Ambit - Cement - Thematic - The Retail Consumer To The Rescue - 19dec2011

December 19, 2011
Cement
BUY
CHANGE IN STANCE Analyst contacts
Nitin Bhasin
Tel: +91 22 3043 3241 nitinbhasin@ambitcapital.com
The retail consumer to the rescue

Low demand from bulk-buying-price-bargaining institutional clients and steady demand from the fragmented-low-bargaining-powerbrand-seeking Individual House Builder (IHB) is helping producers raise cement prices higher despite lower industry utilisation. Pricing power with the IHB consumer base will limit the drop in RoCEs and maintain strong cash flows for the larger players, thus supporting premium valuations and relative outperformance. We revise upwards our estimates and valuations and upgrade the stocks to BUY with UltraTech as our top sector pick. Since our initiation (on August 26, 2011), Ambuja, ACC and UltraTech have outperformed the Sensex by 13%-21%, as cement prices rose higher than expected despite demand remaining muted. Whilst we still maintain that decelerating gross fixed capital formation (GFCF) in FY12 (4.7%) and FY13 (3%) should keep cement demand growth low at 5.5%-6% for FY12 and FY13, we revisit our recommendations for the following reasons: IHB consumption keeping industrys hope alive for stable growth Whilst GFCF growth is an important driver of cement demand, industry sources say that at present it is the retail IHB that is the key volume driver. Whilst there are pockets of healthy institutional activity in the North, West and East, we find institutional real estate activity to continue to moderate. Until we witness a material pick-up in infra investments, we do not expect cement volume growth to go back to 8%-10%. Until then IHB demand should be the main source of muted 5.5%-6% volume growth over FY12/FY13. Larger panIndia players with more IHB customers (v/s institutional client heavy smaller regional companies) will witness higher volume growth. The absence of bargain seekers is supporting prices Lower demand from bulk-buying-discount-seeking institutional clients is reducing the price-based competition from the smaller cement manufacturers as these manufacturers spend more to build dealer reach and brand for targeting higher IHB volumes. Larger players with strong brands are using this opportunity to raise prices and gain market share with their IHB customers realizing that the demand from this large fragmented customer base remains highly inelastic to price rises. We expect at least another 5% increase per annum in prices for the next two years. Rich valuations to stay We revise our EBITDA assumptions for CY12/FY13 materially for higher realisations and volumes given the rising market shares of larger players. Whilst RoICs will still not reach the peaks of CY07-CY09, a sharp jump in EBITDA/tonne and rising competitiveness will support premium valuations. We upgrade the fair valuations for ACC (by 16%), Ambuja (by 36%) and UltraTech (by 31%) and turn BUYers on all three stocks. We prefer UltraTech over ACC given relatively lower EV/EBITDA valuations and the fact that UltraTech would be the key beneficiary should volume growth get higher.
Cement sector coverage summary
Company UltraTech Ambuja ACC Rating BUY BUY BUY CMP ` 1,132 153 1,128 Mcap US$ mn 5,815 4,371 3,950 Fair value Upside ` 1,308 164 1,200 % 15.5 7.2 6.4 EV/EBITDA (x) FY12E 8.7 9.4 10.3 FY13E 8.0 8.9 9.2 FY12E 137 153 134
Ritu Modi
Tel: +91 22 3043 3292 ritumodi@ambitcapital.com
Cement demand and GFCF growth move very closely

20% 16% 12% 8% 4% 0% -4% FY12E FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 25% 20% 15% 10% 5% 0% -5%
Cem ent demand growth GFCF real growth (RHS)
Recent price rises despite large demand supply gap

30% 20% 10% 0% FY96 FY98 FY00 FY02 -10% ` FY12E
Jul-11
Rolling 3-year cement capacities CAGR Rolling 3-year cement despatches CAGR Cement price growth
1-year fwd EV/EBITDA

14 12 10 8 6 4 2 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-07 Jul-08 Jul-09 Jul-10
ACC
Ambuja
UltraTech
Source: Bloomberg, CMA, Industry, Ambit Capital research RoIC (%) FY11 19 33 40 FY12E 18 26 26 RoCE (%) FY11 14 17 16 FY12E 13 15 15
EV/ tonne (US$) FY13E 140 152 133
Source: Company, Bloomberg, Ambit Capital research, Note: ACC and Ambuja are Dec-ending, hence FY11=CY10 and FY12E=CY11E
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 consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
FY14E
FY04
FY06
FY08
FY10
Cement
CONTENTS
SECTOR
The retail consumer saves the day.....................................................3 Absence of bargain seekers helps pricing.........................................5 Other structural changes..................................................................16 Valuations to follow pricing/ unitary EBITDAs .................................19 Relative Valuations ..........................................................................23 Company wise assumptions .............................................................24 Operational and financial summary................................................25
COMPANIES
UltraTech Cement... 27 Ambuja Cement... 37 ACC....45
Ambit Capital Pvt Ltd
Cement
The retail consumer saves the day

Most cement companies agree to the rising relevance of GFCF growth for cement volume growth, but highlight that presently, retail IHB remains the volume driver. Whilst there are mentions of pockets of healthy institutional activity in North, West and East, infra and institutional real estate activity is generally moderating across the country.
Exhibit 1: Dealers highlight stronger IHB demand compared to institutional demand
Region North West Central East South Retail demand Moderate Strong IHB Low IHB Strong IHB Very low IHB Institutional demand Poor construction activities and government projects Moderate construction activities. Low government activities Poor construction activities Strong construction activities Very poor construction and government activities
Source: Industry, Ambit Capital research
Smaller players shift towards retail sales

Industry experts, primary channel checks and management have mentioned that demand is being supported by IHB given muted activity in the institutional market (either in infra or in real estate). Rising infra spends and increased real estate activity over the last decade raised cement volumes. However, with the trade segment currently driving volumes and the lack of institutional clientele has meant that smaller players, which traditionally had a higher proportion of institutional sales are also chasing retail clients.
Exhibit 2: Manufacturers have shifted to trade sales
Trade Earlier Mangalam Cement Dalmia Bharat J K Lakshmi Heidelberg Cement OCL India
Source: Company, Ambit Capital research
Non-trade Now 85 70 50 85 70 Earlier 40 40 60 35 40 Now 15 30 50 15 30
60 60 40 75 60
High regional disparities between South and the rest of India

With the demand environment in South India remaining weak, regional demand disparities between South India and other regions of India continue to remain high. Manufacturers operating in South India mentioned that the region might again witness negative growth or at best flat volumes in FY12 in spite of Karnataka and Tamil Nadu showing increased demand (4%-5%). This decline would be mainly on account of the double digit (17%-18%) de-growth currently being witnessed in Andhra Pradesh (AP). Manufacturers also mentioned that growth in South India is likely to remain muted due to mining issues, political uncertainty and general low demand from the Government and institutional segments.
Cement
Subdued demand scenario for FY12 and FY13

Whilst we have been hearing from our primary channel checks that a major proportion of current cement demand is from the retail/rural segment and infrastructure activities have reduced considerably, we believe that FY12 demand growth will be ~5.5% and will be to some extent higher than the decadal lows witnessed in FY11. However, Government spending, which drives cement demand growth, could pick up in FY13. This should lend support to cement demand growth in FY13, which we expect to be ~6% (previous assumption: 8%). In spite of Government demand lending support, the ongoing weakness in GFCF (expected by our economist, Ritika Mankar to grow at only 3% in FY13) is pulling down our FY13 demand growth assumption. Lack of meaningful progress in large private projects, reduced corporate investments and lower real estate buildup will be the key reasons for keeping cement demand low. Main driver of our ~6% volume growth assumption for FY13 will be the retail IHB which could see some pressure if the services, agriculture and government spend could see declines. Our economist expects agricultural section of the economy as captured in GDP to grow at a poor 1.6% from 4% in FY12E.
Cement
Absence of bargain seekers helps pricing

Over the past few months whilst cement demand has not shown any major improvement (YTD growth of only 4.6% in FY12 v/s 5.4% in the corresponding period last year), the continued price rises have raised the question - Whats holding up the pricing?. Our interaction with the marketing teams, dealers and distributors indicate that absence of demand from the institutional players which are bulk buyers and bargain seekers is reducing the pricing intensity capability of the smaller regional players which have lower reach amongst the retail IHB. The price rises that companies took in the period of Sep Nov 2011 were one of a kind as companies have never taken such high prices rises for 3 months in a row in this season. Whilst MoM despatch growth in Sept-Nov 2011 were in line with past trends, the recent price hikes witnessed by the industry during the same time are one of a kind with such price rises never witnessed in this time period in the past.
Exhibit 3: MoM despatch movements in Sept and Nov11 are in line with the past
(%) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Aug (12.9) 1.5 (7.3) (5.2) (9.0) (3.0) (2.9) (6.7) Sep 14.1 (3.5) 9.6 (0.1) 5.1 (3.1) (0.4) (4.9) Oct 5.5 12.6 3.7 8.1 3.1 2.6 15.3 13.4 Nov (3.3) (5.3) (1.0) (5.7) 0.9 0.8 (18.8) (2.2) Dec 5.7 14.0 9.0 10.1 10.9 15.3 17.5 NA
Exhibit 4: But price increases in the same period are one of a kind
(%) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Aug 1.0 0.1 0.0 0.6 0.4 (0.9) (3.2) (5.3) Sep (0.6) 0.4 0.4 (0.2) 0.6 (1.5) (0.4) 6.1 Oct (3.5) 0.6 1.9 0.1 (0.2) (2.0) 6.4 3.6 Nov (3.2) (0.5) 1.4 (0.2) (0.5) (6.7) 1.4 7.7 Dec 2.2 (0.9) 0.6 (0.4) (1.5) (2.5) (3.7) 0.3
Source: CMA, Company, Ambit Capital research. Note: (a) Cement despatches include ACC and Ambuja; (b)NA indicated Not Applicable
Source: CMA, Industry, Ambit Capital research. Note: (a) cement prices for FY12 are based on dealer/distributor interactions across India and prices for the period FY05-11 are as indicated by CMA; (b)cement prices for Dec-11 are based on mid-Dec dealer interactions
Whats holding up the pricing?
Weak institutional demand leads to lower inter-regional price wars

Inter-regional movement of cement was mainly to cater to the institutional segment in the receiving region. Small manufacturers would mainly target the bulk-buying institutional clients which would result in higher profits because of no discounts, low logistics costs and lower indirect taxes. However with (i) the lack of demand from institutional buyers; (ii) the costs of inter-regional movement rising (freight and selling and distribution expenses); and the (iii) pricing differential between the regions; all of this has resulted in lower movement of cement between regions. This has led to lower inter regional price competition, thus increasing prices in regions of captive consumption.
Cement
Exhibit 5: Capacity utilisation in all regions have declined but prices have increased to May 2011 peak levels
Utilisation (%) Apr-11 May-11 North East Central West South 75.0 89.9 85.9 79.2 62.7 73.5 88.1 84.9 79.1 60.5 Jun-11 77.2 83.6 84.0 73.0 59.8 Jul-11 Aug-11 Sep-11 78.5 84.4 83.1 71.2 65.4 74.9 75.7 80.5 66.3 60.2 65.7 68.0 75.6 64.1 57.0 Price (`/50kg bag) Oct-11 May-11 Nov-11 83.6 76.6 88.4 87.1 55.8 273 288 255 293 293 293 308 273 280 293
Source: CMA, Ambit Capital research. Note: Regional data does not include utilizations of ACC and Ambuja
Continuing demand from IHB

Historically, the mix between the institutional and retail segments has been 40:60. However the industry is now witnessing a period where this mix is close to 30:70. Recent earnings calls, channel checks and discussions with senior managements of cement companies have highlighted that the share of sales to retail/trade IHB is rising (see exhibit 2). We believe apart from weak demand in the non-trade segment, the large manufacturers who mainly cater to the fragmented customer base and whose demand is rising, are creating a short supply situation in the institutional segment. Primary dealer checks in October 2011 had mentioned many states witnessing reduced or complete stoppage of sales to the non-trade (institutional) segment. This has resulted in prices of the institutional segment rising and narrowing the gap between the institutional and retail prices. The main driver for the retail market is the retail IHB, who is more active in a very few metros but is a large consumer of cement in tier II cities and below. UltraTech, in its conference call mentioned that it expects high demand from the rural segment. We believe one of the reasons for the continued price rise is the stable-to-strong demand from the less-price-sensitive individual house builder (IHB). Whilst poor demand growth and low utilisation should have meant lower prices, prices continued to rise across regions, as the demand from IHBs remained strong in rural and semi-urban markets. Whilst demand from the institutional segment is weakening, it is reducing the price-based competition from the smaller cement manufacturers as these manufacturers spend more to build dealer reach and brand for targeting higher IHB volumes. Larger players who comprise nearly one-thirds the industry and have strong brands, are using this opportunity to raise prices and gain market share with their IHB customers. Hence pan-India brands or regional brands have realisations higher than their peers. In order to survive in this slow growth period, smaller manufacturers need to create their brands and increase points of presence which are through distributors and dealers. Hence they are spending more for selling to IHB in turn increasing their final cost of selling and thus shying away from price competition. In our discussions with many marketing teams, everyone highlighted that nearly all mid to small companies are increasing their advertising spends and most are using expensive brand ambassadors for creating connect with IHBs.
Cement
Exhibit 6: FY11 saw a jump in advertising spend of cement manufacturers

8000 7000 6000 5000 4000 3000 2000 1000 FY08 FY09 FY10 FY11 % of sales 1.5% 1.4% 1.3% 1.2% 1.1% 1.0% 0.9% 0.8% 0.7% 0.6%
Exhibit 7: Excluding top 3 cement cos, advertising expenses of other manufacturers jumped 43% in FY10
2400 2200 2000 1800 1600 1400 1200 1000 FY08 FY09 FY10 FY11 % of sales 1.1% 1.0% 0.9% 0.8% 0.7% 0.6% 0.5%
Advertising expenses (Rs mn)
Advertising expenses (Rs mn)
Source: CMA, Company, Ambit Capital research. Note: (a) We have considered expenses and revenues of top 10 cement manufacturers for calculation of the above; (b) ACC, Ambuja and Heidelberg are Decending, hence FY11=CY10; (c) UltraTech includes business of Samruddhi w.e.f July 1, 2010
Source: CMA, Company, Ambit Capital research. Note: (a) We have considered expenses and revenues of top 7 cement manufacturers for calculation of the above excluding UltraTech, Ambuja and ACC
Rising freight costs: Whilst diesel rates have remained stable after the hike in 2QFY12, the impact of recent hike in rail freight by Railway Board (aggregate hike of 6%) is yet to impact the freight costs for the industry.
Rising input costs

