Cement Industry Evaluation Ver 2

8/7/2019 Cement Industry Evaluation Ver 2

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Opportunities in Mid-Sized Cement Segment

May, 2008


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Executive summary

India is currently witnessing large demand momentum. Prevailing supply shortage situation

and firm prices are likely to continue over the next 1-2 years given demand momentum andfuture supply situation.

Perceived over-supply situation in future by analysts and brokers / investors causing themarket to discount earnings below fair value

Cement industry is largely governed by regional dynamics. Energy and freight constitute bulk

of the costs. Operating synergies due to scale economies are minimal.

Some mid-sized companies have efficient operations which make them competitive; thesewill continue to have strong future earnings

Some of these mid-sized companies are trading at substantially lower EV/T and xEV/EBIDTA (even, replacement cost) compared to large players

Hypothesis that opportunity exists to purchase earnings at cheap valuation and lower thanreplacement costs is tested

Analyses indicate that investments in mid-sized cement companies may not yield acceptablereturns at low risk


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Key characteristics

India has about 132 large plants (> 0.3 Mn TPA) with effective capacity of 167 Mn TPA and about 300 mini-plants (< 0.3 Mn TPA) with effective capacity of 6 Mn TPA

Plants are located close to limestone reserves to save on inward freight. 75% of the reserves are clustered in 5 states (2states in South India, 1 each in West, North and Central India) out of 29 states and as a result about 50% of capacity issituated out of these clusters.

Large players operate multiple plants to service local demands.

Mini-cement plants were set-up to make use of small reserves that cannot support large plants, and also benefit fromexcise concessions (proposed to be discontinued).

There are 52 companies operating large plants in India and top 5 companies have a combined marketshare of 46%.

Cement is a bulk commodity and transportation over large distances makes it uncompetitive. Prices are,thus, determined by regional supply-demand situation.

Industry profit potential is low as

Technology is available off-the-shelf

Capital requirement of $100-110 / T and gestation period of ~1.5-2 years for setting up plants (typical plant size is 1.5 MnTPA)

No import duty is levied. In spite of that, imports is low (3%) due to high freight cost, low shelf life, high clearance time atports and large economic quantity for sea transportation

Government intervenes from time to time to check cement prices

Access to cheap power and fuel, proximity to high quality limestone reserves and demand points contributeto critical success factors in this industry.

Cement industry in India is characterized by low industry profit potential


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Historical demand & supply

Historical Demand and Consumption - India

3

44

4

4

4

FY3 FY

4 FY

FY

FY

FY

!

+

"

#

$

%

&

$ '

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+

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#

$

( %

&

$ '

(

During h riod 3 o 2008, capacity grew at a CAGRof5 %

Consumption on the otherhandgrew at a CAGR of9%during the same period

Consumption includes exports whichwere in the range of3 to 5Mn TPA (~3%

arge share ofproduction in North, East andSouth isconsumed in the region only.However, about 20% ofrequirements in Center andWest were fedby North andSouth respectively

North East South West Centre Exports

North 87% 0% 0% % 8% 0%

East 0% 87% 0% 0% 3% %

South 0% 2% 97% 20% 0% 5%

West 0% % 3% 72% 3% 87%

Centre 13% 10% 0% 0% 76% %

Total 100% 100% 100% 100% 100% 100%

Dis

patc

ingRegions

Recei ing Regions

Inter-regional Mo ement of Cement - 2007

Legend:

+ : Supply Shortage

x : Supply Surplus

clusters

Over the past 5- years,growth in demandhas outstrippedgrowth in capacityaddition


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Short term demand supply situation

Current demand levels on a per capita basis is low which implies strong demand growthpossibilities for future

Per capita consumption of 150 Kg in India is half the world average. Compared to Chinas per capitacement consumption of 700 kg and Brazils 200 kg, Indias consumption is low.

Peak per capita cement consumption in various countries has been in the range of 650-800 kg

Key demand indicators include

Based on above demand estimates, demand will grow at 11% CAGR. However, due to slowdown ineconomy as currently being witnessed and future GDP projections, demand CAGR has been revised to8.5% (this does not include impact of price elasticity on demand and cross-elasticity with other buildingmaterials like fly ash and aggregates)

Demand will continue to grow at a rate of 8.5% CAGR (on the conservative side)over the next five years

Demand projections over the next 5 years

Key areas. Vol, (

n

) Details

Residential real estate 650 Indian real estate expected to add 14.3 bn sq ft over the next 5 years (2008-13) involving investments of$325 bn.

Commercial & retail 30

Infrastructure 380 As per planning commission, planned investments in infrastructure projects in 11th five year plan (2008-12)stands at $225 bn. This will translate into demand of380 Mn T of cement.

Others 50 Others include defense, exports, etc.


