
58,233
76,117
72,978
71,136
70,256
38,785
29,884
29,884
29,884
29,884
Investments
16,905
25,752
25,752
25,752
25,752
5,281
2,483
5,815
11,633
20,476
Sundry debtors
5,101
4,946
6,081
7,118
8,157
Sources of funds
Inventories
7,293
7,083
8,108
9,490
10,876
Loans and advances
12,320
13,209
14,189
16,608
19,032
152
104
203
237
272
30,147
27,825
34,397
45,086
58,812
Current Liabilities
15,833
19,162
20,270
23,726
27,189
Provisions
984
2,509
2,509
2,509
2,509
16,816
21,671
22,779
26,235
29,698
Net current assets
13,331
6,154
11,618
18,852
29,115
Miscellaneous expenditure
127,254
137,906
140,232
145,624
155,006
November 09, 2016
Page 90
Dalmia Bharat
Cash flow statement (consolidated)
Particulars
FY15
FY16
FY17E
FY18E
FY19E
PBT
(162)
5,644
6,587
10,969
15,954
Depreciation
2,716
4,528
5,377
5,525
5,739
Others
(785)
(1,434)
(1,963)
(2,274)
(2,772)
Interest paid (net)
4,344
7,256
8,353
8,163
7,997
6,113
15,994
18,354
22,384
26,918
689
3,371
(2,132)
(1,417)
(1,420)
Direct taxes paid
(1,354)
(458)
(1,976)
(3,291)
(4,786)
5,448
18,907
14,247
17,676
20,712
Net capex
(4,953)
(3,852)
(2,238)
(3,683)
(4,858)
Net investments
14,222
(13,827)
Interest received
170
402
CFO
CFI
9,656
(16,704)
(2,238)
(3,683)
(4,858)
34,985
4,129
(2,000)
(2,000)
(1,500)
11
(5,432)
(8,607)
(6,390)
(5,889)
(5,225)
(209)
(534)
(286)
(286)
(286)
CFF
29,345
(5,002)
(8,676)
(8,175)
(7,011)
44,449
(2,798)
3,332
5,818
8,843
496
15,055
12,008
13,993
15,854

Dividends paid
FCF
Ratio analysis / Valuation parameters (consolidated)

Year to March
FY15
FY16
FY17E
FY18E
FY19E
16.5
83.2
16.2
17.1
14.6
Growth / margins (%)

Revenue growth
EBITDA growth
29.6
162.0
16.3
22.0
20.3
PAT growth
(136.2)
6,156.1
109.5
69.4
49.5
(208.9)
1,969.4
109.5
69.4
49.5
EBITDA margin
17.1
24.5
24.5
25.6
26.8
EBIT margin
9.4
17.5
17.4
19.3
21.1
Net margin
0.3
3.0
5.3
7.7
10.1
RoCE
3.0
7.2
9.3
11.8
14.0
RoIC
3.1
8.2
11.6
14.6
17.2
RoE
0.3
5.5
9.9
14.9
18.9
P/E (x)
1,805.0
87.2
41.6
24.6
16.4
P/B(x)
5.4
4.7
4.3
3.7
3.1
Debt/Equity(x)
2.8
2.3
2.1
1.7
1.4
Net debt/Equity(x)
2.1
1.6
1.3
1.0
0.7
EV/Sales(x)
6.5
3.8
3.2
2.7
2.4
Valuation metrics
EV/EBITDA(x)
EV/tonne(`)
37.9
15.3
13.1
10.7
8.9
13,261
9,661
9,615
9,615
9,615
November 09, 2016
Page 91
Dalmia Bharat
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November 09, 2016
Page 92
Orient Cement
BUY
COMPANY INSIGHT
ORCMNT IN EQUITY
November 09, 2016
Not a bad deal!
Cement
Concerns abating on the current operations

Pricing recovery in core markets and better fixed cost recovery (`771/tonne in
FY16 as against `515/tonne in FY14), as Karnataka operations scale up, will
lead to a sharp uptick unitary EBITDA/tonne (`900 in FY18E vs `400 in FY16).
Our estimates imply 19% volume and 8% unitary EBITDA CAGR over FY15-18.
Near-term valuation parameters do not paint the right picture
The deal appears optically expensive on earnings-based valuation tools, such as
EV/EBITDA, since the acquired assets are not likely to generate any significant
EBITDA in the first few years. With capacity utilisation ramp-up, investor
perception for the stock will change from a leveraged player to a high-quality
mid-sized company with scope to play operating and financial leverage akin to
Dalmia Cement is recent past. On current operations, the stock trades at 7.5x
FY18 EV/EBITDA, against our implied valuation of 8.7x.
Catalysts
Demand/pricing
recovery
in
Maharashtra in 2HFY17
Approvals from SAIL for the
acquisition
Unitary EBITDA improvement in
3QFY17
Performance (%)
SENSEX
ORCMNT
Research Analysts
Parita Ashar, CFA
+91 22 3043 3223
FY15
FY16
FY17E
FY18E
FY19E
15,470
3,067
19.8
9.5
11.8
15.6
9,593
15,092
21,079
1,834
3,795
12.2
3.0
3.4
25.8
5,907
18.0
4.0
6.9
12.5
5,907
26,787
6,427
24.0
12.4
13.0
7.4
5,907
27,590
7,381
26.8
15.6
14.3
6.4
5,907
Nitin Bhasin
+91 22 3043 3241
Achint Bhagat, CFA
+91 22 3043 3178

Oct-16
Sep-16
Jul-16
Jun-16
135
125
115
105
95
85
75
Key financials
Year to March
Net Revenues (` mn)
EBITDA (` mn)
PAT (` mn)
EPS (`)
RoE (%)
EV/EBITDA
EV/tonne
GREEN
AMBER
RED
Apr-16
Not much to lose even in the worst case

A well-negotiated price (>US$100/tonne) and limestone security in Central
India (where limestone reserves are depleting), makes us believe that the deal
will enhance shareholder value in the long term. Assuming prices improve by
3.5% CAGR over FY18-22E and SAIL agrees to support expansion at Satna, we
expect 50% value enhancement. In the worst case, with none of the above
going in Orients favour, the value dilution is likely to be 2%. Lastly, we expect
net D/E of 0.6x in the worst case in FY19, which is not excessive in our view.
Accounting:
Predictability:
Earnings Momentum:
Mar-16
East India: Low unitary EBITDA in initial years

Whilst low-cost clinker production advantages at Devapur (`300/tonne lowerthan-industry average) will keep cost competitive in East India, low realisation
will keep EBITDA/tonne low (blended `467/tonne) in FY18. As the pace of
capacity expansion decelerates in East, pricing will improve thereby improving
unitary EBITDA. Our scenario analysis suggests that 2%/3.5% realisation CAGR
(net of cost increase) could increase FY20 unitary EBITDA to `607/724 tonne.
`34/US$0.5
`36.8/US$0.6
`173
`216
25
Flags
Jan-16
Changes to this position: POSITIVE
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Dec-15
Competitive position: MODERATE
Recommendation
Oct-15
Pricing recovery in South/West India (+15% in last month) will drive

improvement of Orients current business profitability; however,
investors are apprehensive on the companys recent acquisition of
Jaypees East India assets (4.2 mn tonnes). Although weak pricing in
East India will keep unitary EBITDA low in the initial years, yet we
believe the deal is likely to be NPV positive in three out of four
scenarios and do not think that leverage will jeopardise its balance
sheet (FY19E net D/E: 0.6x). Also, concerns around SAILs
approval/support for future expansions are unfounded, since it is in
SAILs best interests to support the acquisition. We expect 9-50%
increase in Orients current valuation (`216/share), in three out of four
scenarios; the worst-case outcome is likely to dilute value by marginal
2%. Reinstate BUY from UNDER REVIEW.
Orient Cement
Whats the big deal?