In our Cement Thematic dated August 23, 2011 Its Different This Time we had highlighted that apart from power and fuel costs, the cost of other raw materials (slag, gypsum, fly ash and limestone) continues to rise steadily. Over FY08-FY11, slag, gypsum and limestone costs increased at a CAGR of 17%, 8% and 10%, respectively. Industry experts highlighted that, not only will costs for most inputs continue to rise but the quality of raw material will also deteriorate. Further, limestone royalties are set to increase next year as well. Replacement of gypsum with synthetic gypsum has also not brought any cost benefits. Also relevant are rising freight costs and the rising distance of procurement for most of the inputs.
Exhibit 8: Coal and power costs have been rising

FY08 Avg coal cost (`/tonne) Growth (%) Avg purchase price of power (` per unit) Growth (%) Avg cost of power generated captively (` per unit) Growth (%) 3,100 17.3 3.9 1.9 2.5 6.2 FY09 4,490 44.9 3.9 -1.0 3.2 25.7 FY10 4,025 -10.3 3.7 -4.6 2.7 -16.2 FY11 5,100 26.7 4.3 15.7 3.2 19.8
Exhibit 9: Other raw material costs have also been rising

FY08 Slag (`/tonne) Growth (%) Gypsum (`/tonne) Growth (%) Fly Ash* (`/tonne) Growth (%) Limestone (`/tonne) Growth (%) 121 0.8 1,201 2.7 390 352 FY09 349 (1.0) 1,397 16.4 409 4.7 123 2.3 FY10 517 48.1 1,478 5.8 410 0.4 144 17.0 FY11 571 10.6 1,524 3.1 414 0.9 161 11.5
Source: Company, Ambit Capital research. Note: (a) We have taken the total purchase cost of UltraTech, ACC, India Cements and Shree Cement;(b)ACC and Ambuja are Dec-ending, hence FY11=CY10 and FY12E=CY11E; (c) UltraTech includes business of Samruddhi w.e.f July 1, 2010
Source: Company, Ambit Capital research. Note: (a) We have taken the average purchase cost of UltraTech, Shree Cement, Birla Corp and Century Textiles on per ton basis for calculation of the above except for fly ash where we have taken average purchase cost of UltraTech, Shree Cement, Birla Corp and Kesoram. (b) UltraTech includes business of Samruddhi w.e.f July 1, 2010
Cement Not only are the raw material costs rising but even the cost of freight has been rising continuously. The impact of the diesel rate hike in 2QFY12 was reflected in cement companies posting higher freight costs on a per tonne basis. Whilst diesel rates have remained stable after the hike, the impact of the recent hike in rail freight by the Railway Board is yet to impact the freight costs for the industry. In March 2011, the Indian Railways had levied a busy charge of 7% on all commodities for the period from October 2011 and March 2012; however this was revised to 10%. Apart from this development the surcharge on goods tariff levied on normal tariff rate was increased from 2% to 5%, indicating an aggregate increase of 6% on rail freight charges. This will further increase the freight costs for companies. Apart from freight, over the last couple of years unavailability of coal and rising costs have become well known facts. With the cement industry being a relatively smaller consumer compared to power utilities, the cement manufacturers have no other choice but to pay more for Indian or international coal. Most of the cement companies import South African or Indonesian coal and have been witnessing high prices for last 3-4 quarters. Whilst the coal prices have declined in the international markets by US$12 (or 10%), the sharp decline in the Indian Rupee against US dollar has kept the coal prices stable for last three quarters. Compared to Jul-Oct quarter, Richards Bay coal prices are down prices 8% but the Indian coal prices are stable.
Exhibit 10: Freight rates stabilized with diesel prices
700 650 600 550 500 450 400 FY07 FY08 FY09 FY10 FY11 1QFY12 2QFY12 40 30 20 60 50
Exhibit 11: Coal prices (`/tonne) have remain stable

60% 40% 20% 0% -20% -40% -60% -80% 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 6,000 5,000 4,000 3,000 2,000 1,000
Average Freight Cost (Rs/tonne) Average Diesel Prices - Mumbai (Rs/litre) (RHS)
Source: Company, Bloomberg, Ambit Capital research Note: (a) Freight cost/ tonne of UltraTech, ACC, Ambuja and Shree Cement are taken for above calculation above;(b)ACC and Ambuja are Dec-ending, hence FY11=CY10 and FY12E=CY11E; (c) UltraTech includes business of Samruddhi w.e.f July 1, 2010
YoY growth (%) Rs/tonne - RHS
QoQ growth (%)
Source: Bloomberg, Ambit Capital research. Note: 3QFY12 indicate prices till Dec 9, 2011
In spite of costs starting to stabilize (see exhibit 14), managements in their earnings release and conference calls have indicated price increases on the back of all-round inflationary pressure on costs input costs, coal and freight. They highlighted that whilst price hikes would offset the rising cost trend, cost pressure is likely to keep EBITDA/tonne and margins under pressure.
Cement
Exhibit 12: Realisations likely to increase further in coming quarters

4,500 4,000 3,500 3,000 2,500 2,000 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12
Exhibit 13: Costs might see sequential decline in 3QFY12

15% 10% 5% 0% -5% -10% 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Exhibit 14: YoY growth have started to stabilize

30% 20% 10% 0% -10% 1QFY11 2QFY11 3QFY11 4QFY11
for
costs
1QFY12
2QFY12
Operating costs (Rs/tonne) Realisation (Rs/tonne)
Operating costs (QoQ growth) Realisation (QoQ growth)
Operating costs (YoY growth) Realisations (YoY growth)
Source: Company, CMA, Ambit Capital research Note: (a) Financials of ACC, Ambuja, UltraTech, Shree Cement, Madras Cement, JK Lakshmi, Heidelberg, OCL India and Chettinad are considered for calculation; (b) Realisations of Shree Cement, Madras and OCL only include cement business; (c) ACC, Ambuja and Heidelberg are Dec-ending companies.
Source: Company, CMA, Ambit Capital research. Note: (a) Financials of ACC, Ambuja, UltraTech, Shree Cement, Madras Cement, JK Lakshmi, Heidelberg, OCL India and Chettinad are considered for calculation; (b) Realisations of Shree Cement, Madras and OCL only include cement business; (c) ACC, Ambuja and Heidelberg are Dec-ending companies.
Source: Company, CMA, Ambit Capital research. Note: (a) Financials of ACC, Ambuja, UltraTech, Shree Cement, Madras Cement, JK Lakshmi, Heidelberg, OCL India and Chettinad are considered for calculation; (b) Realisations of Shree Cement, Madras and OCL only include cement business; (c) ACC, Ambuja and Heidelberg are Dec-ending companies.
Capacity additions but at a slow pace are supporting price rises

Capacity additions slowed down
41 33 27 18 27 24 16
have
FY08
FY09
FY10
FY11
FY12E FY13E FY14E
Source: Company, CMA, Industry, Ambit Capital research
In our September 30, 2011 note (Getting Into the Critical Zone), we had highlighted that out of the 7mn-8mn tonnes capacity to be added in 1HFY12, we have confirmations of only ~6mn tonnes becoming operational and others either under development (mainly JPA) or with no clarity on whats going on. The Cement Manufacturers Association (CMA) data until September 2011 suggests addition of: (a) 1.2mn tonnes of capacity of Jaypee Cement in Sikanderabad, UP (central India), which the company highlights was added in FY11; and (b) 1.2mn tonnes of capacity of Lafarge in Singbhum, Jharkhand (eastern India). Whilst most of the new capacity supposed to come in South India could have created pricing pressure in western and southern India, given the poor demand situation in South India, some of the new entrants (JSW Cements) have postponed commissioning to 4QFY12. We believe capacity addition deferrals/cancellations will be beneficial for prices.
2QFY12
9
Cement
Exhibit 15: Status of capacity additions in FY12
Region North JK Lakshmi Birla Corp East Birla Corp Ambuja Cement Lafarge Jaypee Group - SAIL JV Century Plywood Central KJS Cement West Ambuja Cements ABG Cement South Madras Cements Chettinad Cement Andhra Cements JSW Cement Jaypee Group India Addition Status 1.7 0.5 To come up by Mar-12 1.2 Commisioning by Nov-Dec 2011 9.0 0.6 Commisioning by Nov-Dec 2011 1.1 Started operations in Aug-11 2.0 Capacity has already come up Annual Report Earnings release Our discussion Annual Report Source
CMA Company 2.1 Likely to be started production in 4QFY12 presentation Company 3.2 Commisioning in 4QFY12 presentation 2.2 2.2 No data available 4.2 0.9 Started operations in 1QFY12 3.3 Likely to come up in the current fiscal 12.1 2.0 Commissioned in Aug-11 Earnings release 1.5 Capacity has already come up Earnings call Operations at the existing plants have 2.1 been shut down, hence unlikely new Our discussion capacity addition. 1.5 Likely to be started production in 4QFY12 Our discussion Company 5.0 Likely to be started production in 4QFY12 presentation 29.2 Earnings release Press reports
Source: Company, Industry, Ambit Capital research
Exhibit 16: Status of capacity additions in FY13

Region North Jaypee Group JK Lakshmi Wonder Cement East Century Textiles SAIL Central Jaypee Group Mangalam Cement Heidelberg West Century Textiles South Chettinad Cement Sagar Cement India Addition Status 7.2 1.5 Commissioning in FY13 2.7 1.8 mn tonnes likely to come up in FY13 3.0 No information 3.5 1.5 Commissioning by Sep-12 2.0 No information 6.9 2.8 Commissioning in FY13 1.2 To be commissioned by Dec-12 2.9 To be commisioned by 4QFY12 2.8 2.8 Commissioning by Mar-13 3.8 1.0 No information 2.8 To be commissioned by mid 2012 24.1 Earnings call Annual Report Company presentation Earnings call Annual Report Annual Report Company presentation Our discussion Source
Source: Company, Industry, Ambit Capital research
10
Cement
Does recent December decline portend more price declines?

Whilst prices were further expected to rise in December 2011, the difficulty of small builders to purchase cement at high prices and increased supply from manufacturers to achieve volume targets have led to prices either remaining stable, or to some extent, a decline in certain regions. However, dealers and distributors expect further price rise is expected by end-December or mid-January. We would also like to highlight that the cement price declines witnessed in December are very much in trend with every year where a few large companies achieve volume targets by reducing prices.
Exhibit 17: Dealer checks highlight marginal price declines in December in North, East and Central India
320 300 280 260 240 220 200 Jun-11 May-11 Aug-11 Sep-11 Jul-11 Nov-11 Oct-11 Dec-11
Exhibit 18: Prices in Jan rise after witnessing decline in Dec (%) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Nov (3.2) (0.5) 1.4 (0.2) (0.5) (6.7) 1.4 7.7 Dec 2.2 (0.9) 0.6 (0.4) (1.5) (2.5) (3.7) 0.3 Jan 2.5 4.4 (0.1) 0.2 (1.8) 1.9 6.9 NA Feb 5.1 6.0 1.4 0.1 2.8 5.2 8.8 NA Mar 1.6 7.6 6.1 1.1 2.5 3.7 1.9 NA
South Central
North East
West
Source: Industry, Ambit Capital research. Note: (a) Prices are based on interactions with dealers across regions; (b) Dec-11 prices indicated midDec prices
Source: CMA, Industry, Ambit Capital research. Note: (a) cement prices for FY12 are based on dealer/distributor interactions across India and prices for the period FY05-11 are as indicated by CMA; (b)cement prices for Dec-11 are based on mid-Dec dealer interactions
11
Cement
Exhibit 19: After price hikes in November, most regions have witnessed price declines in December
Region North Delhi Jaipur Jodhpur Haryana Punjab West Mumbai 290-320 270-285 Whilst Government projects have not seen any major improvement, demand is mainly due to housing and construction activities. Prices will further increase by `5-7/bag. Ambuja is the preferred brand. Mumbai is a ~700,000 tonne cement market. Prices to further increase on the back of demand from IHB's. South India brand - Kesoram sells ~60% of its despatches in Pune making it a preferred brand after UltraTech. Pune is ~300,000 tonne market Prices in Gujarat have increased on account of very high demand from individual housing and construction. Non-trade segment sells at a discount of `10-15/bag In spite of low demand, manufacturers are expected to increase prices Prices have decreased over the past 10 days by `5-7/bag due to low pick-up in demand. Dealers continue to highlight inventory pile-up. Bhopal is ~60,000 tonne cement market Prices have decreased by `7-9/bag and are likely to remain at these levels. UltraTech doesnt supply in Lucknow. ACC Is the preferred brand Prices have decreased by `5-8/bag and are likely to remain at these levels. UltraTech is the price leader in Indore Low to negligible demand has led to price decrease. Prices are not expected to rise till end of December 270-290 275-290 275-290 285-310 285-305 NA 250-265 250-265 260-290 265-290 Prices to increase only after mid-Jan. Government projects have not seen any major improvement. Shree Ultra (flagship brand of Shree Cement) is the preferred brand and sells at `10/bag discount to ACC and Ambuja Demand supported only from IHBs; Ambuja is the preferred brand in this region Demand supported only from IHBs; Prices are expected to rise by `10/bag in the last week of December Prices are further expected to rise by `10/bag in the last week of December and likely to reach `350/bag till the end of the current fiscal. UltraTech is the preferred brand Prices are further expected to rise by `5/bag in the last week of December Prices (`/50kg bag) Trade Non-trade Price movement Comments
Pune
275-300
250-270
Ahmedabad Nashik Central Bhopal Lucknow Indore Kanpur East Kolkata
255-270 275-290
235-250 250-270
260-275 250-280 265-285 260-280
250-265 250-270 260-275 250-270
300-310
285-305
Prices have further increased by `5-7/bag over the past 10 days. Dealers expect prices to reach `360-370/bag by the end of December Prices have started to come under pressure after increasing by `5-12/bag in the second half of November. Builders are finding it difficult to purchase at the current levels Despite offtakes of Government projects and growing construction demand prices have come under pressure.
Bhubaneswar Raipur South Hyderabad Bangalore Chennai
280-295 290-300
275-285 285-295
275-295 270-290 285-300
265-280 250-270 NA
After marginally increasing in the first half of November, prices have now decreased Political uncertainty, mining issues have led to slow growth in the region. No major construction and infrastructure activity Demand is not expected to pick up until mid January. No supply to institutional segment. Demand only from IHBs but that too is very low. Since Kerala does not have any cement plants, prices tend to be higher than in any other state.
Kerala
300-330
NA
Source: Industry, Ambit Capital research
12
Cement
Where do we go from here?