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Companies economics

Total cost of operations (including interest charges) varied from Rs 1712 / T to Rs3070 / T for the year 2007 across various players

*

Diversifiedcompanies;total cost datafor thesecompaniescomputedbased onhistorical dataand

assumptions oncostappropriation

Companies

nterest

otal

Raw Mat'l

uel & Power

reight Manpower Overheads Interest TotalShree Cements 354 485 322 102 424 25 1,712

Zuari 279 596 388 98 338 60 1,759

Prism 187 719 239 88 476 22 1,731Madras 358 554 397 101 374 45 1,829

Ambuja 165 548 472 92 532 50 1,858India 288 652 599 121 153 178 1,991

Sanghi 163 577 673 59 398 271 2,141

Binani 194 591 611 74 423 136 2,029Birla Corp 291 556 360 107 510 33 1,857

JK Lakshmi 341 695 403 102 361 139 2,041

Chettinad 411 683 439 107 345 68 2,052

Lafarge NA NA NA NA NA NA NARain 167 595 635 71 708 192 2,368My Home NA NA NA NA NA NA NA

ltratech 335 664 591 66 360 51 2,066

Penna 554 658 415 37 622 47 2,333KCP * 333 512 93 205 600 40 1,782

Orient * 279 486 494 170 440 80 1,949ACC 492 372 500 165 536 38 2,105

OCL * 382 580 439 98 442 106 2,047

Guj Sidhee 182 833 571 84 508 79 2,256Dalmia * 312 585 300 136 545 153 2,031

Grasim * 342 685 581 169 386 41 2,204

Century * 204 401 385 374 533 55 1,952Tamil Nadu 420 966 257 386 225 45 2,299

Saurashtra 379 864 249 97 664 168 2,420Mysore 312 780 46 180 971 105 2,395

Mangalam 390 893 586 120 305 9 2,303

JK Cements 287 723 571 107 685 123 2,497Andhra 332 917 340 279 681 521 3,070

Jaypee * 190 336 498 141 617 261 2,044

KCL 205 821 197 342 - 94 1,659Kesoram * 411 494 558 166 319 44 1,991

Malabar 448 334 9 322 1,181 46 2,339CCI 383 388 247 732 977 122 2,850

Deccan Cement 597 600 511 70 217 12 2,007

Sagar Cement 241 603 340 91 795 30 2,099

ixed

verheads

Varia

le Costs


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Lon term cost structures

Operating cost structures were in the range of Rs 1690/T to Rs 2670/T in 2007.With impending over-supply situation and drop in realization, units with high cost

structures may turn delinquentro uct on ost ontnuum

0

20

40

60

80

100

120

140

160

180

1600 1800 2000 2200 2400 2600 2800 3000

ost of Operations ( ncluding nterest

harges , Rs / T

umulative

apacityin

ndia,

nT

n 2010, ndia is likely to have

supply surplus of 44 n T.nits producing at Rs 2100 / T

or above will either turndelinquent or make losses.

cross all regions, there will be excess capacity as a result of new capacities being added. This willresult in price erosion. High-cost units will not be able to sustain price pressures.

ost of production has gone up over the last 5 years. Hence, prices will not go down to previous lowsas seen in 2003 and 2004 but will settle at levels commensurate to current cost structures.

However, as companies are adding to reduce costs, cost structures across companies will

improve by Rs 150-200 / T but prices will also drop to partially negate this cost advantage


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Hypotheses and analyses

Hypothesis: Opportunities exist in purchasing earnin s of mid-sized cement companies at cheap valuation and

significantly lower replacement costs which can yield accepta le returns

Testing Parameters:

1. Establish whether these mid-sized companies are available at cheap valuation and lower thanreplacement costs

2. Establish whether future earnings will continue to be attractive for mid-sized companies

3. Establish whether acceptable returns will be generated at current entry levels and reasonable exitassumptions

Methodology:

Compile exhaustive list of mid-sized companies and arrive at a consideration set based on initial

screening parameters Compare entry costs

Estimate future earnings and yields

Estimate return on investment

Initial hypothesis on attractive opportunities in mid-sized segment tested insubsequent slides


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Screenin of mid cap cement companies

Andhra Cements

CCI

Chettinad Cements

Deccan Cements

Deepak Cements

Gujarat Sidhee

JK Lakshmi Cements

Kalyanpur Cements

Kesoram Industries

KCP

Mangalam Cements

My Home Cements

Mysore Cements

Panyam Cements

Penna Cements Prism Cements

Rain Industries

Sagar Cements

Saurashtra Cements

Shree Digvijay Cements

Zuari Cements

Deccan Cements

Mangalam Cements

Gujarat Sidhee

Chettinad Cements

Saurashtra Cements

Shree Digvijay Cements

Sagar Cements

Prism Cements

JK Lakshmi Cements

Companies eliminated on account of thefollowing:

Trading suspended / nlisted

No information available

An exhaustive list of mid-sized companies considered on which screening criteriawere applied

List of id Sized Cement Companies

Consideration Set


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Company Valuation Centre & East ( rism Cement)

SHP Promoters: Rajan Raheja group (62%)

Non-promoter (non-institution):32%

Current operations & uture Plans Operates 2.5 Mn T unit in Satna (MP)