Orient Cements operations in South and West India are one of the most cost
efficient amongst cement companies in India; recent price uptick in core
markets (AP and Maharashtra) will improve unitary EBITDA from 2HFY17
onwards. In line with its vision of becoming a 15mn tonne cement
manufacturer by 2020, Orient has acquired (subject to requisite approvals)
Jaypees clinker and grinding units in Central and East India. Although the
acquisition cost of ~US$100/tonne for the integrated Jaypee-SAIL Bhillai and
Satna cement plants and ~US$40/tonne for the grinding unit at Nigrie
appears well negotiated, investors worry that:
The company is trying to become too big too soon, which will have an
adverse impact on its balance sheet (excess leverage).
East India is not a lucrative market anymore (post significant increase in

installed capacities). Moreover, will Orient Cement be cost competitive as
against other players with integrated cement plants in the same location?
With SAIL maintaining its 26% share in the business, isnt there too much
uncertainty around future expansions?
In this note, we assess the above mentioned investor concerns and believe
that: (a) even the worst-case outcome, the deal will be 2% value dilutive; and
(b) it is in SAILs own interest to come on board with Orient Cement.
We highlight that in the best-case scenario, there is a 51% upside possibility
to our ex-deal TP of `216/share (considering a dilution of 15% to raise `7bn
at `200/share).
A well-negotiated deal
Orient Cement has entered into an agreement to acquire Jaypees cement assets,
including: (a) 74% stake in Bhilai-Jaypee Cement Limited (BJCL) this includes a
2.2mn tonne grinding unit in Bhilai (Chhattisgarh) and a 1.1mn tonne clinker unit in
Satna (MP); and (b) acquisition of 2mt grinding unit at Nigrie (MP). We believe that
the acquisition price of ~US100/tonne (lowest in the last decade as depicted in
Exhibit 1 below) seems to be already discounting the uncertainty that comes with a JV
partner being on board.
Exhibit 1: Orient-Jaypee valuation is one of the lowest in the last decade
250
Valuation (USD/tonne)
200
200
140
150
128
127
125
119
115
100
98
85
65
50
DBL-Adhunik
DBL-Calcom
Orient-JPA
UTCEM-JPA
HEID-Mysore
Lafarge-Nirma
UTCEM-JPA (Guj)
CRH-MHI
Bcorp-Reliance
Holcim-ACC
November 09, 2016
Page 94
Orient Cement
Exhibit 2: Basic details of the plant
Plant Type
Clinker
Grinding
Grinding
Location
Satna, MP
Bhilai, Chattisgarh
Nigrie, MP
Capacity (mtpa) 1.1 (can be increased to 1.3)

Seller
2.2
BJCL for both Satna and Bhillai
EV
Jaypee Power Ventures
`14,500mn for Satna and Bhillai together
EV/tonne
US$100/t
Orient Cement's
Stake
2.0
`5,000mn
US$40/tonne
74% (26% with SAIL)
100%
CPP
No
No
Railway Siding
Yes
Yes
Type of Cement -
PSC
PPC
Bhillai Steel Plant
JP Power Plant
Power Source
Fly Ash / Slag
Grid
(~`6-7/unit)
-
Slag from Bhilai Steel Plant at Fly Ash from JP Power at

~`700/t, minimal transportationminimal transportation
cost
cost
Architecture of the East India operations

Inward logistics: Post the acquisition, Orient Cement plans to follow the below
logistics structure to the following:
Clinker for Bhillai will be procured from Devapur instead of Satna: Orient
Cements management realised that taking clinker from Satna to Bhillai was not
attractive as; (a) clinker production cost at Satna is ~`2,000/tonne whereas at
Devapur it is ~`1,500/tonne; and (b) distance from Devapur to Bhillai is 470km,
lesser than that of Satna to Bhillai (550km). Hence, Orient Cement will be taking
clinker from Devapur to Bhilai, which will reduce the landed cost of clinker by
~`500/t of clinker (~15-17%). This would also improve the utilisation of the
Gulbarga unit (in the near term) as the company will now supply cement from
Gulbarga to the markets of Central or Eastern Maharashtra, which were
previously served by Devapur (similar distance). Eventually, the company ay have
to increase the clinker capacity at Devapur to ensure optimum utilization of all
grinding units (Jalgoan, Devapur and Bhillai).
Clinker for Nigrie will be procured from Satna: The clinker capacity at Satna
would be utilised to provide clinker to the Nigrie grinding unit, which is at a
distance of merely ~200km. The Nigrie grinding unit will give Orient Cement
access to Bihar and Jharkhand, which are better markets then MP (Satna cluster).
Outward logistics: We believe that Orient Cement will have to travel ~500kms to
reach the target markets:
Bhillai grinding unit: Key markets that the Bhillai unit would be servicing are
Chattisgarh, Odisha, Eastern Maharashtra and Southern MP. As depicted in
Exhibit 3 below, most of the key markets are ~300-500kms away from Bhillai.
Nigrie grinding unit: Key markets that the Nigrie unit would be servicing are
Bihar, Jharkhand, Uttar Pradesh and Madhya Pradesh. As depicted in Exhibit 3
below, even for the Nigrie unit, most of the key markets are ~300-500kms away
from Nigrie.
For our scenario analysis, we assume an average lead distance of ~500km from
each plant and hence, outward freight of ~800/tonne (~`1.6/km).
November 09, 2016
Page 95
Orient Cement
Exhibit 3: Key markets are 300-500 kms away from the acquired assets
November 09, 2016
Page 96
Orient Cement
Exhibit 4: Key markets for the acquired plants
Distance from plant
(km)
Market
Comments on recent pricing trends
Nigrie Cement Plant (2MTPA)

Bihar
400-500
Patna, Gaya, Muzaffarpur, Arrah
A premium market but entry of Shree Cement has diluted the pricing premium. However,
growth remains strong and it is largely a slag cement-based market.
Jharkhand
400-500
Ranchi
Jamshedpur,
Dhanbad
Bokaro,
Ranchi,
Top-3 brands account for ~70% of the overall sales, hence prices remain steady here.
Jharkhand also has a high proportion of slag cement use.
600-700
Madhya Pradesh
Jabalpur
200-300
Satna
200-300
Bhopal
500-600
Gwalior
500-600
Whilst pricing was affected in the last few years, Jaypee's exit has improved pricing
discipline. A highly consolidated market.
Uttar Pradesh
Allahabad
100-200
Varanasi
200-300
Lucknow, Kanpur
300-400
Jhansi
400-500
Agra
600-700
Much like MP, prices in UP improved post exit of Jaypee. Pick-up in rural income will benefit
the state disproportionately as the state is highly rural-dependent.
Bhilai Cement Plant (2MTPA)

Distance from plant
Market
Comments
Orissa
400-500
Rourkela
Brahmapur,
Cuttack
Bhubaneshwar,
Pricing remains stable despite entry of new players, however no major demand
improvement. Largely a slag cement market.
500-600
Chhattisgarh
Korba, Bilaspur
Raipur, Bhilai, Durg
0-100
Pricing has been affected since multiple players have entered the market. Largely a PPC
cement market.
200-300
November 09, 2016
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Orient Cement
East India A premium market losing its sheen

East India has historically been one of the most favoured markets for cement
companies, given that it has been a cement deficit market, which helped the
companies command premium pricing. However, over the last five years, large
capacity additions by several manufacturers from other regions (Shree, JK Lakshmi)
and new entrants, such as Emami Cement, have resulted in capacity CAGR of 9%
over FY10-15. Demand growth (of 7% CAGR) however could not match capacity
growth, resulting in declining utilisations, especially in Chhattisgarh.
Exhibit 5: Capacity utilisation down from 85% in FY10 to 77% in FY15
60
90%
50
85%
40
30
80%
20
75%
10
70%
0
FY10
FY11
FY12
Capacity
FY13
FY14
Volumes
FY15
Utilisation - RHS
Although demand growth in East India has been higher than most other regions, the
rising prominence of volume-focused players, such as Shree, JK Lakshmi and now
Orient Cement will lead to weak pricing in the market. Pricing growth in East will be
the lowest amongst Indian regions. As a result, the premium pricing of the market
has started to wane and has dropped sharply in states, such as Chhattisgarh.
Exhibit 6: Entry of new players
Capacity share:FY09
Shree,
0.0%
Shree,
9.5%
UTCEM,
23.5%
Others,
19.8%
Capacity share:FY16
Capacity share:FY18
UTCEM,
23.3%
Others,
10.5%
Others,
16.5%
Shree,
14.0%
ACC,
12.1%
ACC,
17.3%
ACEM,
14.6%
OCL,
6.4%
Lafarge,
18.4%
UTCEM,
20.0%
ACEM,
12.9%
OCL,
12.7%
Lafarge,
19.0%
ACC,
14.2%
OCL,
11.7%
Nirma*,
14.0%
ACEM,
9.6%

Exhibit 9: East India (ex-Chhattisgarh) volatile prices, barely crossing past highs
390
East Cement prices (`/50kg bag)
370
350
330
310
290
270
Oct-16
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
250
November 09, 2016
Page 98
Orient Cement
..but, structurally a good market to be in:

Orient will largely be servicing the East and Central markets from these plants.
East India is currently grappling with a sharp rise in installed capacities, which has
led to a decline in the premium realisations. However, we believe that the capacity
expansion in the region will decelerate post FY18 (once Shree and JK Lakshmis
expansions are complete). Moreover, given that the regions cement consumption is
significantly lower than other Indian states, we expect East Indian states, such as
Bihar and Jharkhand to continue growing at a fast pace (Bihar and Jharkhand have
been the fastest growing cement markets in India in the last five years). We expect
~10mt of capacity additions in East (Chattisgarh) over FY17-18E, but only ~2mt in
WB is announced thereafter.
Central India: The two Central Indian states, Uttar Pradesh and Madhya Pradesh,
have historically lagged most other Indian states in terms of economic prosperity.
They are classified as Bimaru states (alongside Rajasthan and Bihar) due to slow
economic growth. The per capita income of Central India is the lowest in India (see
table below) due to lack of industrial development, poor public infrastructure, such as
roads/power and poor governance. A pick-up in infrastructure construction and real
estate development (due to development of NCR) pushed up volume growth in
Central India significantly higher that Indias average (6.5% CAGR over FY10-15 vs
4.3% for India) is in line with other fast growing regions, such as North and East
India.
Exhibit 10: Per capita cement consumption in Central and East India is significantly
lower than other markets
Agri GDP
Construction GSDP
GSDP
Region
FY15
CAGR
FY10-15
FY15
North
19%
5.2%
West
16%
7.7%
Central
24%
East
22%
South
18%
Per
Capita
GSDP
PCCC
(Kgs)
CAGR
FY10-15
FY15
CAGR
FY10-15
FY15*
FY15*
17%
3.0%
19%
7.0%
57,633
296
24%
10.4%
25%
7.6%
74,429
293
8.2%
12%
4.6%
13%
6.8%
23,931
162
3.9%
23%
9.5%
19%
7.0%
28,458
135
1.8%
24%
5.6%
24%
6.7%
47,775
243
Source: RBI Docs, Ambit capital research * we use population as per the census document of 2011. PCCC- per
capita cement consumption
Exhibit 11: States such as Bihar and Jharkhand are amongst the fastest growing
cement markets
FY10-15 GSDP CAGR
12%
10%
8%
6%
4%
2%
Odi.
Pun.
AP
CHTG
UP
Ker
WB
Kar,
Har.
Delhi
Mah.
TN
Guj.
Raj.
MP
Jhar
Bihar
0%
Source: RBI Docs, Ambit Capital research.
November 09, 2016
Page 99
Orient Cement
SAIL unlikely to create a hurdle

Our interactions with industry participants suggest that despite the BJCL
assets being in the market for a couple of years now, Jaypee was unable to
sell as the potential bidders wanted to acquire a 100% stake (Jaypee + SAIL)
whereas SAIL was unwilling to sell as SAIL owns the limestone mines. In the
case of this acquisition, SAIL remains a 26% JV partner in BJCL, which in our
view has its pros and cons. We discuss below that, whilst investor concerns
are understandable, we believe the downside is limited.
Contract renewals by SAIL: BJCL is dependent on SAIL for: (a) limestone for the
Satna clinker (since SAIL owns the mines); (b) slag for blending at the Bhillai
grinding unit (from SAILs Bhillai Steel plant); and (c) power for Bhillai grinding
unit (from Bhillai Steel plant). In our view, given these cement plants are nonoperational at the moment, it would be SAILs interest to renew the contracts as a
new JV partner would revive these assets and improve SAILs return on these
investments.
Transfer price of clinker: Whilst convincing SAIL to renew the raw material
supply contracts is a relatively easier task, the key variable remains the price at
which these are transferred. Orient would have to negotiate the following prices
with SAIL:
(a) Price of clinker sold by BJCL to Nigrie grinding unit (as SAIL has a 26% stake
in BJCL but no stake in Nigrie unit. For our scenario analysis, we assume
clinker transfer price of `2,000/tonne from Satna to Nigrie.
(b) Price of slag and power supplied to Bhillai grinding unit by Bhillai Steel plant.
We note that SAIL currently sells slag to BJCL at ~`700/tonne, which in our
view is higher than the market and could be renegotiated by Orient. For our
scenario analysis, we conservatively assume slag sale price to continue at
`700/tonne and power price of `7/unit.
(c) Price of clinker sold by Orients Devapur plant to Bhillai grinding unit. For our
scenario analysis, we assume clinker transfer price of `1,500/tonne from
Devapur to Bhillai units.
SAILs approval required for all future acquisition: We are cognizant of the
fact that despite large limestone reserves with SAIL, the expansion prospects of
these assets would require SAILs consent (by way of either equity infusion or
equity dilution). We believe it is difficult to judge whether and how SAIL would
come on board and hence, we do a scenario analysis assuming: (a) no capacity
expansion; and (b) 2.5x capacity expansion of the Satna clinker unit and a set-up
of a new grinding unit linked to Satna over FY18-22E.
Orient is at a locational disadvantage

Nigrie Orient not as competitive as local players in demand markets
Bihar is currently a ~9mt cement market (15% of east India). Due to the lack of
limestone reserves in Bihar, it has been a cement deficit market. However, in the last
3 years, capacity has grown from ~1mt to 5mt post capacity additions by Shree and
UltraTech. Although Bihar still remains in deficit (9mt demand vs 5mt production) and
has better pricing than Chattisgarh, Orient will be at a disadvantage compared to
peers Shree and UltraTech whose grinding units are closer to the market. Jharkhand
is also a cement surplus market (9mt capacity vs 5mt demand) and hence, Orient
would have to compete with local players with large capacities, such as Lafarge
(4.6mt grinding unit), Dalmia (2.1mt grinding unit in Bokaro) and ACC (1.8mt
capacity). Moreover, Jharkhand and Bihar are slag-based cement markets and hence,
Orients fly ash based Nigrie unit will be at a cost disadvantage compared to local
players in Jharkhand due to lower blending.
November 09, 2016
Page 100
Orient Cement
Exhibit 12: Supply structure in East and Central India
Capacities in East and Central

India
No Company
Kalyanpur Cement
1.0
Banjari
Bihar
Shree Cement
2.0
Aurangabad
Bihar
Ultratech (G)
1.6
Pataliputra
Bihar
Lafarge India (G)
4.6
Singhbhum
JHK
Bokaro Jaypee (G)
2.1
Bokaro
JHK
ACC Ltd.
0.9
Chaibasa
JHK
Devapur Bhilai Unit Assuming clinker transfer from the Devapur plant, building
in all the related overheads and assuming that the price per bag is similar to the
current market price, we expect unitary EBITDA of `225/tonne.
JHK
Orissa
4.0
Rajgangpur
Orissa
OCL India (G)
0.1
Kapilas
Orissa
11
ACC - Bargarg
Cement Works
2.1
Bargarh
Orissa
12
Shiva Cement
0.6
13
Birla Corpn. Ltd. (G)
2.3
Kutra(Sunder
Orissa
Garh)
Durgapur
WB
1.2
Durgapur
1.0
Mejia
WB
Kolaghat
WB
UltraTech Cmt. Ltd.

(G)
Lafarge India (P) Ltd.
(G)
16
Ramco Cement (G)
1.0
WB
17
ACC Ltd (G)
0.5
Purulia
WB
18
Ambuja Cement (G)
1.0
Sankrail
WB
19
Ambuja Cement (G)
1.3
Farakka
WB
20
OCL india
Sonar BanglaB.K.Birla (G)
1.4
Medinipur
WB
1.5
Sagardighi
WB
22
Century Cement
2.1
Raipur
CHG
23
UltraTech Cement
2.5
Raipur
CHG
24
UltraTech Cement
1.9
Hirmi
CHG
25
CCI Ltd.
0.4
Akaltara
CHG
26
CCI Ltd.
0.4
Mandhar
CHG
27
Lafarge India (P) Ltd.
1.6
Bilaspur
CHG
28
Lafarge India (P) Ltd
0.6
Sonadih
CHG
29
Bhilai Jaypee (G)
2.2
Bhilai
CHG
30
ACC Ltd.
1.6
Jamul
CHG
31
Ambuja Cement
3.2
Bhatapara
CHG
32
Grasim
4.8
Raipur
CHG
33
Shree Cement
2.0
Raipur
CHG
34
JK Lakshmi
2.7
Durg
CHG
UP
35
Birla Cement
0.6
Raebareli
36
Heidelberg Cement
0.5
Jhansi
UP
37
Jaypee Cement
0.5
Dalla
UP
UP
38
Jaypee Cement (G)
2.5
Chunar
39
Jaypee Cement (G)
0.6
Sadva Khurd UP
40
Jaypee Cement (G)
1.0
Tanda
UP
41
Jaypee Cement (G)