Price hikes to continue
Whilst dealer interactions highlight that prices have declined in December 2011, these price declines are similar to trends witnessed in the past (exhibit 4) where prices in December are generally under pressure. We expect trends of the past to continue where the Jan-Mar period witnesses price increases and expect price jumps in the near term. However, we do not expect very sharp increase in prices. Also, we believe FY10-FY13E could witness a similar trend as seen in FY06-FY08. Whilst despatches growth over the FY06-FY08 period was only 9% and operating costs increased by 12%, cement prices increased by 18% CAGR (as increasing costs led to price increases). Whilst high capacity utilisation characterized that period, the low demand from the price insensitive market will support the price drives of the cement majors.
Exhibit 20: Despatches (mn tonnes) grew marginally over FY06-FY08
65 55 45 35 25 15 5 North Central South West East
Exhibit 21: Utilisations (%) in most regions increased in FY07

105% 100% 95% 90% 85% 80% 75% North Central South East West
Exhibit 22: But prices increased by `66/50kg bag over FY06-FY08

245 225 205 185 165 145 125 North Central South
FY08
13
FY06
FY07
FY08
FY06
FY07
FY08
FY06
FY07
Source: CMA, Ambit Capital research
Exhibit 23: Marginal growth despatches (mn tonnes) led significant growth in costs
2,500 2,000 1,500 1,000 FY06 FY07 FY08 Operating Costs (Rs/tonne) Operating Costs (YoY growth)
in to
15% 13% 11% 9% 7% 5%
Exhibit 24: Utilisations increased in

170 160 150 140 130 120
in
India FY07
95% 94% 93% 92% 91% 90% 89%
Exhibit 25: Prices increased by `66/50kgbag over FY06-08

275 225 175 125 75 FY06 FY07 Cement prices (Rs/50kg bag)
FY06 FY07 FY08 Cement despatches (mn tonnes) Utilisation (%)
Source: Company, CMA, Ambit Capital research Note: Financials of ACC, Ambuja, UltraTech and Shree Cement are considered for calculation. ACC and Ambuja are Dec-ending cos hence FY06=CY05 and so on
West FY08
East
Cement
Regional dynamics becoming acute

Going forward we believe that prices are further expected to rise as manufacturers demonstrate discipline with low stocks of inventory thus impacting utilizations. Whilst in the past we have seen prices decline with declining capacity utilizations, the same was not witnessed in FY12 as manufacturers increased prices in spite of operating at low utilizations. Also, whilst capacity addition may slow down on an annual basis in FY12 itself vis--vis last four years, what matters more is the supply momentum that has been created because of large additions over the last few years. We assume that the industry will operate at 74% utilization for FY12 and at 72% for FY13.
Exhibit 26: Prices in FY11 have risen in spite of declining utilisation
30%
100% 90% 80%
Rolling 3-year cement capacities CAGR Rolling 3-year cement despatches CAGR Cement price growth Annual capacity utilisations (RHS)
20%
10% 70% 0% FY12E FY13E FY14E FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 60% 50%
-10%
Source: CMA, Ambit Capital research Note (a) We calculate capacity utilisation assuming 4.5 months availability of the incremental capacities in the fiscal (b) the Cement price growth above is calculated using the CMA-provided all-India average price of 50kg cement bag.
Small manufacturers would earlier engage in inter-regional sales with despatches mainly sold to the bulk buyers. This led to inter-regional price competition as exports from other regions was available at a cheaper price. However, with lack of demand from the institutional segment and the growing retail segment becoming more and more brand conscious, these manufacturers have to incur incremental costs of selling and distribution in their own region of operation. Whilst this is resulting in price hikes in regions of captive consumption, it is reducing price competition between regions. We highlight that in the southern region, the supply momentum has remained ahead of demand momentum. Whilst prices bounced back in FY11, we believe that pricing in the South might be at risk as utilization remains low. Discussions with senior management of companies operating in the South highlight that they expect prices to stabilize at current levels with only a marginal increase in the next 6-12 months. The exhibits below clearly highlight that the differences between South India and India (barring the southern region) are becoming acute. Whilst utilization in the South has declined significantly, other regions have not witnessed a similar significant decline.
14
Cement
Exhibit 27: Supply in South India has materially ahead of demand since FY09
30% 21% 12% 3% -6% -15% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
remained
100% 90% 80% 70% 60% 50% FY11
Exhibit 28: but India barring South has only seen a minimal supply demand mismatch
30% 21% 12% 3% -6% -15% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 100% 90% 80% 70% 60% 50%
Rolling 3-year cement capacities CAGR (LHS) Rolling 3-year cement despatches CAGR (LHS) Cement price growth (LHS) Annual capacity utilisations (RHS)
Source: CMA, Ambit Capital research Note (a) the Cement price growth above is calculated using the CMA-provided South India average price of 50kg cement bag
Rolling 3-year cement capacities CAGR (LHS) Rolling 3-year cement despatches CAGR (LHS) Cement price growth (LHS) Annual capacity utilisations (RHS)
Source: CMA, Ambit Capital research Note (a) the Cement price growth above is calculated using the CMA-provided South India average price of 50kg cement bag
15
Cement
Other structural changes

Based on our discussions with senior executives in the cement industry, the three key trends to watch out for are:
Fragmentation is rising, consolidation not happening

These industry veterans highlighted that the number of players in the industry continue to rise with presently 66 companies (48 under CMA and incl ACC and Ambuja) involved in cement manufacturing compared with 55 companies three years ago. Large and small business groups with no track record of cement manufacturing (Wonder Cement, KJS, ABG, JSW, Emami) across the country are entering cement manufacturing. Apart from this, small to mid-size regional players are also expanding capacities further in their regions (such as Heidelberg, Birla Corp, Century Textiles) or entering new regions (such as J K Lakshmi, Dalmia Cements and Shree Cement), with the expectations of becoming pan-India players. A larger part of the incremental capacities in the industry over the next 3-4 years will be added by the smallto-mid-size players (with capacities up to 10mn tonnes) leading to increasing fragmentation. Lastly, the extent of fragmentation should be considered in light of nearly 20mn tonnes of capacity outside Cement Manufacturers Association (CMA) plus Holcim group (ACC and Ambuja), wherein most of these capacities are 1 mn tonnes or lower. Acquisition interest remains high amongst the large foreign and the mid-tolarge Indian players. However, valuation in most of the cases remains a deterrent with smaller players seeking premium valuations closer US$160US$170/tonne for capacities yet to commence operations or with uncertain fuel/raw material linkages as against the replacement cost of US$110US$140/tonne.
Exhibit 29: Addition of capacities over FY08-11 by larger players led to their rising share
Exhibit 30: Higher amount of capacities planned by small mid players to increase fragmentation
<5 mn, 15.9% 20 mn tonne+ 41.6%
<5 mn, 16.1% 20 mn tonne+, 40.1% 5-10 mn, 24.5%
5-10 mn, 24.7% 10-20 mn tonne, 17.8%

10-20 mn tonne, 19.3%

Source: Industry, Company, Ambit Capital research
16
Cement
Longer gestation, higher costs and split nature for Greenfield capacities
Greenfield cement capacity addition in India will now take 4.5-5 years (as opposed to 3-3.5 years) as land acquisition and aggregation and getting the required clearances will require more time than in the past. Whilst longer gestation and higher land costs will increase the Greenfield set up costs, one of the key reasons for higher greenfield costs will be the rising split grinding nature of the incremental capacities. As grinding units are shifted away from the clinkerisation unit, the grinding unit investment cost (which is 35% of the total plant cost) increases by 15%-20% thus raising the overall replacement cost by 5%-7%. Whilst this raises the upfront cost, it reduces the logistics costs by replacing the movement of cement with clinker and increases proximity to their target markets (an example of this J K Lakshmi Cements, which is putting up 2.7mn tonnes capacity with three grinding units: one in Chhattisgarh next to the clinkerisation unit and each of the other two 0.9mn tonnes grinding units in Jharkhand and Orissa). Given the rising costs and gestation period for Greenfield capacities, more companies could opt for Brownfield capacities in the near term.
An inevitable fuel shift towards pet coke

The rising cost and unavailability of coal are well known facts. With the cement industry being a relatively smaller consumer compared to power utilities, the cement manufacturers have no other choice but to pay more for Indian or international coal. With no visibility on a material improvement in the availability and prices for coal, manufacturers are shifting, and will incrementally shift, their source of fuel to pet coke (presently ~25% of the Indian capacities are on pet coke). However, the extent may vary. Smaller companies which are adding new capacities or have expanded capacities recently will be able to have a higher degree of replacement to pet coke compared with the larger companies that have older plants. In the recent earnings calls, the larger players such as UltraTech and smaller players such as Mangalam informed that they are incrementally replacing coal with pet coke. Experts highlighted that whilst presently Reliance and imports are the chief sources of pet coke, incremental oil refinery coker units are coming up in India, which will increase the supply of fuel grade pet coke and will possibly reduce the prices of pet coke as well. On a like-to-like per calorific value basis, companies and experts highlight that pet coke is 15%-20% cheaper than coal. More importantly, unlike the supply disruptions in coal availability, petcoke supply arrangements with private parties reduce the risk of cement production interruption.
Exhibit 31: Pet coke (as % of total fuel) has increased for some cement companies
Linkage / E-auction Earlier JK Cement Mangalam Cement UltraTech Cement Dalmia Bharat India Cements Sagar Cement 31 100 55 0 40 50 Now 21 0 38 0 35 10 Imported Coal Earlier 6 0 35 100 60 50 Now 6 0 38 60 65 90 Pet coke Earlier 63 0 10 0 0 0 Now 73 100 24 40 0 0
17
Cement
Exhibit 32: Companies using pet coke have comparatively lower fuel costs
YoY growth (%) Madras Cement Shree Cement JK Lakshmi Cement UltraTech Cement Heidelberg Ambuja Cement ACC India Cements OCL India Pet coke as % of fuel 100 100 100 24 20 10 0 0 0 3QFY11 38.9 27.2 44.4 18.3 3.4 31.2 6.2 12.6 2.6 4QFY11 6.1 69.2 37.2 25.8 17.4 29.4 8.4 1.9 61.4 1QFY12 8.7 19.4 20.2 19.5 35.1 31.6 31.2 (6.0) 9.1 2QFY12 13.7 1.6 (15.4) 10.3 24.6 3.5 26.8 6.5 27.8
Source: Company, CMA, Industry, Ambit Capital research
Exhibit 33: Imported petcoke prices have declined by 43% since Aug-11
140 130 120 110 100 90 80 70 60
US$/tonne
May-10
Sep-10
Aug-10
Oct-10
Jun-10
Jul-10
Nov-10
Mar-11
Apr-10
Feb-11
May-11
Sep-11
Dec-10
Aug-11
Oct-11
Jan-11
Jun-11
Apr-11
Jul-11
Petcoke (US Gulf) prices

Source: Bloomberg, Ambit Capital research
Richards Bay (South Africa) prices
Nov-11
18
Cement
Valuations to follow pricing/ unitary EBITDAs

Whilst the cement majors have posted declining EBITDA/tonne for the JuneSeptember 2011 quarter, mainly as the quarter was a seasonally weak period, we expect EBITDA/tonne to improve (by `15-`200/tonne) for the cement majors for CY2011/FY2012. This is mainly due to price rises and operating costs stabilizing. Moreover, we expect the EBITDA/tonne to continue to rise in FY13 as low volume growth helps the larger players in pushing through prices. Whilst return ratios may be lower than those in the past, we expect valuations to improve as the near-term low growth, rising constraints and delayed expansion environment will improve their lead over other smaller players.
Exhibit 34: EBITDA/tonne has started improving with increasing prices
100% 90% 80% 70% 60% FY05 FY06 FY07 FY08 FY09 FY10 FY11 1HFY12 80% 60% 40% 20% 0% -20% -40%
Exhibit 35: EBITDA/tonne recovering from the low of CY10/FY11

1,231 1,047 1,006 1,005 773 Ultratech FY13E FY12E
FY11 FY12E FY13E ACC Ambuja
859
Capacity utilisation (LHS) EBITDA/ tonne growth (RHS)
ACC FY10
797
835
Ambuja FY11
Source: Ambit Capital research, Company, CMA Note: (a) Calculation is based on combined data from ACC, Ambuja, UltraTech & Shree Cement; (b) 1HFY12 EBITDA/tonne growth is compared to 1HFY11 growth; (c) ACC and Ambuja are December ending companies. (d) UltraTech includes Samruddhi operations w.e.f.July 1, 2010.
We note that RoCEs after declining in CY10/FY11 remain stable for the next two years on account of stable or marginal improvement in EBITDA/tonne.
Exhibit 36: RoCEs after declining remain stable
70% 60% 50% 40% 30% 20% 10% FY09 FY10 Ultratech FY11 FY12E FY13E ACC
Exhibit 37: Similarly RoICs also remain steady