Capacity additions in planning stage

Key strengths / advantages

Deep value: $100 / T No CPP, lowest freight costs in the industry, efficient

operations

Entry cost at current share prices and yields

IRR for exit in 3 years and for various x EV /EBIDTA

Entry at 4 % discount to current share prices willyield 25% IRR at exit x EV/EBIDTA of 7.0 x and

EV/T of $80

Company Summary Valuation Summary

Operations Operates largest kiln in the country andhas efficient operations with one of thelowest specific power and fuelconsumptions

Efficient freight management (least

freight cost in the industry)Advantages Local linkage for coal leading to lower

procurement costs (Rs 2300 / T)

High brand recall able to charge apremium of 5%

Railway siding

Prism likely to have strong future earnings but high entry cost causing high risk inreturns on investment at conservative exit assumptions

0

0

0

2

Equit lue12

,

27

12,

27

12,

27

12,

27

12,

27Net ebt (

,286) (

,870) (

,

0) (6,

04) (7,

87)EV, M

,240 7,657 6,

86 6,12

4,5

9EV T,

89 $74 $67 $59 $44

EV E I TA 2.74x 3.41x 7.89x 5.22x 2.02xash iel 14% 13% 5% 7% 13%

EV/ E I TA 5.0x 6.0x 7.0x 8.0x 9.0xExit EV, M 5,864 7,036 8,209 9,382 10,555Exit EV/T, $56 $68 $79 $90 $101Exit Net ebt (6,404) (6,404) (6,404) (6,404) (6,404)Exit Equit 12,267 13,440 14,613 15,786 16,958IRR (3 ears) -1% 2% 5% 8% 11%


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Company Valuation orth (JK Lakshmi)

SHP Promoters: Singhania group (42%)

Non-promoter (non-institution):31%

Current operations and future plans Operates 3.4 Mn T in Rajasthan (North India)

Operates 5 RMC plants as well

Capacity addition to reach 5 Mn TPA by Q1, 09 and another 7RMC plants during the same year

Key strengths / advantages

Deep value: $90 / T $ 10 Mn for RMC; and 20% discount on replacement

cost for existing asset due to age and inefficiency(Power: 85 nits / T)

Entry cost at current share prices and yields

IRR for exit in 3 years and for various x EV /EBIDTA

Entry at 4 % discount to current share prices willyield 25% IRR at exit x EV/EBIDTA of 10.0 x and

EV / T of $50

Company Summary Valuation Summary

JK Lakshmi available at low entry cost but low expected future earnings causinghigh risk in returns on investment at conservative exit assumptions

Operations Specific power & fuel consumptionclose to industry average

New unit & CPP to result in low cost

Advantages

Commissioned 36 MW CPP to meetentire power requirement, with 10 MWthrough waste heat recovery. Railwaysiding at the factory

High brand recall

Accumulated tax losses to last foranother3 years

orward integration into RMC

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08!

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09!

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10!

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12Equity Value 6,565 6,565 6,565 6,565 6,565et De t 2,035 3,063 2,512 1,897 1,218

EV, n 8,600 9,629 9,078 8,462 7,783EV/ , $63 $48 $45 $42 $39x EV/ EBID 2.45 x 3.25 x 9.31 x 8.68 x 7.98 xCash ield 48% 38% 8% 9% 10%

x EV/EBID 5.00 x 8.00 x 10.00 x 15.00 x 20.00 xExit EV, n 4,875 7,800 9,750 14,625 19,500Exit EV / , $24 $39 $49 $73 $97Exit et De t 1,897 1,897 1,897 1,897 1,897Exit Equity 2,978 5,903 7,853 12,728 17,603IRR (3 ears) -23% -3% 6% 25% 39%


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Industry Comparators

Recent transactions in Indian cement industry

Historical trading multiples for consideration set

Acquirer ar et ear Stake Capacity, n ransaction at EV /

Cimpor Shree Digvijay Cements 2007 53.63% 1.07 $ 162 / T

Italcementi Shri Vishnu Cements 2006 50.00% 1.30 $ 80 / T

CRH My Home Industries 2008 50.00% 2.50 $ 215 / T

Heidelberg Mysore Cement 2006 54.89% 2.30 $ 112 / T

Historica EV/ or i Cap ayers

$0

$50

$100

$150

$200

a shmi Mangalam rism Chettinad Saurashtra

% &

'

a(

shmi $83 $92 $61 $45

Mangalam $73 $101 $54 $33 $42)

rism $113 $93 $76 $55 $52

Chettinad $172 $145 $75 $51 $71

Saurashtra $83 $76 $75 $57 $53

0

1

07 01

06 01

05 01

04 01

03

Historica EV/E I A or i Cap ayers

-10

0

10

20

a shmi Mangalam rism Chettinad Saurashtra

% &

'

a(

shmi 4 10 13 26

Mangalam 3 6 9 5 -41)

rism 3 7 9 10 18

Chettinad 8 17 9 6 11

Saurashtra 9 32 90 -11 274

0

1

070

1

060

1

050

1

040

1

03

ean: / Me ian: 4/

Industry comparators indicate that exit assumptions made for computing IRRwere on the conservative side


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ThankY

ou

Cement Industry Evaluation Ver 2

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