UltraTech Cement
(G)
UltraTech Cement
(G)
1.1
Sikandrabad
UP
1.3
Dadri
UP
1.3
Koil
UP
44
ACC Ltd (G)
2.3
Tikaria
UP
1.5
42
Whilst Orient will incur additional freight (~`300/tonne) to transport clinker

from Devapur to Bhilai, we believe that the low-cost advantage at Devapur
(clinker production cost of `1,500/tonne as against `1,800-1,900 for most
other players), will offset the cost disadvantage. Whilst we have limited data
around the economics of the plants, we work out the likely unitary EBITDA
based on the basic cost details:
Sindri
Jharsuguda
10
21
yet the deal is not value dilutive
0.9
1.0
15
The Bhillai grinding unit is a Chhattisgarh-based slag cement unit which would be
running on clinker from Orients Devapur plant. As depicted in exhibit above,
Chhattisgarh and Odisha have significant integrated cement plants that are based on
locally produced clinker and hence, Orient will be at a disadvantage. Higher clinker
cost in the case of Orient will be partially offset by higher blending ratio (~35% in
case of the other plants in Chhattisgarh as most are based on fly ash vs ~65% for
Orient as Bhillai is slag based). We highlight that whilst pricing in Orissa is healthy
(balance between capacity and demand), pricing in Chhattisgarh is severely
depressed (`220/50kg bag in Chhattisgarh vs `330/50kg bag in Bihar/Jharkhand
and Odisha) given high surplus 7mt demand vs 23t capacity.
ACC Ltd. (G)

UltraTech Cement
Ltd (G)
OCL India
14
Bhillai Demand market faces severe pricing pressures
State
CapaPlace
city
43
45
Ambuja Cement (G)
46
Birla Vikas
Dadri
UP
Satna
47
Satna Cement
MP
Satna
48
Maihar Cement
MP
3.8
Maihar
49
MP
UltraTech Cement
3.0
Jawad Road
MP
50
Heidelberg Cement
1.0
Damoh
MP
MP
1.6
51
CCI Ltd.
0.4
Neemuch
52
Jaypee Cement
3.0
Rewa
MP
53
Jaypee Cement
4.9
Bela
MP
54
Jaypee Cement
1.5
Sidhi
MP
55
Prism Cement
5.6
Satna
MP
56
ACC Ltd
2.2
Kymore
MP
57
Emami Cement
2.5
Risda
CHG
58
Jaypee
2.1
Nigrie
MP
Source: Ambit Capital Research
November 09, 2016
Page 101
Orient Cement
Exhibit 13: Expect unitary EBITDA of `225/tonne
Cost head
Cost
Multiple
Clinker cost
1500
0.33
495 Assuming 3:1 clinker to cement conversion
Transportation
1000
0.33
330 Assuming 3:1 clinker to cement conversion
700
0.7
1000
0.05
Power
210
Freight
800
Others
600
Employee
200
Slag
Gypsum
Total costs
Spot
Realisation
EBITDA
Cost/tonne Comments
490 Cost/tonne of slag agreed with SAIL

50
Cost for grinding assumimg 30 units for grinding at
`7/unit
Assuming 500kms lead distance at `1.6 per tonne
800
km
600 Assuming fixed costs based on current operations
Assuming employee costs based on current
200
operations
3,175
210
3400 Assuming realisation of `220/bag

225
Satna-Nigrie unit Assuming clinker transfer from the Satna plant at `2,000/tonne
(current manufacturing cost), building in all the related overheads and assuming that
the price per bag is similar to the current market price, we expect unitary EBITDA of
`675/tonne
Exhibit 14: Expect unitary EBITDA of `675/tonne
Cost head
Clinker cost
Cost
Multiple Cost/tonne Comments
2000
0.7
1,400 Assuming clinker:cement conversion ratio of 1.4
Transportation
320
0.7
225 Assuming clinker:cement conversion ratio of 1.4
Fly Ash
300
0.3
Power
210
Freight
800
Others
600
Employee
200
Total costs
3370
Spot Realisation
EBITDA
90 Based on current price of fly ash

Cost for grinding assumimg 30 units for grinding at
210
`7/unit
Assuming 500kms lead distance at `1.6 per tonne
800
km
600 Assuming fixed costs based on current operations
Assuming employee costs based on current
200
operations
3,525
4,200 Assuming realisation of `320/bag
675
What are we not building in?

We are not assuming efficiency benefits at Devapur, given that the plant will be
operating at full utilisation (as against ~85% utilisation currently). Moreover, the fixed
overheads assumptions are based on a reasonable utilisation level of 70-75%, if the
utilisation is lower fixed costs per tonne will increase.
We build in four scenarios, assuming two key uncertainties:
Capacity expansion is dependent on SAIL: As discussed above (page 8),

whilst it is highly likely that SAIL will come on board to renew the limestone, slag
and power supply agreement, it remains unpredictable whether it would support
Orient in future expansions.
Profitability in East India: Our analysis of East India markets (page 6-7) and
Orients position relative to peers in the region suggests that although Orient is
worse off compared to its peers, the East India market per se is better placed
relative to rest of the country. Although pricing is depressed currently, there is
demand potential and profitability of Orients acquired assets would depend on
competitive intensity in the region two years from now.
November 09, 2016
Page 102
Orient Cement
In all the scenarios, we assume dilution of 15%, assuming that the company will raise
equity of `7bn at `200/share. Moreover, we do not make any changes to our
estimates of Orients existing business.
Scenario I: No capacity expansion at Satna, Nigrie and Bhillai and pricing
remain weak in the region (2% realisation CAGR (net of cost increase) and 11%
EBITDA/tonne CAGR). This is the worst case, which will be value dilutive to our TP
by `4/share (2%) and implies IRR of 12.6% for the acquisition. Under this
scenario, FY18/FY19 EPS will be diluted by ~34%/19%. Net debt to equity even
in the worst case normalises to 0.6x by FY19E and hence, we do not expect the
acquisition to be a stress for Orient Cements balance sheet.
Scenario II: No capacity expansion at Satna, Nigrie and Bhillai but pricing
improves in the region (3.5% realisation growth (net of cost increase) and 16%
EBITDA/tonne CAGR). Based on this, the value added per share to our TP is `33
(15%) and the IRR is 16%. Under this scenario, FY18/FY19 EPS will be diluted by
~34%/16%.
Scenario III: Orient manages to expand clinker capacity at Satna and sets up
new grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable.
However, pricing remains weak in the region (2% realisation CAGR (net of cost
increase) and 12% EBITDA/tonne CAGR). Based on this, the value added per
share to our TP is `19 (9%) and the IRR is 14%. Under this scenario, FY18/FY19
EPS will be diluted by ~34%/19%.
Scenario IV: Orient manages to expand clinker capacity at Satna and sets up
new grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable.
Pricing also improves in the region (3.5% realisation growth (net of cost increase)
and 17% EBITDA/tonne CAGR). Based on this, the value added per share to our
TP is `111 (50%) and the IRR is 18%. Under this scenario, FY18/FY19 EPS will be
diluted by ~34%/16%.
Exhibit 15: Key assumptions and estimates for the acquisition under each scenario
Scenario 1
Scenario 2
Scenario 3
Scenario 4
225
225
225
225
EBITDA/tonne at spot prices (`)

- Bhillai
- Nigrie
675
675
675
675
FY18 Blended
467
467
467
467
Growth assumptions
Realisation CAGR (FY18-28E)
2.00%
3.50%
2.00%
3.50%
Volume CAGR (FY20-28E)
NIL
NIL
13%
13%
EBITDA/tonne in FY22E (`)
766
1,014
878
1,137
Volume in FY22E (mt)
3.5
3.5
5.4
5.4
EBITDA/tonne CAGR (FY18-28E)
11%
16%
12%
17%
EBITDA CAGR (FY20-28E)
10%
14%
26%
30%
Total Equity value
9,360
21,261
16,717
46,694
Less: Share of SAIL
2,434
5,528
4,346
12,140
Equity Value for Orient

Less: Equity infusion assumed to be
~`7bn
Net Value
No of shares (mn, post dilution
assumed)
Value per share (`)
6,927
15,733
12,371
34,553
7,000
7,000
7,000
7,000
(73)
8,733
5,371
27,553
240
240
240
240
(4)
33
19
111
12.6%
16.0%
14.0%
18.0%
Equity value (` mn)
Project IRR
Our assessment of key investor concerns suggests that: (a) it is in SAILs own
interest to come on board with Orient; and (b) even in the worst case
scenario, if pricing in Chhattisgarh remains under pressure, the deal is only
2% value dilutive. Net debt to equity even in the worst case normalises to
0.6x by FY19E and hence, we do not expect the acquisition to be a stress for
Orient Cements balance sheet. We highlight that in the best case scenario,
there is a 50% upside (`111/share) to our ex-deal TP of `216/share.
November 09, 2016
Page 103
Orient Cement
Proforma financials under each Scenario