35% 30% 25% 20% 15% 10% 5% FY09 FY10 Ultratech
Ambuja
Source: Ambit Capital research, Company, (a) ACC and Ambuja are Decending, hence FY11=CY10 and FY12E=CY11E; (b) UltraTech includes business of Samruddhi w.e.f July 1, 2010
Source: Ambit Capital research, Company, (a) ACC and Ambuja are Decending, hence FY11=CY10 and FY12E=CY11E; (b) UltraTech includes business of Samruddhi w.e.f July 1, 2010
951
992
998
1,020
19
Cement In the last upcycle (FY07-FY10), the EBITDA/tonne of major cement manufacturers peaked in FY10 and thereafter declined, mainly on account of increase in power and fuel and raw material costs. Whilst JPA showed the highest EBITDA/ tonne during this period, it also posted the sharpest fall in FY11 from FY10.
Exhibit 38: EBITDA per tonne heading towards
(`/tonne) UltraTech Ambuja ACC JPA Shree Cement Industry CY03/ FY04 243 522 316 234 466 338 CY04/ FY05 243 567 451 386 568 415 CY05/ Avg CY06/ FY06 FY04-06 FY07 376 793 469 480 703 540 288 643 415 374 584 436 820 966 916 1,049 1,264 941 CY07/ FY08 1,046 1,241 1,007 1,270 1,010 1,101 CY08/ FY09 968 1,031 904 1,191 744 960 CY09/ FY10 1,006 1,047 1,231 1,303 980 1,110 Avg FY07-10 961 1,073 1,019 1,217 966 1,032 CY10/ FY11 773 951 859 713 573 797 CY11E/ FY12E 1,005 992 797 NA NA NA CY12E/ FY13E 1,020 998 835 NA NA NA
Source: CMA, Company, Ambit Capital research Note: (a) ACC and Ambuja are Dec-ending companies hence FY04=CY03. FY05=CY04 and so on; (b) UltraTech includes financials of Samruddhi w.e.f. July 1, 2010; (c) EBITDA per tonne for JPA pertains to cement business.; (d) Average has been calculated by taking total EBITDA and total volumes for the period (FY04-06 and FY07-10) for each company and the industry; (e) FY12 and FY13 are Ambit estimates; (f) NA indicates Not Available
EBITDA margin for Ambuja has been amongst the most stable in the industry; ACC, UltraTech and JPA posted higher margins in the FY07-FY10 cycle versus FY04-FY06.
Exhibit 39: EBITDA margin
(%) UltraTech Ambuja ACC JPA Shree Cement Industry CY03/ FY04 16.0 28.5 14.1 14.0 28.0 18.5 CY04/ FY05 14.1 28.7 20.6 19.3 29.9 21.2 CY05/ Avg CY06/ FY06 FY04-06 FY07 17.7 32.5 18.5 21.6 33.6 23.1 16.1 30.4 17.8 18.9 30.8 21.2 29.5 34.8 29.5 36.1 44.7 32.5 CY07/ FY08 32.5 37.0 28.6 40.0 31.6 33.0 CY08/ FY09 27.6 29.1 26.2 36.1 23.8 27.9 CY09/ FY10 28.9 27.8 32.9 36.8 29.3 30.8 Avg FY07-10 29.5 31.7 29.4 37.2 30.5 30.9 CY10/ FY11 20.3 26.2 23.5 19.9 18.7 22.0 CY11E/ FY12E 21.7 24.6 19.6 NA NA NA CY12E/ FY13E 21.1 24.0 19.9 NA NA NA
Source: Company, Ambit Capital research Note: (a) ACC and Ambuja are Dec-ending companies hence FY04=CY03. FY05=CY04 and so on; (b) UltraTech includes financials of Samruddhi w.e.f. July 1, 2010; (c) EBITDA margin for JPA pertains to cement business; (d) Average has been calculated by taking total EBITDA and total revenues for the period (FY04-06 and FY07-10) for each company and the industry; (e) FY12 and FY13 are Ambit estimates; (f) NA indicates Not Available.
RoCEs for ACC, Ambuja and UltraTech have declined over the 3-4 years as cash and liquid investments increased significantly for these companies. For Shree Cement the sharp decline in FY2011 was on account of losses in the captive power generation business.
Exhibit 40: RoCE for the industry has declined significantly
CY03/ FY04 UltraTech Ambuja ACC JPA Shree Cement Industry 6.1 6.8 6.7 4.0 5.3 6.3 CY04/ FY05 3.1 9.0 10.3 7.0 4.5 7.3 CY05/ Avg FY06 FY04-06 8.2 16.5 11.6 7.9 5.4 11.5 5.8 10.8 9.5 6.3 5.1 8.4 CY06/ FY07 24.6 19.8 26.3 13.8 9.9 20.7 CY07/ FY08 24.5 22.0 26.3 8.9 14.8 19.6 CY08/ FY09 17.6 16.1 21.4 5.5 22.0 14.7 CY09/ FY10 17.1 15.5 25.4 6.3 19.5 14.9 Avg FY07-10 20.9 18.4 24.9 8.6 16.5 17.5 CY10/ CY11E/ CY12E/ FY11 FY12E FY13E 11.4 13.1 13.9 3.6 2.5 8.8 11.9 13.8 13.0 NA NA NA 11.5 13.2 13.4 NA NA NA
Source: Company, Ambit Capital research Note: (a) ACC and Ambuja are Dec-ending companies hence FY04=CY03. FY05=CY04 and so on; (b) UltraTech includes financials of Samruddhi w.e.f. July 1, 2010; (c) RoCE for JPA pertains to cement business; (d) RoCE is calculated at 30% tax rate on EBIT for all the years: (e) FY12 and FY13 are Ambit estimates; (f) NA indicates Not Available.
ROICs peaked in FY10 as EBITDA margins and EBITDA/tonne peaked in that fiscal year. Since then, in FY11 the RoICs have declined but not to low levels of FY04-06 as pricing discipline helped companies contain the drop in EBITDA/ tonne.
20
Cement
Exhibit 41: RoICs have declined after hitting a peak in CY07/FY08
CY03/ FY04 UltraTech Ambuja ACC Shree Cement Industry 3.1 10.0 7.7 5.8 8.5 CY04/ FY05 3.2 13.3 12.6 5.1 9.8 CY05/ Avg FY06 FY04-06 8.7 26.7 14.1 6.5 16.9 5.0 16.7 11.5 5.8 11.7 CY06/ FY07 31.0 35.7 33.1 12.7 35.5 CY07/ FY08 40.9 41.7 39.6 20.9 43.1 CY08/ FY09 27.3 34.8 40.1 37.4 38.3 CY09/ FY10 23.1 30.2 61.9 47.1 41.5 Avg FY07-10 30.6 35.6 43.7 29.5 39.6 CY10/ CY11E/ CY12E/ FY11 FY12E FY13E 15.7 20.9 34.0 6.5 22.3 17.4 22.9 22.2 NA NA 18.0 21.7 18.1 NA NA
Source: Company, Ambit Capital research Note: (a) ACC and Ambuja are Dec-ending companies hence FY04=CY03. FY05=CY04 and so on; (b) UltraTech includes financials of Samruddhi w.e.f. July 1, 2010; (c) For IC calculation, cash, current investments and CWIP are not considered; ;(d) We have not considered JPA as we do not have the CWIP for their cement business. (e) RoIC have been calculated at 30% tax rate on EBIT for all the years; (e) FY12 and FY13 are Ambit estimates; (f) NA indicates Not Available.
Valuation methodology replacement
DCF
or
relative/
Cement is a relatively mature and a stable industry in India and can be valued either on relative earnings basis or on DCF. Whilst the DCF would exhibit much lower volatility than earnings or cash flows and focus on long term trends, relative valuation captures the market sentiment and works better in the short run. In the DCF method, no individual year will have a major impact on the DCF value, as high cash flows cancel out the low ones. However, in the real world, the share prices of cyclical companies such as cement are less stable and move in line with cement demand growth, earnings cycle and RoCEs. Hence, relative valuations EV/tonne and EV/EBITDA can be also used to value these companies.
DCF- based valuation

We use DCF based valuation methodology for valuing the cement majors and note that these cash flow based valuations are closer to the above replacement cost/ historical relative valuations. For DCF valuation purposes we use a 15% WACC which is close to cost of equity given that all of these companies are debt free or have very little debt. We model the next three years explicitly and after that we model gradual capacity expansions, 4%-7% volume growth and a similar cycle for the next 10 years as the last decade. Post that we model a 4% terminal growth rate. Whilst RoCEs decline, we note that RoICs continue to increase to the levels posted in FY07.
Exhibit 42: UltraTech trades at a discount to peers on EV/EBITDA
Present 1-yr fwd EV/EBITDA premium EV/tonne premium valuations EV/EBITDA EV/tonne 3-yr 5-yr 3-yr 5-yr (x) (US$) avg avg avg avg UltraTech Cement Ambuja Cement ACC 9.0 9.8 9.8 158.0 170.7 143.9 11% 29% 24% 20% 22% 28% 30% 32% 23% 29% 19% 15% Our fair value ` 1,308 164 1,200 Implied 1-yr fwd valuations EV/EBITDA EV/tonne (x) (US$) 9.7 10.1 10.1 169.8 176.0 148.6
Source: Bloomberg, Company, Ambit Capital research. Note: (a) Present 1-yr fwd valuations are based on Ambit estimates for all the three companies; (b)ACC and Ambuja are Dec-ending companies
Relative/ replacement
If we were to value the three cement majors on EV/tonne, we would value them at a significant premium to their 5-year average EV/tonne given that their expected profitability for next 2-3 years will be much better than what they have witnessed over last two years. These two years will further fortify their strengths in the market and low volumes will provide them pricing strength. These target valuations are 25-30% premium to the present replacement cost of US$135-140/tonne
21
Cement (companies and considering the increasing gestation period and rising constraints). Rising gestation period for setting up capacities and existing infrastructure supported advantages of these large companies will keep the valuations at a premium to the replacement cost.
Exhibit 43: Target valuations to reflect the low levels of utilisation and profitability
Target Capacity valn. US$/ tonne mn tonnes UltraTech Ambuja ACC 160 170 160 49 27 30 Target EV US$ mn 7,800 4,590 4,800 Current Net debt EV CY12/ FY13 ` mn ` mn 366,600 215,730 225,600 18,208 (31,741) (19,977) Target mcap* ` mn 348,392 247,471 245,577 Fair value `/share 1,271 162 1,307 CMP ` 1,132 153 1,128 Upside/ downside (%) 12% 6% 16%
Source: Company, Ambit Capital research, Bloomberg, Note: (a) * calculated as Target EV less Net debt; (b) ACC and Ambuja are Dec-ending, hence FY11=CY10 and FY12E=CY11E; (c) UltraTech includes business of Samruddhi w.e.f July 1, 2010
Exhibit 44: ACC 1-year forward EV/EBITDA (x)

12 10 8 6 4 2 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11
Exhibit 45: ACC 1-year forward EV/tonne (US$)

225 175 125 75 25 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11
22
1-yr fwd EV/EBITDA
Avg 1-yr fwd EV/EBITDA
1-yr fwd EV/tonne
Avg 1-yr fwd EV/tonne
Source: Company, Bloomberg, Ambit Capital research
Exhibit 46: Ambuja 1-year forward EV/EBITDA (x)

14 12 10 8 6 4 2 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11
Exhibit 47: Ambuja 1-year forward EV/tonne (US$)

275 225 175 125 75 25 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11
1-yr fwd EV/EBITDA
1-yr fwd EV/tonne
Cement
Exhibit 48: UltraTech 1-year forward EV/EBITDA (x)
14 12 10 8 6 4 2 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
120 80 40 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
17 18 26 6 40 8 9
Exhibit 49: UltraTech 1-year forward EV/tonne (US$)

200 160
1-yr fwd EV/EBITDA
1-yr fwd EV/tonne
Relative Valuations
Exhibit 50: Global Relative valuation snapshot
Companies India UltraTech Cement Ambuja Cements ACC JPA Shree Cement India Cements Madras Cements Average - India Europe Lafarge Holcim CRH Heidelberg Buzzi Unicem Italcementi Average - Europe Asia Anhui Conch Siam Cement Public Tangshan Jidong Taiheiyo Average - Asia China Thailand China Japan 13,491 12,214 6,697 3,025 2,336 5.3 11.2 10.7 9.0 9.9 9.2 5.0 9.5 9.4 7.0 8.7 7.9 108 NA NA NA 348 228 10.0 12.6 17.0 10.0 14.8 12.9 9.6 10.5 14.6 7.8 11.3 10.8 13 25 29 16 -22 20 31 27 19 4 14 15 20 11 NA 13 19 27 12 NA 46 11 11 50 54 14 15 35 France Switzerland Ireland Germany Italy Italy 9,599 17,323 12,641 7,366 1,544 1,332 7.5 8.0 8.4 6.3 6.2 6.3 6.8 7.2 7.6 7.9 6.0 5.7 5.8 6.4 147 159 641 163 79 89 213 10.9 17.1 17.2 11.5 33.6 33.8 19.5 9.1 14.8 15.4 9.2 18.4 19.1 13.8 5 9 7 0 6 2 5 6 4 3 -3 1 19 12 14 22 14 7 11 10 8 NA 6 6 (2) (4) (1) 8 (6) (9) 0 (12) (0) 122 (20) (2) India India India India India India India 5,815 4,371 3,950 2,385 1,279 398 481 8.7 9.1 10.3 10.6 6.5 5.7 5.5 7.6 8.1 8.6 9.2 8.2 5.4 5.2 5.3 7.0 131 158 126 551 101 63 76 109 16.0 18.7 19.8 12.3 25.9 7.6 8.2 16.0 15.4 18.0 18.1 9.9 15.1 6.7 7.8 13.5 27 20 29 15 44 9 25 18 18 18 19 11 5 13 19 21 23 4 42 10 12 26 4 (8) 40 (4) 7 1 (6) 2 (10) 4 (13) (7) (3) Country EV/EBITDA EV/tonne (x) US$ mn FY12 FY13 (US$) M Cap P/E (x) FY12 FY13 RoE (%) FY10 FY11 RoCE(%) FY10 CAGR (FY10-13) (%) FY11 EBITDA EPS
Indocement Tunggal Indonesia
Source: Company, Ambit Capital research, Bloomberg, Industry; Note: (a) ACC and Ambuja are Dec-ending, hence FY11=CY10 and FY12E=CY11E and FY13E=CY12E; (b) UltraTech includes business of Samruddhi w.e.f July 1, 2010
Apr-11
12 (169)
23
Cement
Company wise assumptions