Scenario I: No capacity expansion at Satna, Nigrie and Bhillai and pricing remain
weak in the region (2% realisation CAGR (net of cost increase) and 11%
EBITDA/tonne CAGR). This is the worst case, which will be value dilutive to our TP by
`4/share (2%) and IRR of 12.6%. Under this scenario, FY18/FY19 EPS will be diluted
by ~34%/19%. Net debt to equity even in the worst case normalizes to 0.6x by FY19
and hence, we do not expect the acquisition to be a stress for Orient Cements
balance sheet.
Exhibit 16: Scenario 1 - 2% realisation growth (net of cost increase), 11% EBITDA/t CAGR over FY18-28E and no capacity
expansion
Particulars
Jaypee's assets
Existing operations
Consolidated
FY18
FY19
FY20
FY21
FY22
FY18
FY19
FY20
FY21
FY22
FY18
FY19
FY20
FY21
FY22
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
Utilisation (%)
41%
64%
83%
83%
83%
88%
88%
89%
80%
85%
109%
121%
133%
154%
161%
Volumes (mt)
1.7
2.7
3.5
3.5
3.5
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
12.3
12.9
P&L drivers
Capacity (mtpa)
EBITDA/tonne (`)
561
606
658
717
776
907
1,043
1,158
1,285
1,388
847
929
1,002
1,131
1,229
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
971
1,638
2,293
2,497
2,704
6,427
7,381
8,360
11,394
13,133
7,398
9,019
10,653
13,891
15,837
586
604
623
642
662
1,523
1,546
1,569
2,077
2,591
2,110
2,151
2,192
2,719
3,254
385
1,034
1,670
1,855
2,042
4,904
5,835
6,791
9,317
10,542
5,288
6,869
8,461
11,172
12,584
1,011
1,039
1,040
1,021
1,018
1,176
1,124
1,023
922
895
2,187
2,163
2,063
1,942
1,913
(627)
(6)
630
834
1,024
3,728
4,711
5,768
8,395
9,647
3,101
4,705
6,398
9,230
10,671
1,193
1,507
1,788
2,603
2,990
1,193
1,507
1,788
2,603
2,990
(163)
(1)
110
145
178
(464)
(4)
520
689
846
2,535
3,203
3,980
5,793
6,656
1,908
3,198
4,610
6,627
7,680
Less: Taxes (` mn)

Less: Minority (`
mn)
PAT (` mn)
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(13.3)
(0.1)
14.9
19.7
24.2
12.4
15.6
19.4
28.3
32.5
8.0
13.3
19.2
27.6
32.0
Equity
20,037 23,077
27,264
33,397
40,521
Net Debt
Ratios
19,239 14,821
9,395
1,891
(8,068)
0.3
0.1
(0.2)
EPS (`)
Balance Sheet
Net Debt /Equity

Net Debt/EBITDA
1.0
0.6
2.7
1.7
0.9
0.1
(0.5)
Pre-tax RoCE
12.5% 16.6%
21.2%
29.3%
35.0%
Post-tax RoCE
9.6% 12.8%
16.3%
21.8%
25.8%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.6
6.4
4.8
4.2
5,472
5,472
5,472
5,472
5,472
82
82
82
82
82
November 09, 2016
Page 104
Orient Cement
Scenario II: No capacity expansion at Satna, Nigrie and Bhillai but pricing improves
in the region (3.5% realisation growth (net of cost increase) and 16% EBITDA/tonne
CAGR). Based on this, the value added per share to our TP is `33 (15%) and the IRR is
16%. Under this scenario, FY18/ FY19 EPS will be diluted by ~34%/16%.
Exhibit 17: Scenario 2 3.5% realisation growth (net of cost increase), 16% EBITDA/t CAGR over FY18-28E and no capacity
expansion
Particulars
Jaypee's assets
FY18
FY19
FY20
Existing operations
FY21
FY22
FY18
FY19
FY20
FY21
Consolidated
FY22
FY18
FY19
FY20
FY21
FY22
P&L drivers
Capacity (mtpa)
Utilisation (%)
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
41%
64%
83%
83%
83%
88%
88%
89%
80%
85%
72%
80%
87%
81%
85%
Volumes (mt)
1.7
2.7
3.5
3.5
3.5
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
12.3
12.9
EBITDA/tonne (`)
467
590
724
867
1,014
907
1,043
1,158
1,285
1,388
829
925
1,023
1,173
1,294
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
807
1,596
2,523
3,020
3,534
6,427
7,381
8,360
11,394
13,133
7,234
8,978
10,883
14,413
16,668
586
604
623
642
662
1,523
1,546
1,569
2,077
2,591
2,109
2,150
2,192
2,719
3,254
221
992
1,900
2,377
2,872
4,904
5,835
6,791
9,317
10,542
5,125
6,827
8,690
11,695
13,414
1,017
1,053
1,052
1,017
983
1,176
1,124
1,023
922
895
2,193
2,177
2,075
1,939
1,878
(796)
(61)
847
1,360
1,889
3,728
4,711
5,768
8,395
9,647
2,932
4,650
6,615
9,756
11,536
Less: Taxes (` mn)

Less: Minority (`
mn)
PAT (` mn)
280
449
623
1,193
1,507
1,788
2,603
2,990
1,193
1,507
2,068
3,051
3,614
(207)
(16)
148
237
329
(207)
(16)
148
237
329
(589)
(45)
420
674
937
2,535
3,203
3,980
5,793
6,656
1,946
3,158
4,400
6,467
7,593
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(16.8)
(1.3)
12.0
19.3
26.8
12.4
15.6
19.4
28.3
32.5
8.1
13.2
18.3
27.0
31.7
Equity
20,037 23,195
27,595
34,062
41,655
Net Debt
Ratios
19,239 14,667
8,971
1,034
(9,539)
0.3
0.0
(0.2)
EPS (`)
Balance Sheet
Net Debt /Equity

Net Debt/EBITDA
1.0
0.6
2.7
1.6
0.8
0.1
(0.6)
Pre-tax RoCE
12.5% 16.9%
22.3%
30.9%
37.4%
Post-tax RoCE
9.6% 13.2%
17.0%
22.9%
27.3%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.4
6.1
4.6
4.0
5,472
5,472
5,472
4,392
4,392
82
82
82
66
66
November 09, 2016
Page 105
Orient Cement
Scenario III: Orient manages to expand clinker capacity at Satna and sets up new
grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable. However,
pricing remains weak in the region (2% realization CAGR (net of cost increase) and
12% EBITDA/tonne CAGR). Based on this, the value added per share to our TP is `19
~34%/19%.
Exhibit 18: Scenario 3 - 2% realisation growth (net of cost increase), 12% EBITDA/t CAGR over FY18-28E and 13% volume
CAGR over FY20-28E
Particulars
Jaypee's assets
FY18
FY19
FY20
Existing operations
FY21
FY22
FY18
FY19
FY20
FY21
Consolidated
FY22
FY18
FY19
FY20
FY21
FY22
P&L drivers
Capacity (mtpa)
Utilisation (%)
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
41%
64%
83%
104%
129%
88%
88%
89%
80%
85%
72%
80%
87%
87%
97%
Volumes (mt)
1.7
2.7
3.5
4.4
5.4
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
13.2
14.8
EBITDA/tonne (`)
467
533
607
797
878
907
1,043
1,158
1,285
1,388
829
909
985
1,129
1,208
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
807
1,442
2,114
3,489
4,748
6,427
7,381
8,360
11,394
13,133
7,234
8,823
10,474
14,883
17,881
586
604
1,245
1,283
1,323
1,523
1,546
1,569
2,077
2,591
2,109
2,150
2,814
3,360
3,914
221
837
869
2,206
3,425
4,904
5,835
6,791
9,317
10,542
5,125
6,673
7,660
11,523
13,967
1,017
1,059
1,819
2,591
2,646
1,176
1,124
1,023
922
895
2,193
2,183
2,842
3,513
3,542
(796)
(221)
(950)
(385)
778
3,728
4,711
5,768
8,395
9,647
2,932
4,490
4,818
8,010
10,425
Less: Taxes (` mn)

Less: Minority (`
mn)
PAT (` mn)
(313)
(127)
257
1,193
1,507
1,788
2,603
2,990
1,193
1,507
1,475
2,476
3,247
(207)
(58)
(165)
(67)
136
(207)
(58)
(165)
(67)
136
(589)
(164)
(471)
(191)
386
2,535
3,203
3,980
5,793
6,656
1,946
3,040
3,509
5,602
7,042
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(16.8)
(4.7)
(13.5)
(5.5)
11.0
12.4
15.6
19.4
28.3
32.5
8.1
12.7
14.6
23.4
29.4
Equity
20,037 23,077
26,586
32,188
39,230
Net Debt
Ratios
19,239 14,821
9,690
2,444
(7,697)
0.4
0.1
(0.2)
EPS (`)
Balance Sheet
Net Debt /Equity

Net Debt/EBITDA
1.0
0.6
2.7
1.7
0.9
0.2
(0.4)
Pre-tax RoCE
12.5% 16.6%
19.8%
31.2%
40.4%
Post-tax RoCE
9.6% 12.8%
16.0%
24.5%
31.0%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.6
6.4
4.5
3.7
5,472
5,472
5,472
4,392
4,392
82
82
82
66
66
November 09, 2016
Page 106
Orient Cement
Scenario IV: Orient manages to expand clinker capacity at Satna and sets up new
grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable. Pricing
also improves in the region (3.5% realisation growth (net of cost increase) and 17%
EBITDA/tonne CAGR). Based on this, the value added per share to our TP is `111
~34%/16%.
Exhibit 19: Scenario 4 3.5% realisation growth (net of cost increase), 17% EBITDA/t CAGR over FY18-28E and 13% volume
CAGR over FY20-28E
Particulars
Jaypee's assets
FY18
FY19
FY20
Existing operations
FY21
FY22
FY18
FY19
FY20
FY21
Consolidated
FY22
FY18
FY19
FY20
FY21
FY22
P&L drivers
Capacity (mtpa)
Utilisation (%)
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
41%
64%
83%
104%
129%
88%
88%
89%
80%
85%
72%
80%
87%
87%
97%
Volumes (mt)
1.7
2.7
3.5
4.4
5.4
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
13.2
14.8
EBITDA/tonne (`)
467
590
724
986
1,137
907
1,043
1,158
1,285
1,388
829
925
1,023
1,192
1,302
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
807
1,596
2,523
4,318
6,148
6,427
7,381
8,360
11,394
13,133
7,234
8,978
10,883
15,711
19,281
586
604
1,245
1,283
1,323
1,523
1,546
1,569
2,077
2,591
2,109
2,150
2,814
3,360
3,914
221
992
1,278
3,035
4,825
4,904
5,835
6,791
9,317
10,542
5,125
6,827
8,069
12,352
15,367
1,017
1,053
1,794
2,527
2,523
1,176
1,124
1,023
922
895
2,193
2,177
2,817
3,448
3,419
(796)
(61)
(516)
508
2,301
3,728
4,711
5,768
8,395
9,647
2,932
4,650
5,252
8,903
11,948
Less: Taxes (` mn)

Less: Minority (`
mn)
PAT (` mn)
168
759
1,193
1,507
1,788
2,603
2,990
1,193
1,507
1,788
2,770
3,750
(207)
(16)
(134)
88
401
(207)
(16)
(134)
88
401
(589)
(45)
(382)
252
1,141
2,535
3,203
3,980
5,793
6,656
1,946
3,158
3,598
6,045
7,797
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(16.8)
(1.3)
(10.9)
7.2
32.6
12.4
15.6
19.4
28.3
32.5
8.1
13.2
15.0
25.2
32.5
Equity
20,037 23,195
26,793
32,838
40,635
Net Debt
Ratios
19,239 14,667
9,433
1,616
(9,505)
0.4
0.0
(0.2)
EPS (`)
Balance Sheet
Net Debt /Equity

Net Debt/EBITDA
1.0
0.6
2.7
1.6
0.9
0.1
(0.5)
Pre-tax RoCE
12.5% 16.9%
20.8%
33.4%
44.3%
Post-tax RoCE
9.6% 13.2%
16.2%
25.9%
33.5%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.4
6.1
4.2
3.5
5,472
5,472
5,472
4,392
4,392
82
82
82
66
66
November 09, 2016
Page 107
Orient Cement
We maintain our assumptions for the

existing business
For the purposes of our estimates and valuation, we do not factor in the acquisition
(as it is yet to be closed) but depict the impact of the acquisition on our estimates and
valuation in the scenario analysis above. We maintain our assumptions and estimates
for the existing business (detailed below).
Volumes: We expect strong volume growth in FY17 and FY18, driven by scale-up
of capacities in Karnataka we expect 50% capacity utilisation in FY17 and 75%
in FY18. Moreover, we expect the sharp demand recover in AP-Telangana to
sustain, driven by ramp-up in government spending, especially in irrigation.
Realisation: Pricing discipline has improved in Maharashtra as fight for market

share receded and demand recovered post monsoon. We estimate 3% realisation
growth in FY17 and 9% growth in FY18.
Costs: We estimate a 4% reduction in unitary operating costs in FY17, driven by

operating leverage benefits and better fixed recovery at the Karnataka plant.
Moreover, we expect power and fuel costs to reduce led by higher adoption of
petcoke and logistics costs to grow only marginally given adoption of SAP and
improved IT systems for logistics.
EBITDA/tonne: We expect EBITDA/tonne to increase to `620 and `908 in FY17

and FY18, respectively, as against `399 in FY16. Most of the gains in unitary
EBITDA are likely to be driven by improved pricing in Maharashtra/AP.
Exhibit 20: Financial assumptions expect strong EBITDA recovery over the next two years
Particulars (` mn
unless mentioned)
Assumptions
YoY growth
FY15
FY16
FY17E
FY18E
FY17E
FY18E
4.1
4.4
6.0
7.0
35.8%
16.7%
82%
55%
75%
88%
Cement Realisation
3,736
3,400
3,502
3,817
3.0%
Operating costs
3,018
3,002
2,882
2,910
-4.0%
718
399
620
908
55.6%
15,470
15,092
21,088
26,799
39.7%
3,067
1,834
3,798
6,431
107.1%
EBITDA margin (%)
19.8
12.2
18.0
24.0
586 bps
599 bps
Adjusted PBT
2512
603
1222
3732
102.7%
205.5%
Adjusted PBT margin (%)
16.2
4.0
5.8
13.9
180 bps
813 bps
Tax
564
(20)
391
1,194
44.3%
-101.7%
1,948
623
831
2,538
134.5%
-75.5%
Cement sales
Capacity utilisation
Comments
Strong volume growth over the next two years driven by
ramp up of the Karnataka plant
Per tonne analysis
EBITDA
Marginal realisation increase in the FY17 but a step jump in

FY18 driven by improved discipline
Operating costs likely to decline in FY17 as efficiencies of
1.0% Karnataka capacities improve alongside better fixed cost
recovery
Sharp improvement in unitary EBITDA driven by improved
46.3%
pricing and lower costs
9.0%
Financials (` mn
unless specified)
Net Revenues
EBITDA
Adjusted PAT
Adjusted PAT margin (%)
12.6
4.1
3.9
9.5
EPS (`)
9.5
3.0
4.1
12.4
Capex
9,222
3,697
497
1.2
0.7
0.7
0.8
49 bps
(7,664)
(1,121)
1,755
1,380
-536.6%
GB Turnover
FCF
Change in revenue is on account of above-mentioned

change in realisation and volume estimates
Strong EBITDA growth led by improvement in unitary
69.3%
profitability (albeit on a low base of last year)
27.1%
PBT growth driven by higher EBITDA and better absorption

of depreciation and interest
865 bps -534 bps

134.5%
3,635 1757.3%
-75.5%
1.7%
-5 bps We build in capex for further expansions of 1.5-2mn tonnes
-181.2%
November 09, 2016
Page 108
Orient Cement
Exhibit 21: Ambit vs Consensus
Particulars
Ambit
Consensus
FY2017
21,079
20,418
FY2018
26,787
25,380
FY2017
3,795
3,310
FY2018
6,427
5,485
Divergence Comments
Revenue (` mn)
3% Our sales estimates are higher than consensus since we expect a sharp realisation up6% tick as pricing discipline improves
EBITDA (` mn)
15% Our EBITDA estimates are higher than consensus, mainly due to higher than
consensus realisation estimates; consensus EBITDA saw significant downgrades due to
17% weak pricing in Maharashtra but we believe improved pricing discipline will lead to
strong unitary EBITDA expansion in 2HFY17 and FY18
PAT (` mn)
FY2017
829
813
FY2018
2,535
2,380
2% Despite higher EBITDA estimates, our PAT estimates are lower than consensus, which
7% could be on account of a higher tax estimate
Exhibit 22: Explanation for flags highlighted on the first page

Segment
Score
Comments
Accounting
GREEN
The company is in the second quartile of Ambit's forensic accounting screener of BSE-500 companies.
Moreover in the last two years, the company delivered cumulative CFO/EBITDA of 100%. On our accounting
checks too, we do not find any major red-flags.
Predictability
AMBER
Orient Cement has made timely announcements in terms of expansions and has not misguided on growth
expectations. However, EBITDA/tonne is a function of realisations, which is volatile and difficult to predict given
the fragmented and low growth nature of the market it operates in.
RED
FY17/FY18 EBITDA estimates have seen sharp downgrades in the past three months, which are not a cause for
concern.
Earnings Momentum
November 09, 2016
Page 109
Orient Cement
Valuations when expectations are down