Exhibit 51: Company-wise assumptions
CY09/ FY10 ACC Capacity utilisation (%) Cement despatches (mn tonnes) Cement Realisation (`/tonne) EBITDA (`/tonne) Net Revenue (` mn) EBITDA (` mn) EBITDA margin (%) PAT (` mn) RoIC (%) RoCE (%) Ambuja Capacity utilisation (%) Cement despatches (mn tonnes) Cement Realisation (`/tonne) EBITDA (`/tonne) Net Revenue (` mn) EBITDA (` mn) EBITDA margin (%) PAT (` mn) RoIC (%) RoCE (%) Ultratech* Capacity utilisation (%) Cement despatches (mn tonnes) Cement Realisation (`/tonne) EBITDA (`/tonne) Net Revenue (` mn) EBITDA (` mn) EBITDA margin (%) PAT (` mn) RoIC (%) RoCE (%) 78.4 32.0 3,520 1,006 71,138 20,351 28.6 10,932 23.6 17.4 77.8 36.7 4,012 773 133,553 26,878 20.1 14,042 18.9 13.8 78.7 37.8 4,584 1,005 178,386 38,640 21.7 19,484 18.3 12.5 82.1 40.0 4,790 1,020 193,713 40,832 21.1 20,260 18.5 11.9 (64)bps 15 14 (23) 88 32 (848bps) 28 (461)bps (363)bps 98bps 3 14 30 34 44 154bps 39 (68)bps (123)bps 339bps 6 4 2 9 6 58bps 4 27bps (65)bps 85.6 18.8 3,766 1,047 71,781 19,682 27.4 12,184 39.5 18.3 85.7 20.0 3,633 951 75,015 19,349 25.8 12,636 33.1 17.0 80.8 21.0 3,993 992 86,048 21,132 24.6 12,530 25.5 15.4 82.6 22.3 4,113 998 92,835 22,248 24.0 12,976 24.0 14.5 7bps 6 (4) (9) 5 (2) (162)bps 4 (636)bps (130)bps (488)bps 5 10 4 15 9 (124)bps (1) (757)bps (158)bps 183bps 6 3 1 8 5 59bps 4 (157)bps (91)bps 87.6 21.3 3,738 1,231 81,909 26,440 32.3 16,067 64.0 26.3 80.3 21.0 3,657 859 79,758 18,124 22.7 11,200 39.8 16.3 82.8 23.6 3,983 797 95,957 18,801 19.6 10,744 25.6 15.0 84.7 24.9 4,142 835 104,684 20,782 19.9 11,764 20.3 15.0 (730)bps (1) (2) (30) (3) (31) (956)bps (30) (2,420)bps (999)bps 252bps 12 9 (7) 20 4 (313)bps (4) (1,422)bps (127)bps 186bps 6 4 5 9 11 26bps 9 (534)bps (1)bps Assumptions CY10/ CY11E/ FY11 FY12E CY12E/ FY13E CY10/ FY11 Growth (%) CY11E/ FY12E CY12E/ FY13E
Source: Company, Ambit Capital research Note: (a) UltraTech financials for FY11 are restated to include Samruddhi operations. This is done for like to like comparison in FY12, however FY11 nos are not comparable to FY10; (b) ACC and Ambuja are Dec-ending companies hence FY10=CY09; (c) All financials pertain to standalone entity; (d) Cement and clinker sales are considered for calculation of per tonne costs; (e) Growth in utilization, EBITDA margins, RoIC and RoCE is in bps
24
Cement
Operational and financial summary

Exhibit 52: Operational and financial summary of cement companies under coverage
CMP (`) UltraTech Ambuja ACC 1,132 153 1,128 TP (`) 1,308 164 1,200 Upside (%) 15.5 7.2 6.4 BUY BUY BUY Rating MCap (` bn) 312 234 212 MCap (US$ mn) 5,815 4,371 3,950 EV/EBITDA (x) FY11 11.9 10.4 10.6 FY12E 8.8 9.2 10.2 FY13E 8.1 8.6 9.2 EV/tonne (US$) FY11 FY12E FY13E 145.0 178.0 157.1 138.8 149.6 133.7 142.0 148.3 132.8 FY11 22.4 18.1 18.9 P/E (x) FY12E 16.1 18.3 19.7 FY13E 15.5 17.6 18.0
Cement despatches (mn tonnes) FY11 UltraTech Ambuja ACC 33.2 20.0 21.0 FY12E 37.8 20.9 23.6 FY13E
Revenues (` mn) FY11 FY12E FY13E
EBITDA (` mn) FY11 FY12E FY13E
EBITDA margin (%) FY11 FY12E FY13E 20.1 25.8 22.7 21.7 24.6 19.6
PAT (` mn) FY11 FY12E 19,484 12,530 10,744 FY13E 20,260 12,997 11,764
40.0 133,553 178,386 193,713 26,878 38,640 40,832 22.2 24.9 75,015 79,758 86,048 92,835 19,349 21,132 22,278
21.1 14,042 24.0 12,636 19.9 11,200
95,957 104,684 18,124 18,801 20,782
RoCE (%) FY11 UltraTech Ambuja ACC 13.8 17.0 16.3 FY12E 12.5 15.4 15.0 FY13E 11.9 14.5 15.0 FY11 18.4 18.3 17.9
RoE (%) FY12E 16.9 16.2 16.0 FY13E 15.3 15.2 16.5
Revenue growth (%) FY11 87.7 4.5 -2.6 FY12E 33.6 14.7 20.3 FY13E 8.6 7.9 9.1
EBITDA growth (%) FY11 FY12E FY13E 32.1 -1.7 -31.5 43.8 9.2 3.7 5.7 5.3 10.5
PAT growth (%) FY11 28.4 3.7 -30.3 FY12E 38.8 -0.8 -4.1 FY13E 4.0 3.6 9.5
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Cement
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26
Cement
December 19, 2011
UltraTech Cement
Bloomberg: UTCEM IN EQUITY Reuters: ULTC.BO
BUY
Accounting: GREEN Predictability: GREEN Earnings Momentum: AMBER CHANGE IN STANCE

Nitin Bhasin
Managing tough times well

Competitive position: STRONG Changes to this position: STABLE
Why are we revising our estimates?

Higher realizations: Realizations for 1HFY12 grew 15% on YoY basis mainly on account of a sharp increase in prices in the South (26% of despatches) and due to continuous price hikes since 2QFY12. This could lead to higher realization growth in 2HFY12 as well. On account of: (a) input costs stabilizing (prices of imported coal stabilizing and freight costs inching up marginally); (b) some petcoke substitution (10%-12% cheaper than coal); and (c) prices rising post the monsoons, EBITDA/tonne is likely to further improve in 3QFY12 to `998 and in FY12 to `1,005. Volumes: Whilst demand from the rural segment and brand-seeking IHBs is likely to improve volumes for 2HFY12, volume growth for FY12 would remain flat on like to like basis mainly owing to exposure to Southern India which is currently witnessing negative growth. We expect the overall capacity utilization of UltraTech to grow marginally from 78% in FY11 to 79% in FY12E and to 82% in FY13E.
Ritu Modi
Recommendation
CMP: Target Price (12 month): Previous TP: Upside (%) EPS (FY13E): Change from previous (%): Variance from consensus (%): `1,132 `1,308
`1,000
16 `73.9 22 (7)
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `3126bn/US$5,815mn `1,230/883 `192mn/US$3.6mn 0.7x 15,491 4,652
Impact on our estimates

In light of the above, we upgrade our realization growth estimates for FY12 to 14% YoY (earlier 9%) and for FY13 to 4.5% YoY (3.6%), leading to EBITDA/tonne of `1,005 (earlier `843) and `1,020 (`859) for the respective years. We also increase our volume estimates for FY12 to 38.4mn tonnes (earlier 37.8mn tonnes) and and for FY13 to 40mn tonnes (38.9mn tonnes), on the back of improved capacity utilization. Higher EBITDA further leads to PAT margins increasing by 171bps for FY12E and 165bps for FY13E.
Stock Performance (%)

1M Absolute Rel. to Sensex -1.6 6.1 3M 1.1 9.6 12M 7.3 29.3 YTD 5.0 29.4
Valuation and recommendation

UltraTech is currently trading at 9x 1-year forward EV/EBITDA on our EBITDA estimates. Whilst on EV/tonne the stock is trading at a 28% premium to its 5year average (US$125/tonne), on 1-year forward EV/EBITDA, the stock is trading at a 20% premium to its 5-year average. Higher realizations, input costs stabilizing and higher utilization could lead to improvement in EBITDA/tonne to `1,005 for FY12 as against `985 for 1HFY12 and then only lead to a marginal improvement in FY2013. We turn BUYers on UltraTech with a fair valuation of `1,308 (16% upside). They key risk of higher volumes and resultant lower prices could impact UltraTech the least with its higher than peers institutional clients.
Exhibit 1: Key financials - standalone
Year to March Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) EPS (`) RoCE (%) RoIC (%) EV / EBITDA (x) FY09 64,379 17,589 27.3 78.5 18.6 29.0 8.6 FY10E 71,138 20,351 28.6 87.8 17.4 23.6 6.9 FY11E 133,553 26,878 20.1 51.2 13.8 18.9 11.7 FY12E 178,386 38,640 21.7 71.1 12.5 18.3 8.7 FY13E 193,713 40,832 21.1 73.9 11.9 18.5 8.0
Performance (%)
25,000 20,000 15,000 10,000 Dec-10 Apr-11 Aug-11
Sensex
1300 1100 900 700 Dec-11

UltraTech Cem.
Shareholding (%)
Others, 15% DII, 7%
FII, 15%
Promoters, 63%
Source: Company, Ambit Capital research. Note: * FY11 financials include Samruddhi operations w.e.f. July 1, 2010
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.
Please refer to the Disclaimers at the end of this Report.
UltraTech Cement
Upward revision in estimates

Exhibit 2: Higher realizations and improved volumes have led to revision in estimates
New FY12E Utilization (%) Despatches (mn tonnes) Realization (`/tonne) EBITDA (`/tonne) Revenues (` mn) EBITDA margin (%) PAT (` mn) RoIC (%) RoCE (%) 78.7 FY13E 82.1 Old FY12E 77.6 FY13E Change (%) FY12E FY13E Comments MoM despatches increase in October 2011 and are expected increase in Dec 2011 due to demand being supported by the retail segment has led to overall increase in despatches thus leading to higher utilization Distributors have highlighted price hikes in 4QCY11 leading to high realizations High realizations and operating costs stabilizing have led to improvement in margins Improvement in realizations and average utilizations will lead to improvement in profitability; however this will still be low as compared to previous years
79.9 110bps 225bps
37.8 4,584 1,005 178,386 21.7 19,484 18.3 12.5
40.0 4,790 1,020 193,713 21.1 20,260 18.5 11.9
36.7 4,367 843 166,485 19.1 15,331 14.5 10.3
38.9 4,601 863 182,113 16,038
3 5 19 7 27
3 4 18 6 26
18.6 256bps 252bps 14.1 374bps 441bps 10.0 224bps 192bps
Source: Company, Ambit Capital research. Note: (a) Cement and clinker sales are considered for calculation of per tonne costs; (b) All financials pertain to standalone entity
Near term quarterly operating assumptions

Exhibit 3: Near term quarterly operating assumptions
3Q FY11 Total despatches (mn tonnes) Realizations QoQ growth Raw materials RM consumed (incl stock adj) Purchase of traded goods Employee costs Power & fuel 9.4 3,974 8% 539 520 30 201 958 4Q FY11 10.4 4,298 8% 547 568 37 208 924 1Q FY12 9.7 4,519 5% 572 483 39 191 1,073 2Q 3Q 4Q FY12E FY12 FY12E FY12E 8.9 4,369 -3% 606 695 50 230 1,067 9.6 4,631 6% 630 630 51 213 1,110 10.4 4,724 2% 642 642 51 218 1,143 615 614 48 213 1,104 Employee costs in 1HFY12 grew 8% YoY and we expect it to grow by 5% YoY for the remaining part of the fiscal Sequentially we expect power and fuel costs to increase by ~4% on the back of increased dependence on imported coal Ultratech sells 36% of its despatches via railways. With the hike in rail freight, the costs would increase by ~14% YoY in the coming quarters Increase in slag, fly ash, gypsum and limestone prices will result in raw material costs increasing by ~4% sequentially in 3QFY12 38.5 4,584 Comments Lower demand in South India and lower utilization has kept the despatches low (on a like to like basis the growth is -1.1%)
Freight and selling Others EBITDA QoQ growth YoY growth
779 729 784 56% -7%
785 799 1,040 33% 44%
796 708 1,270 22% 22%
836 841 729 -43% 45%
886 772 998 37% 27%
913 838 987 -1% -5%
862 793 1,005
Source: Company, Ambit Capital research, Industry Note: (a) Cement and clinker sales are considered for calculation of per tonne costs; (b) All financials pertain to standalone entity
28
UltraTech Cement
Ambit v/s consensus

Exhibit 4: We are broadly in line with consensus
Consensus Revenue (` mn) FY2012 FY2013 EBITDA (` mn) FY2012 FY2013 PAT (` mn) FY2012 FY2013 EPS (`) FY2012 FY2013 70.0 79.4 71.1 73.9 2% -7% 19,182 21,889 19,484 20,260 2% -7% Higher depreciation v/s divergence at the PAT level consensus has resulted in 37,243 42,426 38,640 40,832 4% -4% Our EBITDA estimates are higher than consensus on account of high realizations. However for FY13, we believe increase in rail freight charges and increasing costs of raw materials will keep EBITDA lower than consensus. 174,214 195,479 178,386 193,713 2% -1% We are marginally ahead of consensus for FY12 as we expect higher realizations for the second half of the fiscal. For FY13, we do not expect demand to pick up significantly thus resulting in lower revenues Ambit Divergence Comments
Source: Company, Ambit Capital research, Bloomberg Note: (a) All financials pertain to standalone entity
DCF-based valuation `1,308/share

We upgrade our DCF-based valuation to `1,308/share from `1,000/share. This implies a 9x 1-year forward EV/EBITDA and an EV of US$157/tonne. Whilst on EV/EBITDA the fair value will still imply a 29% premium to its last 5-year average, on an EV/tonne basis the fair value will be at a 38% premium to its 5-year average. In comparison to the replacement cost of US$130/tonne, the stock will be trading at a 30% premium. We believe this premium is justified given its large capacities countrywide and a likelihood of the company picking up the largest share of institutional demand with low risk to its pricing. Amongst the larger peers, UltraTech has large capacities and geographic reach but does not have the pricing leadership in most regions of its operations. This does not expose it to prices to a large extent (as with Ambuja and ACC), should demand rise sharply from the institutional segment.
Exhibit 5: FCF to remain low in the near term

20 16 12 10% 8 4 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 5% 0% (Rs bn) 20% 15%
Exhibit 6: DCF based value is `1,308/share

PV of the forecasting period up to FY22 (` bn) Terminal value (` bn) Enterprise value (` bn) Less: net debt at Mar-12 (` bn) Implied equity value (` bn)
RoIC
189.6 193.0 382.6 24.2 358.4 1,308
PV of FCFF (LHS)
WACC
Implied equity value (` per share)

Source: Company, Ambit Capital research Note: (a) All financials pertain to standalone entity
29
UltraTech Cement
Exhibit 7: 1-year forward EV/EBITDA is trading at a premium to its 5-year average
14 12 10 8 6 4 2 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Exhibit 8: Profitability historical averages

50% 40% 30% 20% 10% 0%
continues
to
remain
below
FY12E
RoIC FY06-11 Avg RoIC
RoCE FY06-11 Avg RoCE
1-yr fwd EV/EBITDA
Source: Source: Ambit Capital research, Bloomberg
Source: Ambit Capital research, Bloomberg Note: (a) RoIC has been calculated at 30% tax rate on EBIT and for IC calculation, cash, current investments and CWIP are not considered (b) RoCE is calculated on reported financials (c) All financials pertain to standalone entity (d) FY11 financials include operations of Samruddhi w.e.f. July 1, 2010
Exhibit 9: 1-year forward P/B is below its 5-year averages

6 5 4 3 2 1 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Exhibit 10: RoE continues to decline
55% 45% 35% 25% 15% 5% FY12E FY13E

30
FY05
FY06
FY07
FY08
FY09
FY10
1-yr fwd P/B
Avg 1-yr fwd P/B
RoE
FY06-11 Avg RoE
Source: Ambit Capital research, Bloomberg Note: (a) RoE is calculated on reported financials; (b) All financials pertain to standalone entity; (c) FY11 financials include operations of Samruddhi w.e.f. July 1, 2010
FY11
FY13E
FY06
FY07
FY08
FY09
FY10
FY11
UltraTech Cement
Is Grasim a better way to own UltraTech?