Since the announcement of the acquisition, Orient Cement stock has
underperformed the Sensex by ~20% on the back of poor earnings visibility
of the acquired assets and expected balance sheet stress for the next two
years. Now the stock trades at attractive 7.4x FY18 EV/EBITDA (on our
estimates, which are 15-17% higher than consensus) at the start of the
demand upcycle. We believe the stock will re-rate closer to its mid-cap peers
(currently at 10-30% discount) as: (a) pricing and demand recover in its core
markets; and (b) visibility towards earnings potential of the recent
acquisition improves. On one-year forward EV/tonne, the stock trades at
~`6,000, in line with five-year average.
Our target price of `216/share implies 8.7x FY18E EV/EBITDA, given that we expect
the company to sustain strong EBITDA growth for the next two-three years after FY18
as the demand super-cycle commences.
After a sharp run up in the recent past, stock lost most of the gain as skepticism
around the acquisition set in.
Exhibit 24: and
6,000
10
5,000
4,000
3,000
Average EV/EBITDA
its
average
EV/tonne
One-yr fwd EV/Tonne
One-yr fwd EV/Tonne
Oct-16
12
Apr-14
Jun-14
Aug-14
7,000
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
8,000
Apr-14
Jun-14
Aug-14
16
with
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
(`/tonne)
(x)
in-line
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Exhibit 23: Orient is trading at a marginal premium to its

average EV/EBITDA
Average EV/Tonne
Trading at a discount to other good quality mid-cap names

Orient Cement is trading at a 10-30% discount to comparable mid-cap cement
names, such as Ramco Cement, JK Lakshmi and Heidelberg.
The recent re-rating in some mid-cap names was driven by improved pricing and
earnings visibility whereas the de-rating in Orient Cements case has been driven by
the overhang of its recent acquisition. We believe that Orient Cement can chart the
same path as other mid-cap cement names as: (a) pricing and demand recovers in its
core markets; and (b) visibility towards earnings potential of the recent acquisition
improves.
Note that the table below is based on consensus estimates for uniform comparison
amongst the companies, hence Orients EV/EBITDA multiples are 8.8x on FY18
estimates as against 7.4x based on our higher-than-consensus estimates.
November 09, 2016
Page 110
Orient Cement
Exhibit 25: Relative valuation summary mid-cap cement companies
Capacity
Mcap
(mn tonnes)
Orient Cement
Ramco Cements
**
Dalmia Bharat
#@
Century Tex#
(` bn) US$ mn
FY17
FY18
8.0
8.0
36
537
13.5
13.5
147
21.0
21.0
12.8
8.0
US$ mn
EV/EBITDA
EV/tonne
(x)
CAGR (FY16-18)
Sales EBITDA
FY17
FY18
FY17
FY18
0.6
14.6
8.8
6,049
6,049
30
73
2,193
2.0
14.2
12.3
12,430
12,430
12
184
2,736
1.8
12.9
11.1
11,834
11,834
12.8
102
1,520
14.1
16.0
NA
12,391
8.0
54
799
0.7
13.1
9.3
9,228
10.8
10.8
67
990
0.4
13.2
10
11.0
11.0
58
858
0.8
13.8
10.5
10.5
60
895
1.3
6.0
6.0
33
496
3.5
3.5
3.5
3.5
13
Prism Cement #
JK Cement
Jk Lakshmi
Cement
Birla Corp #
Advt 6m
Heidelberg India
Mangalam
Cement
Sagar Cement
ROE
EPS
(%)
FY17
FY18
95
19
12
15
18
19
16
19
72
10
14
12,391
NA
NA
NA
NA
9,228
12
43
NA
12
24
8,712
8,712
15
31
152
12
20
9.5
6,458
6,458
22
66
NA
10
18
10.9
8.2
5,398
5,398
16
55
64
11
13
0.6
12.6
9.8
6,773
6,773
12
28
115
11
16
139
0.4
9.6
7.0
3,788
3,788
20
107
NA
10
15
190
0.3
7.9
7.0
4,145
4,145
32
47
61
17
November 09, 2016
Page 111
Orient Cement
Key catalysts and risks

Catalysts
Demand and pricing recovery in South/West India: Cement demand has been
extremely weak in Maharashtra due to the weak monsoon. We note early signs of
demand recovery in AP-Telangana led by government impetus on irrigation. An
above-average monsoon should improve rural income, driving volume improvement
in East Maharashtra Orients target market. Improved demand amid no major
capacity addition will support pricing, driving expansion in unitary EBITDA for Orient.
Approvals by SAIL: For the acquisition to go through, approval by SAIL and renewal
of critical raw material supply agreements by SAIL is critical. Once SAIL vets the deal,
we expect the acquisition-related uncertainty and resultant overhang to subside.
Risks
Acquisition-led dilution risk: The companys debt/equity has increased to 1.1x in
FY16-end post commissioning of the Karnataka plant. If the acquisition of Jaypees
assets goes through in the next 6 months, debt/equity will rise to 1.2-1.3x.
Teething problems and dilution of cost efficiencies in Karnataka plant: Whilst
management claims that the inefficiencies of power and fuel at the Karnataka plant
have been addressed, if such problems sustain cost savings will fail to come through.
Increase in petcoke prices: Orient Cement has adopted 50% petcoke at its AP
plant and the new plant in Karnataka will be largely run on petcoke. Petcoke prices
are up 50% from the lows of Mar-16 and are now only at a 10-12% discount to coal.
Further increase in petcoke prices could dilute cost savings.
November 09, 2016
Page 112
Orient Cement
Balance Sheet
Year to March (Rs Mn)
Share capital
FY15
FY16
FY17E
FY18E
FY19E
205
205
205
205
205
9,551
9,958
10,886
13,273
16,227
Total Networth
9,755
10,163
11,091
13,478
16,432
11,057
12,898
12,898
11,898
11,898
Loans
Sources of funds
Net block
1,250
1,228
1,228
1,228
1,228
22,064
24,289
25,217
26,604
29,558
7,981
21,497
26,268
25,248
24,214
13,194
2,391
3,131
7,306
428
378
1,086
288
320
Sundry debtors
832
921
1,019
1,221
1,216
Inventories
1,099
1,410
1,155
1,468
1,555
Loans and advances
1,802
1,771
2,310
2,936
3,110
4,482
4,744
5,974
6,426
6,744
Current Liabilities
3,130
3,906
3,465
4,403
4,665
Provisions
Net current assets
464
438
245
336
579
3,594
4,344
3,710
4,739
5,243
888
400
2,264
1,687
1,501
22,064
24,289
25,217
26,604
29,558
FY15
FY16
FY17E
FY18E
FY19E
15,470
15,092
21,079
26,787
28,376
Profit and Loss

Revenue
yoy growth
Total expenses
EBITDA
8%
-2%
40%
27%
6%
12,403
13,258
17,283
20,360
20,786
3,067
1,834
3,795
6,427
7,590
yoy growth
37%
-40%
111%
69%
18%
Net depreciation
473
763
1,374
1,523
1,546
2,594
1,071
2,422
4,904
6,044
141
544
1,290
1,240
1,190
EBIT
Interest
Other income
Adj PBT
Adj PAT
yoy growth
Reported PAT
59
75
87
64
66
2,512
603
1,219
3,728
4,920
564
(20)
390
1,193
1,574
1,948
623
829
2,535
3,345
93%
-68%
33%
206%
32%
1,948
623
829
2,535
3,345
EPS (Rs)
9.5
3.0
4.0
12.4
16.3
EPS diluted (Rs)
9.5
3.0
4.0
12.4
16.3
DPS (Rs)
1.4
0.2
0.2
0.6
1.6
November 09, 2016
Page 113
Orient Cement
Cash Flow Statement
FY15
FY16
FY17E
FY18E
FY19E
PBT
2,512
602
1,219
3,728
4,920
Depreciation
473
763
1,374
1,523
1,546
Others
107
(23)
(87)
(64)
(66)
544
1,290
1,240
1,190
3,097
1,886
3,795
6,427
7,590
(1,005)
824
(1,155)
(222)
218
Interest paid (net)
Direct taxes paid

CFO
Net capex
Interest received
CFI
Dividends paid
(534)
(134)
(390)
(1,193)
(1,574)
1,558
2,576
2,250
5,012
6,234
(9,222)
(3,697)
(497)
(3,635)
(4,686)
87
64
66
(9,223)
(3,691)
(409)
(3,571)
(4,621)
7,771
1,841
(1,000)
158
(0)
(0)
(134)
(519)
(1,290)
(1,240)
(1,190)
(57)
(42)
(391)
CFF
7,268
1,065
(1,132)
(2,240)
(1,581)
(397)
(50)
709
(798)
32
815
418
378
1,086
288
418
368
1,086
288
320
(7,664)
(1,121)
1,754
1,377
1,547
FCF
Ratio Analysis
Particulars
FY15
FY16
FY17E
FY18E
FY19E
Revenue growth
7.5
(2.4)
39.7
27.1
5.9
EBITDA growth
37.4
(40.3)
111.3
69.3
18.1
PAT growth
92.8
(68.0)
33.1
205.8
32.0
92.8
(68.0)
33.1
205.8
32.0
EBITDA margin
19.8
12.2
18.0
24.0
26.7
EBIT margin
16.8
7.1
11.5
18.3
21.3
Net margin
12.6
4.1
3.9
9.5
11.8
RoCE
11.8
3.4
6.9
13.0
14.8
RoIC
24.1
5.2
7.5
14.3
18.4
RoE
21.6
6.3
7.8
20.6
22.4
Debt/Equity(x)
1.1
1.3
1.2
0.9
0.7
Net debt/Equity(x)
1.1
1.2
1.1
0.9
0.7
Valuation Parameters
Particulars
FY15
FY16
FY17E
FY18E
FY19E
P/E (x)
18.2
56.9
42.8
14.0
10.6
P/B(x)
3.6
3.5
3.2
2.6
2.2
EV/Sales(x)
3.1
3.1
2.2
1.8
1.7
EV/EBITDA(x)
15.6
25.8
12.5
7.4
6.2
EV/ tonne (Rs)
9,593
5,907
5,907
5,907
5,907
152
94
94
98
98
EV/tonne (US$)
November 09, 2016
Page 114
Orient Cement
Institutional Equities Team

Saurabh Mukherjea, CFA
CEO, Institutional Equities
(022) 30433174
saurabh.mukherjea@ambit.co
Research Analysts
Name
Industry Sectors
Nitin Bhasin - Head of Research

Aadesh Mehta, CFA
Abhishek Ranganathan, CFA
Achint Bhagat, CFA
Anuj Bansal
Aditi Singh
Ashvin Shetty, CFA
Bhargav Buddhadev
Deepesh Agarwal, CFA
Dhiraj Mistry, CFA
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Girisha Saraf
Karan Khanna, CFA
Mayank Porwal
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Paresh Dave, CFA
Parita Ashar, CFA
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Rahil Shah
Rakshit Ranjan, CFA
Ravi Singh
Ritesh Gupta, CFA
Ritesh Vaidya, CFA
Ritika Mankar Mukherjee, CFA
Ritu Modi
Sagar Rastogi
Sudheer Guntupalli
Sumit Shekhar
Utsav Mehta, CFA
Vivekanand Subbaraman, CFA
E&C / Infra / Cement / Industrials

Banking / Financial Services
Retail
Cement / Home Building
Mid-caps
Economy / Strategy
Automobile
Power Utilities / Capital Goods
Power Utilities / Capital Goods
Consumer
Automobile
Mid-caps / Small-caps
Strategy
Retail
Healthcare
Metals & Mining / Aviation
Strategy / Derivatives
Consumer
Oil & Gas / Chemicals / Agri Inputs
Consumer
Economy / Strategy
Automobile
Technology
Technology
Economy / Strategy
E&C / Industrials
Media
Desk-Phone E-mail
(022) 30433241
(022) 30433239
(022) 30433085
(022) 30433178
(022) 30433122
(022) 30433284
(022) 30433285
(022) 30433252
(022) 30433275
(022) 30433264
(022) 30433132
(022) 30433211
(022) 30433251
(022) 30433214
(022) 30433206
(022) 30433212
(022) 30433223
(022) 30433218
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(022) 30433201
(022) 30433181
(022) 30433242
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(022) 30433175
(022) 30433292
(022) 30433291
(022) 30433203
(022) 30433229
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(022) 30433261
aadesh.mehta@ambit.co
abhishek.r@ambit.co
anuj.bansal@ambit.co
aditi.singh@ambit.co
ashvin.shetty@ambit.co
bhargav.buddhadev@ambit.co
deepesh.agarwal@ambit.co
dhiraj.mistry@ambit.co
gaurav.khandelwal@ambit.co
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sumit.shekhar@ambit.co
utsav.mehta@ambit.co
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Sales
Name
Regions
Sarojini Ramachandran - Head of Sales

Dharmen Shah
Dipti Mehta
Hitakshi Mehra
Krishnan V
Nityam Shah, CFA
Parees Purohit, CFA
Praveena Pattabiraman
Punitraj Mehra, CFA
Shaleen Silori
UK
India / Asia
India / USA
India
India / Asia
USA / Europe
UK / USA
India / Asia
India / Asia
India
Desk-Phone E-mail
+44 (0) 20 7886 2740
(022) 30433289
(022) 30433053
(022) 30433204
(022) 30433295
(022) 30433259
(022) 30433169
(022) 30433268
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sarojini.r@ambit.co
dharmen.shah@ambit.co
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+65 8606 6476

+65 6536 1935
pramodgubbi@ambitpte.com
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Singapore
Pramod Gubbi, CFA Director
Shashank Abhisheik
Singapore
Singapore
USA / Canada
Ravilochan Pola - CEO
Americas
+1(646) 361 3107
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Production
Sajid Merchant
Sharoz G Hussain
Jestin George
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November 09, 2016
Production
Production
Editor
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Database
(022) 30433247
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Page 115
Orient Cement
Orient Cement Ltd (ORCMNT IN, BUY)
250
200
150
100
50
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Orient Cement Ltd

Source: Bloomberg, Ambit Capital research
Ultratech Cement Ltd (UTCEM IN, BUY)
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
5,000
4,000
3,000
2,000
1,000
0
UltraTech Cement Ltd

Shree Cement Ltd (SRCM IN, UNDER REVIEW)

20,000
15,000
10,000
5,000
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Shree Cement Ltd

Dalmia Bharat Ltd (DBEL IN, BUY)
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
2,500
2,000
1,500
1,000
500
0
Dalmia Bharat Ltd

November 09, 2016
Page 116
Orient Cement
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>10%
SELL
NO STANCE
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW
NOT RATED
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE
We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE
We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
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Orient Cement
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CEMENT

What are you playing?

Parita Ashar, CFA

November 09, 2016

Ambit Capital Pvt. Ltd.

November 09, 2016

What are you playing?

Pricing has improved across India (8%/5% over last 6m/12m);

Source: Company Ambit Capital research

Operating leverage scope

Source: Company Ambit Capital research

Financial leverage scope

Net Debt Equity (x)

Source: Company Ambit Capital research

How long can unexpected benefits last?

Demand growth narrative becoming stale; check through OL/FL filter

Demand remains as unpredictable as ever but pricing to the rescue

SELL 1,086 16,280 23.5

9.8 15,317 10,181

12.4 23,741 21,420 19,314 15,545 44.7

Target EV/EBITDA (X)

FY19E FY16 FY17E FY18E FY19E

12.7 16,569 15,616 15,616 15,616

Source: Ambit Capital research, Company, Bloomberg

Exhibit 2: Operational assumptions summary

90 4,936 4,847 5,140 5,447 4,035 3,824 3,984 4,149

956 1,082 1,215 1,360

77 4,321 4,387 4,711 5,041 3,659 3,578 3,662 3,791

857 1,083 1,286

81 4,868 5,033 5,342 5,663 4,346 4,326 4,409 4,523

790 1,021 1,204

95 3,966 4,244 4,456 4,723 2,982 2,953 3,011 3,032

927 1,285 1,291 1,443

90 3,399 3,501 3,816 3,930 3,000 2,881 2,909 2,887

Source: Ambit Capital research, Company, Bloomberg

Exhibit 3: Financial Summary

EBITDA (Rs bn)

PAT (Rs bn)

241.1 251.8 290.8 345.2 46.2

95.5 108.3 126.3 15.3

118.0 124.9 140.6 158.6 15.3

87.5 100.3 15.8

92.2 115.8 137.9 13.2

79.4 101.4 136.6 183.8

23.5 131.2 385.5 529.1 675.5

Source: Ambit Capital research, Company, Bloomberg

Revenue growth (%)

EBITDA growth (%)

PAT growth (%)

Source: Ambit Capital research, Company, Bloomberg

November 09, 2016

Ambit Capital Pvt. Ltd.

When the going remains tough

Demand waiting in vain

India - Cement volume growth

YoY volume growth

Source: Company, Ambit Capital research

November 09, 2016

Ambit Capital Pvt. Ltd.

3-yr Demand CAGR

Demand CAGR FY96-16

Source: Company, Ambit Capital research

Monsoon impact: Limited benefits in FY17, wait for FY18

November 09, 2016