Our analysis shows that from a cement perspective it is better to own UltraTech than Grasim as: (a) UltraTech is more liquid than Grasim; and (b) Grasim suffers from a conglomerate discount. Grasim Industries Ltd operates as a diversified manufacturing company. The Groups principal activities include manufacture of viscose staple fibre (VSF), cement, chemicals and textiles. As a part of the restructuring process, the cement business was consolidated with its subsidiary, UltraTech Cement. In the first phase, Grasim's cement business was demerged into Samruddhi Cement Ltd, a subsidiary of Grasim. In the second phase, Samruddhi Cement Ltd was amalgamated with UltraTech Cement w.e.f. July 1, 2010. Grasim, through its subsidiary UltraTech Cement Ltd., has a capacity of ~52mn tonnes and is the largest cement player in India. Apart from 60.3% holding in UltraTech, Grasim also has investments in other Birla group companies.
Exhibit 11: Grasim has significant investments in other large entities
Name of Company UltraTech Cement Idea Cellular Ltd Aditya Birla Nuvo Ltd Hindalco Industries Ltd Thai Carbon Black Public Co. Ltd Thai Rayon Public Co. Ltd Country India India India India Thailand Thailand Amount held (mn shares) 165.3 171.0 3.3 54.5 8.3 14.0 shareholding (%) 60.3 5.2 3.0 2.9 2.8 6.9
Considering that Grasim currently holds a 60.3% stake in UltraTech, we analyse if its better to hold Grasim over UltraTech on: (a) liquidity; and (b) implied holding company discount to UltraTech. Our analysis shows that from a cement perspective it is better to own UltraTech than Grasim as: (a) UltraTech is more liquid than Grasim; and (b) Grasim suffers from a conglomerate discount.
Exhibit 12: UltraTech is more liquid than Grasim
Grasim Mcap (` bn) Free float 3m ADV (mn shares) 3m ADV (US$ mn) 3m ADV (` mn) 3m ADV adj for free float
Source: BSE, Ambit Capital research
UltraTech 310 36% 0.2 3.6 169 0.15%
218 69% 0.1 3.4 162 0.11%
As Grasim has a monopoly in the Indian VSF business, we compare it with its closest global competitor Lenzing, which commands 21% of the global viscose market. Exhibit 13 highlights certain financial and operating comparisons between Grasim and Lenzing. In order to arrive at an indicative valuation for the VSF business, we consider a 4x EV/EBITDA multiple for Grasims non-cement business, which implies a 7% discount to the valuation of Lenzing.
31
UltraTech Cement
Exhibit 13: Lenzing v/s Grasim
Lenzing CY08 Fibre revenue growth Fibre EBIT margin Fibre EBITDA margin RoCE Production growth 11% 11% 17% 14% 3% CY09 -7% 10% 17% 11% 5% CY10 40% 15% 20% 25% 15% FY09 -17% 16% 20% 19% -17% Grasim FY10 41% 33% 36% 25% 30% FY11 19% 32% 34% 15% 1%
We believe investments in Grasim would mainly be for the sake of ownership in the cement business, and less likely for the standalone VSF business. Based on Bloomberg consensus estimates for non-cement business (standalone), we arrive at the market value of Grasims investments and hence the implied holding company discount for these investments.
Exhibit 14: Implied holding company discount
` mn unless specified Current mcap of Grasim (A) Non-cement EBITDA (FY13E) (B) EV /EBITDA (x) (C) Value of non-cement business (B*C) Less: Net debt of non-cement business (FY13E) Mcap of non-cement business (D) Implied value of investments (E=A-D) UltraTech Idea Cellular Aditya Birla Nuvo Ltd Larsen & Toubro Ltd Hindalco Industries Market value of investments (F) Implied discount for ownership in investments (1-E/F) 187,201 14,399 2,772 4,144 6,851 215,366 33% ` mn unless specified 217,980 15,927 4.0 63,708 (9,741) 73,449 144,532
Source: BSE, Bloomberg, Company, Ambit Capital research Note: Bloomberg consensus estimates are taken for FY13E EBITDA and Net Debt for the non-cement business.
The exhibit below clearly highlights that the holding company discount over the past year has remained above its average of 30% for the most part of the period. Todays 33% discount is more or less justified if one were to suggest that UltraTech is fairly valued.
Exhibit 15: Holding company discount over the past year
45% 40% 35% 30% 25% 20% 15% 10% Aug-11 Nov-10 Sep-11 Oct-10 Oct-11 Nov-11 Jan-11 Dec-10 Feb-11 Mar-11 Jun-11 Jul-11 May-11 Dec-11
32
Holding company discount

Source: Bloomberg, Company, Ambit Capital research
Apr-11
Avg discount
On our fair value for UltraTech at `1,308, the discount would be closer to 41%. Using our fair value of UltraTech for Grasims holding and a 33% discount to the holdings in Grasim and other group companies, we arrive at a indicative valuation of `2,605 for Grasim, implying 12% upside.
UltraTech Cement
33
UltraTech Cement Balance sheet - standalone

Year to March (` mn) Share capital Reserves and surplus Total net worth Loans Deferred tax liability (net) Sources of funds Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Other current assets Total current assets Current liabilities Provisions Current liabilities and provisions Net current assets Application of funds
FY09 1,245 34,776 36,021 21,416 7,229 64,667 46,357 6,773 10,348 1,045 1,939 6,920 3,816 13,720 11,209 1,322 12,531 1,189 64,666
FY10 1,245 44,842 46,087 16,045 8,307 70,439 49,417 2,594 16,696 837 2,158 8,217 3,511 14,724 11,381 1,610 12,991 1,733 70,439
FY11* 2,740 103,920 106,660 41,446 17,301 165,407 114,003 11,053 37,303 1,448 6,023 19,565 10,539 12 37,587 28,804 5,735 34,539 3,048 165,407
FY12E 2,741 120,669 123,410 39,308 17,447 180,164 112,883 50,000 15,303 2,235 5,865 19,549 9,775 37,424 29,324 6,122 35,446 1,978 180,164
FY13E 2,741 138,145 140,886 36,320 17,447 194,653 111,868 62,000 12,303 8,284 6,369 21,229 10,614 46,496 31,843 6,171 38,015 8,481 194,653
Income statement - standalone

Year to March (` mn) Revenue YoY growth Total expenses EBITDA YoY growth Net depreciation / amortisation EBIT Net interest and financial charges Other income PBT Provision for taxation Adjusted PAT YoY growth Reported PAT EPS basic (`) EPS diluted (`) DPS (`) FY08 64,379 16% 46,790 17,589 -2% 3,230 14,359 1,255 510 13,615 3,844 9,770 -3% 9,770 78.5 78.5 5.0 FYO9 71,138 10% 50,786 20,351 16% 3,881 16,471 1,175 586 15,882 4,949 10,932 12% 10,932 87.8 87.8 6.0 FY10E 133,553 88% 106,675 26,878 32% 7,657 19,221 2,771 1,412 17,862 3,820 14,042 28% 14,042 51.2 51.2 6.0 FY11E 178,386 34% 139,747 38,640 44% 9,172 29,467 3,031 990 27,427 7,943 19,484 39% 19,484 71.1 71.1 6.0 FY12E 193,713 9% 152,881 40,832 6% 9,982 30,850 2,813 498 28,536 8,275 20,260 4% 20,260 73.9 73.9 6.0
Source: Company, Ambit Capital research Note: (a) *FY11 financials include Samruddhi operations w.e.f. July 1, 2010
34
UltraTech Cement Cash flow statement - standalone

Year to March (` mn)
PBT Depreciation Others Interest paid (net) CFO before change in WC Change in working capital Direct taxes paid CFO Net capex Net investments Interest received CFI Proceeds from borrowings Change in share capital Interest & finance charges paid Dividends paid CFF Net increase in cash Opening cash balance Closing cash balance FY09 13,615 3,230 (274) 1,255 17,826 (1,153) (2,097) 14,576 (8,298) (8,608) 452 (16,454) 3,819 (1,174) (728) 1,917 38 1,007 1,045 FY10 15,882 3,881 (434) 1,175 20,504 (893) (3,891) 15,719 (2,741) (6,338) 562 (8,517) (5,223) 1 (1,459) (728) (7,410) (208) 1,045 837 FY11* 17,862 7,657 (1,432) 2,771 26,858 (925) (5,190) 20,743 (12,169) (5,234) 1,164 (16,489) 12 14 (2,930) (1,405) (4,309) (55) 837 782 FY12E 27,427 9,172 (990) 3,031 38,640 1,858 (7,797) 32,701 (47,000) 22,000 990 (24,010) (2,138) 1 (3,031) (2,736) (7,903) 787 1,448 2,235 FY13E 28,536 9,982 (498) 2,813 40,832 (455) (8,275) 32,102 (20,967) 3,000 498 (17,468) (2,987) 0 (2,813) (2,784) (8,585) 6,049 2,235 8,284
Ratio analysis - standalone

Year to March
Revenue growth EBITDA growth PAT growth EPS norm (dil) growth EBITDA margin EBIT margin Net margin RoCE RoIC RoE FY09 16% -2% -3% -3% 27% 22% 15% 19% 29% 31% FY10 10% 16% 12% 12% 29% 23% 15% 17% 24% 27% FY11* 88% 32% 28% -42% 20% 14% 11% 14% 19% 18% FY12E 34% 44% 39% 39% 22% 17% 11% 13% 18% 17% FY13E 9% 6% 4% 4% 21% 16% 10% 12% 19% 15%
Valuation parameters
Year to March
P/E (x) P/B(x) Debt/Equity(x) Net debt/Equity(x) EV/Sales(x) EV/EBITDA(x) EV/tonne(US$) FY09 14.4 3.9 0.6 0.3 2.4 8.6 145.9 FY10 12.9 3.1 0.3 0.0 2.0 6.9 129.3 FY11* 22.1 2.9 0.4 0.0 2.4 11.7 143.3 FY12E 15.9 2.5 0.3 0.2 1.9 8.7 137.2 FY13E 15.3 2.2 0.3 0.1 1.7 8.0 140.4
35
UltraTech Cement
36
Cement
December 19, 2011
Ambuja Cement
Bloomberg: ACEM IN EQUITY Reuters: ABUJ.BO
BUY

Nitin Bhasin
West is Better than the rest

Competitive position: MODERATE Why are we revising our estimates? Higher realizations: Whilst realizations for 3QCY11 declined in line with our estimates, its rise since October 2011 could lead to a further increase in our realization assumptions for the last quarter of CY11. With input costs stabilizing (prices of imported coal stabilizing and freight costs up marginally), and prices rising post the monsoons, could push 4QCY11E EBITDA/tonne to `1,024 (earlier `769) taking EBITDA/tonne to `992 for CY11E. Improving demand in West India: The companys absence from Southern India insulates it from the declining volume market; and with demand in Western India remaining strong, we can see Ambuja posting a better performance v/s most peers in the near term. Our channel checks have been highlighting that post the monsoons, cement demand in West India is witnessing robust demand due to support from the Governments infrastructure projects in Gujarat. The issue of unavailability of sand in western India was resolved in November 2011; thus cement offtake was relatively better. The same was witnessed in Ambujas November 2011 volumes, which grew 3% MoM while the industry growth declined 2% MoM. Change to this position: STABLE
Ritu Modi
Recommendation
CMP: Target Price (12 month): Previous TP: Upside (%) EPS (CY12E): Change from previous (%) Variance from consensus (%) `153 `164
`121
7 `8.5 20 (9)
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `234bn/US$4,371mn `166/112 `354mn/US$6.6mn 0.9x 15,491 4,652
Impact on our estimates: In the light of price hikes in 4QCY11E, we upgrade our 4QCY11E and CY11 realization growth estimates to 16% (earlier 7%) and 10% YoY (7%), respectively leading to EBITDA/tonne of `1,024 (earlier `600) and `997 (` 841), respectively. We believe that strong demand in West India and the company wanting to pull off their year-end target could lead to higher volumes for December 2011. We estimate 11% YoY (earlier 7%) and 4.7% YoY (4.1%) volume growth for 4QCY11E and CY11E, respectively on the back of improved capacity utilization. Using the CY11E base and keeping our incremental change assumptions constant for CY12E, our CY12E EBITDA estimates increase by 15%, and PAT, by 19%. Valuation and recommendation: Ambuja is currently trading at 9.8x 1year forward EV/EBITDA on our EBITDA estimates. Whilst on EV/tonne the stock is trading at an 18% premium to its 5-year average (US$145/tonne), on 1-year forward EV/EBITDA, the stock is trading at a 22% premium to its 5-year average. We expect RoIC to decline to 25.5% in CY11E and to 24% and CY12E from 33% in CY10. Higher realizations, input costs stabilizing and higher utilization could lead to improvement in EBITDA/tonne to `997 for CY11E and to `1,004 for CY12E. We turn BUYers on Ambuja with a fair valuation of `164 (7% upside).
Exhibit 1: Key financials
Year to March Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) EPS (`) RoCE (%) RoIC (%) EV/ EBITDA (x) CY08 62,693 18,126 28.9 9.2 20.6 38.9 12.3 CY09 71,781 19,682 27.4 8.0 18.3 39.5 11.0 CY10 75,015 19,349 25.8 8.3 17.0 33.1 10.7 CY11E 86,048 21,132 24.6 8.2 15.4 25.5 9.4 CY12E 92,835 22,248 24.0 8.5 14.5 24.0 8.9

Performance (%)
25,000 20,000 15,000 10,000 Dec-10 Apr-11 Aug-11
Sensex Ambuja Cem.
175 150 125 100 Dec-11
Shareholding (%)
Others, 12%
DII, 14% Promoters, 50%
FII, 24%
Source: Company, Ambit Capital research. Note: Financials pertain to standalone entity
Ambuja Cement

Exhibit 2: Improvement in demand and higher realizations have led to revision in estimates
New CY11E Utilization (%) Despatches (mn tonnes) Realization (`/tonne) EBITDA (`/tonne) Revenues (` mn) EBITDA margin (%) PAT (` mn) RoIC (%) RoCE (%) 80.8 21.0 3,993 992 86,048 24.6 12,530 25.5 15.4 CY12E 82.6 22.3 4,113 998 92,835 24.0 12,976 24.0 14.5 Old CY11E 79.9 20.8 3,876 841 21.4 20.3 12.7 CY12E 81.3 22.0 4,020 880 Change (%) CY11E CY12E Comments MoM despatches increase in Oct-11 and Nov11 and an expected increase in Dec-11 due to strong demand in West India has led to an overall increase in despatches thus leading to higher utilizations Distributors have highlighted price hikes in 4QCY11 leading to high realizations High realizations and operating costs stabilizing has led to improvement in margins Improvement in realizations and average utilizations will lead to improvement in profitability; however this will still be low compared to previous years
88bps 125bps 1 3 18 3 22 2 2 13 4 19
83,351 89,451 10,293 10,887
21.6 315bps 236bps 19.3 520bps 463bps 12.4 272bps 213bps

4Q CY10 Total despatches (mn tonnes) Realizations QoQ growth Raw materials RM consumed (incl stock adj) Employee costs Power & fuel Outward freight Freight on interunit clinker transfer Others EBITDA QoQ growth YoY growth 5.0 3,583 2% 247 331 155 894 632 186 755 708 4% -25% 1Q CY11 5.7 3,899 9% 250 227 167 851 644 254 675 1,108 56% -9% 2Q 3Q 4Q 1Q CY11E CY11 CY11E CY11E CY12E 5.3 4.8 5.6 4,172 10% 294 294 163 1,071 715 212 770 1,024 53% 45% 5.8 4,297 3% 303 303 180 1,103 751 222 696 1,071 5% -3% 274 217 187 1,002 680 229 732 992 Seasonally good quarter and higher utilization will lead to high EBITDA Sequentially we expect power and fuel costs to increase by ~3% in 4QCY11 and 1QCY12. Whilst freight costs declined 2% in 3QCY11, we expect rail freight hike to impact costs by increasing 6% in 4QCY11 We expect prices of raw materials to increase 5% sequentially in 4QCY11, thus resulting in 18% YoY growth for CY11 21.3 3,992 Comments Utilization at 82% in 4QCY11 and 86% in 1QCY12 will lead to respective 14% and 10% sequential growth in volumes.
4,079 3,793 5% 275 49 206 -7% 278 303 217
1,057 1,040 688 247 738 1,123 1% -4% 675 200 748 671 -40% -1%
Source: Company, Ambit Capital research, Industry Note: (a) Cement and clinker sales are considered for calculation of per tonne costs; (b) All financials pertain to standalone entity
38
Ambuja Cement
Ambit v/s consensus

Consensus Revenue (` mn) CY2011 CY2012 EBITDA (` mn) CY2011 CY2012 PAT (` mn) CY2011 CY2012 EPS (`) CY2011 CY2012 8.2 9.4 8.2 8.5 0% -9% 12,544 14,657 12,530 12,976 0% -11% Lower EBITDA in CY12 and higher depreciation v/s consensus has resulted in significant divergence at PAT level 20,227 23,219 21,132 22,248 4% -4% Our EBITDA estimates are higher than consensus on account of high realizations. However for CY12, we believe increase in rail freight charges and increasing costs of raw materials will keep EBITDA lower than consensus. 83,243 94,243 86,048 92,835 3% -1% For CY11 we are marginally ahead of consensus as we expect higher realizations for the last quarter. In CY12, we do not expect demand to pick up significantly thus resulting in lower revenues Ambit Divergence Comments
DCF-based valuation `164/share

We upgrade our DCF-based valuation to `164/share from `121/share. This implies a 9.8x 1-year forward EV/EBITDA and an EV of US$170/tonne. Whilst on EV/EBITDA the fair value will still imply a 26% premium to its last 5-year average, on an EV/tonne basis the fair value will be at a 22% premium to its 5-year average. Valuations will still be at a premium (35%) to the replacement value of US$130/tonne given the companys leadership and high return profile in the past and recovery expected in the future.
Exhibit 5: FCF remains high leading to high RoICs

12 10 8 6 4 2 0 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21 CY22 (Rs bn) 70% 60% 50% 40% 30% 20% 10% 0%
Exhibit 6: DCF-based value for cement business of `164/share

PV of the forecasting period up to CY22 (` bn) 117.6
Terminal value (` bn) Enterprise value (` bn) Less: net debt at Dec-12 (` bn) Implied equity value (` bn)
102.1 219.7 (31.8) 251.4 164
PV of FCFF (LHS)
WACC
RoIC
Implied equity value (` per share)

39
Ambuja Cement
14 12 10 8 6 4 2 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

55% 45% 35% 25% 15% 5%
continues
to
remain
below
CY11E
RoCE
RoIC CY07-10 Avg RoIC
1-yr fwd EV/EBITDA
CY07-10 Avg RoCE
Source: Ambit Capital research, Bloomberg Note: (a) RoIC has been calculated at 30% tax rate on EBIT and for IC calculation, cash, current investments and CWIP are not considered (b) RoCE is calculated on reported financials (c) All financials pertain to standalone entity
Exhibit 9: 1-year forward P/B is in line with its 5-year averages

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11
50% 40% 30% 20% 10% CY11E CY12E

40
CY07
CY08
CY09
1-yr fwd P/B
Avg 1-yr fwd P/B
RoE
CY07-10 Avg RoE
Source: Ambit Capital research, Bloomberg Note: (a) RoE is calculated on reported financials; (b) All financials pertain to standalone entity.
CY10
CY12E
CY07
CY08
CY09
CY10
Ambuja Cement
41
Ambuja Cement Balance sheet - standalone

Year to Dec (` mn) Share capital Stock options Reserves and surplus Total net worth Loans Deferred tax liability (net) Sources of funds Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Other current assets Total current assets Current liabilities and provisions Net current assets Miscellaneous expenditure Application of funds
CY08 3,045 3 53,680 56,729 2,887 3,808 63,423 31,928 19,472 3,324 8,518 2,246 9,387 2,999 244 23,395 14,738 8,657 43 63,423
CY09 3,047 2 61,659 64,709 1,657 4,858 71,224 34,400 27,144 7,270 8,807 1,522 6,832 2,531 102 19,793 17,411 2,383 27 71,224
CY10E 3,060 13 70,228 73,301 650 5,309 79,260 56,278 9,307 6,260 17,482 1,282 9,019 3,406 166 31,353 23,942 7,412 5 79,260
CY11E 3,063 19 78,325 81,407 585 5,687 87,679 61,754 6,000 5,260 25,827 2,357 9,430 4,951 118 42,683 28,020 14,662 3 87,679
CY12E 3,063 19 86,711 89,793 485 5,687 95,964 60,271 7,000 4,260 28,461 2,543 10,174 4,324 127 45,629 21,197 24,432 2 95,964

Year to Dec (` mn) Revenue YoY growth Total expenses EBITDA YoY growth Net depreciation / amortisation EBIT Net interest and financial charges Other income PBT Provision for taxation Adjusted PAT yoy growth Reported PAT EPS basic (`) EPS diluted (`) DPS (`)
CY08 62,693 11% 44,567 18,126 -13% 2,598 15,528 321 1,407 19,698 5,676 14,023 -21% 14,023 9.2 9.2 2.2
CY09 71,781 14% 52,100 19,682 9% 2,970 16,712 224 1,546 18,033 5,849 12,184 -13% 12,184 8.0 8.0 2.4
CY10E 75,015 5% 55,666 19,349 -2% 3,872 15,478 487 1,363 16,619 3,983 12,636 4% 12,636 8.3 8.3 2.6
CY11E 86,048 15% 64,917 21,132 9% 4,642 16,489 518 2,153 18,125 5,595 12,530 -1% 12,530 8.2 8.2 2.0
CY12E 92,835 8% 70,587 22,248 5% 4,983 17,265 518 1,789 18,537 5,561 12,976 4% 12,976 8.5 8.5 2.5
42
Ambuja Cement Cash flow statement - standalone

Year to Dec (` mn) PBT Depreciation Others Interest paid (net) CFO before change in WC Change in working capital Direct taxes paid CFO Capex Investments Others CFI Proceeds from borrowings Change in share capital Interest & finance charges paid Dividends paid CFF Net change in cash Opening cash balance Closing cash balance
CY08 19,698 2,598 (2,575) (1,636) 18,085 (2,484) (5,924) 9,677 (16,415) 5,703 1,407 (9,306) (327) 12 (512) (3,902) (4,728) (4,357) 13,849 9,491
CY09 18,033 2,970 (14) (1,272) 19,717 4,700 (3,153) 21,264 (13,439) 523 975 (11,942) (637) 74 (196) (3,900) (4,659) 4,664 9,491 14,155
CY10E 16,619 3,872 1,037 (2,198) 19,330 (219) (368) 18,743 (8,342) 2,147 922 (5,273) (849) 551 (194) (4,248) (4,735) 8,734 14,155 22,889
CY11E 18,125 4,642 1,232 (2,866) 21,133 1,094 (5,217) 17,010 (6,812) 1,000 2,153 (3,658) (65) 9 (518) (4,432) (5,007) 8,345 17,482 25,827
CY12E 18,537 4,983 2,202 (3,472) 22,249 (7,136) (5,561) 9,552 (4,500) 1,000 1,789 (1,711) (100) 0 (518) (4,590) (5,208) 2,634 25,827 28,461
Ratio analysis
Year to Dec Revenue growth EBITDA growth PAT growth EPS norm (dil) growth EBITDA margin EBIT margin Net margin RoCE RoE RoIC
CY08 11% -13% -21% -21% 29% 25% 22% 21% 27% 39%
CY09 14% 9% -13% -13% 27% 23% 17% 18% 20% 39%
CY10E 5% -2% 4% 3% 26% 21% 17% 17% 18% 33%
CY11E 15% 9% -1% -1% 25% 19% 15% 15% 16% 26%
CY12E 8% 5% 4% 4% 24% 19% 14% 15% 15% 24%
Year to Dec P/E (x) P/B (x) Debt/Equity (x) Net debt/Equity (x) EV/Sales (x) EV/EBITDA (x) EV/tonne (US$)
CY08 16.6 4.1 0.1 (0.1) 3.5 12.3 226.0
CY09 19.2 3.6 0.0 (0.2) 3.0 11.0 202.8
CY10E 18.5 3.2 0.0 (0.3) 2.7 10.7 182.3
CY11E 18.7 2.9 0.0 (0.4) 2.3 9.4 153.3
CY12E 18.0 2.6 0.0 (0.4) 2.1 8.9 152.0
43
Ambuja Cement
44
Cement
December 19, 2011
ACC
Bloomberg: ACC IN EQUITY Reuters: ACC.BO
BUY

Nitin Bhasin
Volume momentum leader

Competitive position: STRONG Why are we revising our estimates? Increasing realisations: The high realisations reported in 3QCY11 (seasonally weak quarter) and the rise in realisations in the last couple of months, would further raise our realisations assumptions for the last quarter of CY11E. Whilst operating costs for ACC rose 10% QoQ for 3QCY11, with input costs stabilizing (imported coal prices stabilizing and freight costs inching up marginally) and prices rising in October 2011 and November 2011, this could push 4QCY11E EBITDA/tonne to `690 (earlier `536) thus taking EBITDA/tonne to `797 for CY11E. IHB demand pick-up: With demand from IHBs (individual house builders) remaining strong in rural and semi-urban markets, we believe ACC would show an improvement in despatches over the next two years on the back of high utilization of 83% for CY11E and 85% for CY12E from 80% in CY10. However, exposure to South India (26%), which is currently witnessing negative growth would limit volume growth for ACC. Impact on estimates: In the light of continuous price hikes in 4QCY11E and expected increases in 1QCY12, we upgrade our CY11 realisation growth estimates to 9% (earlier 5%) leading to EBITDA/tonne of `797 (earlier `694). We believe that strong demand from the retail segment and the company wanting to pull off their year-end target would lead to higher volumes for December 2011. We estimate 4% YoY (earlier 3%), 12.5% YoY (earlier 4.1%) and 5.5% YoY (earlier 5%) volume growth for 4QCY11E, CY11E and CY12E, respectively on the back of improved capacity utilization. Using the base for CY11E and keeping our incremental change assumptions constant for CY12E, our estimates for CY12E EBITDA increase by 13% and for PAT, by 21%. Valuation and recommendation: ACC is currently trading at 9.8x 1-year forward EV/EBITDA on our EBITDA estimates. Our CY12 EBITDA estimates are lower v/s consensus on account of marginally lower realization due to slight pick-up in infrastructure activities and increase in rail freight charges and increased cost of raw materials. Whilst on EV/tonne the stock is trading at a 13% premium to its 5-year average (US$128/tonne), on 1-year forward EV/EBITDA, the stock is trading at a 26% premium to its 5-year average. We expect RoIC to decline to 25.6% in CY11E and to 20.3% in CY12E from 39.8% in CY10. Input costs stabilizing and higher utilization would lead to improvement in EBITDA/tonne. We turn BUYers on ACC with a fair valuation of `1,200 (6% upside).
Exhibit 1: Key financials
Year to January Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) EPS (`) RoCE (%) RoIC(%) EV/ EBITDA (x) CY08 74,484 19,076 25.6 61.9 22.9 42.9 10.6 CY09 81,909 26,440 32.3 85.4 26.3 64.0 7.5 CY10 79,758 18,124 22.7 59.5 16.3 39.8 10.7 CY11E 95,957 18,801 19.6 57.1 15.0 25.6 10.3 CY12E 104,684 20,782 19.9 62.5 15.0 20.3 9.2
Changes to this position: STABLE
Ritu Modi
Recommendation
CMP: Target Price (12 month): Previous TP: Upside (%): EPS (CY12E): Change from previous (%) Variance from consensus (%): `1,128 `1,200
`1,035
6 `62.5 21 (10)
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `212bn/US$3,950mn `1,237/915 `360mn/US$6.7mn 0.8x 15,491 4,652

Performance (%)
25,000 20,000 15,000 10,000 Dec-10 Apr-11
Sensex
1600 1100 600 Aug-11 Dec-11

ACC
Shareholding (%)
Others, 19%
DII, 15%
Promoters, 50%
FII, 16%
Source: Company, Ambit Capital research. Note: Financials pertain to standalone entity
ACC

Exhibit 2: Improvement in demand from IHB and higher realizations have led to a revision in estimates
New CY11E Utilization (%) Despatches (mn tonnes) Realization (`/tonne) EBITDA (`/tonne) Revenues (` mn) EBITDA margin (%) PAT (` mn) RoIC (%) RoCE (%) 82.8 23.6 3,983 797 95,957 19.6 10,744 25.6 15.0 CY12E 84.7 24.9 4,142 835 104,684 19.9 11,764 20.3 15.0 Old CY11E 82.4 23.5 3,842 674 17.3 8,211 20.6 11.7 CY12E 84.1 24.7 3,995 744 Change (%) CY11E 44bps 0 4 18 4 31 CY12E 60bps 1 4 12 4 21 Comments MoM despatch increase in Oct 2011 and expected increase in Dec 2011 due to demand being supported by the retail segment has led to an overall increase in despatches, leading to higher utilizations Distributors have highlighted price hikes in 4QCY11 leading to high realizations High realizations and operating costs stabilizing has led to improvement in margins Improvement in realizations and average utilizations will lead to improvement in profitability; however this will still be low compared to previous years
91,837 100,254 9,759
18.3 232bps 151bps
18.0 501bps 229bps 12.6 332bps 236bps

4Q CY10 Total despatches (mn tonnes) Realizations QoQ growth Raw materials RM consumed (incl stock adj) Purchase of traded goods Employee costs Power & fuel Freight and selling Others EBITDA QoQ growth YoY growth 5.6 1Q CY11 6.2 2Q 3Q 4Q 1Q CY11E CY11 CY11E CY11E CY12E 6.0 5.6 5.8 6.4 23.6 Comments Despite low demand in South India which constitutes ~26% of ACC's total despatches and utilizations close to 76% for the second half, ACC will report double-digit volume growth in CY11 (12.5%)
3,490 1% 611 439 64 265 804 534 1,011 606 30% -35%
3,849 10% 593 582 79 180 768 553 798 930 53% -21%
4,039 3,832 5% 641 457 73 201 956 585 842 975 5% -12% -5% 647 621 64 246 985 593 931 569 -42% 22%
4,216 10% 653 645 59 268 995 599 1,021 690 21% 14%
4,321 2% 666 666 59 198 1,024 623 838 959 39% 3%
3,983 633 577 69 223 923 582 896 797 Higher operating costs would keep EBITDA low in CY11 Employee costs in 1HCY11 grew 6% YoY and we expect it to remain flat YoY for 2HCY11 We expect power and fuel costs to increase 3% in 1QCY12 ACC sells 52% of its despatches via railways. With the hike in rail freight, the costs would increase by ~12% YoY in the coming quarters Sequentially, we do not expect raw material costs to increase significantly as the impact of increase in prices was already seen in 1HCY11
46
ACC
Ambit v/s consensus

Consensus Revenue (` mn) CY2011 CY2012 EBITDA (` mn) CY2011 CY2012 PAT (` mn) CY2011 CY2012 EPS (`) CY2011 CY2012 59.5 69.7 57.1 62.5 -4% -10% 11,189 13,280 10,744 11,764 -4% -11% Higher depreciation v/s consensus has resulted in the divergence at PAT level. 18,472 21,644 18,801 20,782 2% -4% Our EBITDA estimates are higher than consensus on account of high realizations. However for CY12, we believe increase in rail freight charges and increasing costs of raw materials will keep EBITDA lower than consensus. 93,360 106,026 95,957 104,684 3% -1% For CY11 we are ahead of consensus as we expect higher realizations for the last quarter. For CY12, we are in line with consensus. Ambit Divergence Comments
DCF-based valuation `1,200/share

We upgrade our DCF-based valuation to `1,200/share from `1,035/share. This implies a 9.8x 1-year forward EV/EBITDA and an EV of US$144/tonne. Whilst on EV/EBITDA the fair value will still imply a 32% premium to its last 5-year average, on an EV/tonne basis the fair value will be at a 19% premium to its 5-year average. Valuations will still be at a premium (14%) to the replacement value of US$130/tonne given the companys leadership and high return profile in the past and an expected improvement in the near future.
Exhibit 5: FCF remains high leading to high RoICs
12 10 8 6 4 2 0 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21 (Rs bn) 70% 60% 50% 40% 30% 20% 10% 0%
Implied equity value (` bn) Implied equity value (` per share)
Exhibit 6: DCF-based value for cement business of `1,200/share

PV of the forecasting period up to CY21 (` bn) 92.1
Terminal value (` bn) Enterprise value (` bn) Less: net debt at Dec-12 (` bn)
113.3 205.4 (20.0) 225.5 1,200
PV of FCFF (LHS)
WACC
RoIC
47
ACC We still expect a decline in profitability to lead to a decline in EV/EBITDA valuations over the next couple of quarters.


65% 55% 45% 35% 25% 15% 5%
continues
to
remain
below
CY11E
RoCE
RoIC CY06-10 Avg RoCE
1-yr fwd EV/EBITDA
CY06-10 Avg RoIC
Source: Ambit Capital research, Bloomberg Note: (a) RoIC has been calculated at 30% tax rate on EBIT and for IC calculation, cash, current investments and CWIP are not considered (b) RoCE is calculated on reported financials (c) All financials pertain to standalone entity
Exhibit 9: 1-year forward P/B is in line with its 5-year averages

40% 35% 30% 25% 20% 15% 10% 5% CY11E CY12E

48
CY06
CY07
CY08
CY09
1-yr fwd P/B
Avg 1-yr fwd P/B
RoE
CY06-10 Avg RoE
Source: Ambit Capital research, Bloomberg Note: (a) RoE is calculated on reported financials; (b) All financials pertain to standalone entity.
CY10
CY12E
CY06
CY07
CY08
CY09
CY10
ACC
49
ACC Balance sheet - standalone

Year to Dec (` mn) Share capital Reserves and surplus Total net worth Loans Deferred tax liability (net) Sources of funds Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Other current assets Total current assets Current liabilities Provisions Current liabilities and provisions Net current assets Application of funds
CY08 1,879 47,399 49,277 4,820 3,358 57,456 34,697 16,029 6,791 9,842 3,102 7,933 6,513 207 27,596 18,018 9,639 27,657 (61) 57,456
CY09 1,880 58,282 60,162 5,669 3,493 69,324 41,583 21,562 14,756 7,464 2,037 7,790 5,161 110 22,562 19,639 11,500 31,139 (8,578) 69,324
CY10E 1,880 62,815 64,695 5,238 3,615 73,548 50,824 15,628 17,027 10,800 1,783 9,150 5,239 561 27,534 20,940 16,525 37,464 (9,931) 73,548
CY11E 1,880 67,407 69,286 5,208 4,362 78,856 66,796 5,000 9,027 18,825 2,629 11,042 6,309 263 39,068 23,540 17,494 41,034 (1,966) 78,856
CY12E 1,880 71,087 72,966 5,178 4,362 82,506 66,497 10,000 8,027 21,079 2,868 11,472 6,883 287 42,590 25,361 19,247 44,608 (2,018) 82,506

Year to Dec (` mn) Revenue YoY growth Total expenses EBITDA YoY growth Net depreciation / amortization EBIT Net interest and financial charges Other income PBT Provision for taxation Adjusted PAT YoY growth Reported PAT EPS basic (`) EPS diluted (`) DPS (`)
CY08 74,484 5% 55,408 19,076 -5% 2,942 16,134 400 1,143 17,366 5,238 11,639 -3% 12,128 62.0 61.9 20.0
CY09 81,909 10% 55,469 26,440 39% 3,421 23,020 843 767 22,944 6,877 16,067 38% 16,067 85.6 85.4 23.0
CY10E 79,758 -3% 61,634 18,124 -31% 3,927 14,198 568 985 14,615 3,414 11,200 -30% 11,200 59.7 59.5 30.5
CY11E 95,957 20% 77,156 18,801 4% 4,645 14,156 977 1,861 15,040 4,296 10,744 -4% 10,744 57.2 57.1 24.4
CY12E 104,684 9% 83,902 20,782 11% 5,298 15,484 478 1,563 16,569 4,805 11,764 9% 11,764 62.7 62.5 32.1
50
ACC Cash flow statement - standalone

Year to Dec (` mn) PBT Depreciation Others Interest paid (net) CFO before change in WC Change in working capital Direct taxes paid CFO Net capex Net investments Interest received CFI Proceeds from borrowings Change in share capital Interest & finance charges paid Dividends paid CFF Net Change in cash Opening cash balance Closing cash balance
CY08 16,877 2,942 (710) 400 19,509 758 (3,184) 17,083 (13,762) 2,017 1,164 (11,704) 1,756 14 (403) (4,339) (2,971) 2,408 7,435 9,842
CY09 22,944 3,421 (276) 843 26,932 1,979 (4,941) 23,971 (15,154) (1,211) 857 (15,049) 849 19 (1,054) (4,359) (4,546) 4,376 14,383 18,759
CY10E 14,615 3,927 (32) 568 19,077 1,190 (760) 19,507 (8,111) (489) 935 (8,023) (431) 1 (935) (5,002) (6,367) 5,117 18,759 23,876
CY11E 15,040 4,645 (1,861) 977 18,801 61 (3,550) 15,312 (9,988) 8,000 1,861 (127) (30) (0) (977) (6,153) (7,160) 8,025 23,876 18,825
CY12E 16,569 5,298 (1,563) 478 20,782 2,306 (4,805) 18,283 (10,000) 1,000 1,563 (7,437) (30) (0) (478) (8,084) (8,592) 2,254 18,825 21,079
Ratio analysis
Year to Dec Revenue growth EBITDA growth PAT growth EPS norm (dil) growth EBITDA margin EBIT margin Net margin RoCE RoE RoIC
CY08 5% -5% -16% -3% 26% 22% 16% 23% 26% 43%
CY09 10% 39% 32% 38% 32% 28% 20% 26% 29% 64%
CY10E -3% -31% -30% -30% 23% 18% 14% 16% 18% 40%
CY11E 20% 4% -4% -4% 20% 15% 11% 15% 16% 26%
CY12E 9% 11% 9% 9% 20% 15% 11% 15% 17% 20%
Year to Dec P/E (x) P/B (x) Debt/Equity (x) Net debt/Equity (x) EV/Sales (x) EV/EBITDA (x) EV/tonne (US$)
CY08 18.2 4.3 0.1 (0.2) 2.7 10.6 199.9
CY09 13.2 3.5 0.1 (0.2) 2.4 7.5 157.3
CY10E 18.9 3.3 0.1 (0.3) 2.4 10.7 157.7
CY11E 19.7 3.1 0.1 (0.3) 2.0 10.3 134.2
CY12E 18.0 2.9 0.1 (0.3) 1.8 9.2 133.3
51
ACC
Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%
Buy Sell
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Ambit - Cement - Thematic - The Retail Consumer To The Rescue - 19dec2011

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Ambit - Cement - Thematic - The Retail Consumer To The Rescue - 19dec2011

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December 19, 2011

The retail consumer to the rescue

Cement demand and GFCF growth move very closely

Cem ent demand growth GFCF real growth (RHS)

Recent price rises despite large demand supply gap

1-year fwd EV/EBITDA

EV/ tonne (US$) FY13E 140 152 133

Ambit Capital Pvt Ltd

The retail consumer saves the day

Source: Industry, Ambit Capital research

Smaller players shift towards retail sales

Non-trade Now 85 70 50 85 70 Earlier 40 40 60 35 40 Now 15 30 50 15 30

High regional disparities between South and the rest of India

Ambit Capital Pvt Ltd

Subdued demand scenario for FY12 and FY13

Ambit Capital Pvt Ltd

Absence of bargain seekers helps pricing

Whats holding up the pricing?

Weak institutional demand leads to lower inter-regional price wars

Ambit Capital Pvt Ltd

Continuing demand from IHB

Ambit Capital Pvt Ltd

Exhibit 6: FY11 saw a jump in advertising spend of cement manufacturers

Advertising expenses (Rs mn)

Advertising expenses (Rs mn)

Rising input costs

Exhibit 8: Coal and power costs have been rising

Exhibit 9: Other raw material costs have also been rising

Ambit Capital Pvt Ltd

Exhibit 11: Coal prices (`/tonne) have remain stable

YoY growth (%) Rs/tonne - RHS

QoQ growth (%)

Ambit Capital Pvt Ltd

Exhibit 12: Realisations likely to increase further in coming quarters

Exhibit 13: Costs might see sequential decline in 3QFY12

Exhibit 14: YoY growth have started to stabilize

Operating costs (Rs/tonne) Realisation (Rs/tonne)

Operating costs (QoQ growth) Realisation (QoQ growth)

Operating costs (YoY growth) Realisations (YoY growth)

Capacity additions but at a slow pace are supporting price rises

FY12E FY13E FY14E

Source: Company, CMA, Industry, Ambit Capital research

Ambit Capital Pvt Ltd

Source: Company, Industry, Ambit Capital research

Exhibit 16: Status of capacity additions in FY13

Source: Company, Industry, Ambit Capital research

Ambit Capital Pvt Ltd

Does recent December decline portend more price declines?

Ambit Capital Pvt Ltd

Ahmedabad Nashik Central Bhopal Lucknow Indore Kanpur East Kolkata

260-275 250-280 265-285 260-280

250-265 250-270 260-275 250-270

Bhubaneswar Raipur South Hyderabad Bangalore Chennai

275-295 270-290 285-300

Source: Industry, Ambit Capital research

Ambit Capital Pvt Ltd

Where do we go from here?

Exhibit 21: Utilisations (%) in most regions increased in FY07

Exhibit 22: But prices increased by `66/50kg bag over FY06-FY08

Source: CMA, Ambit Capital research

Source: CMA, Ambit Capital research

Source: CMA, Ambit Capital research