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Initiating Coverage | Diversified Initiating Coverage | Diversified Initiating Coverage | Diversified Initiating Coverage | Diversified Initiating Coverage | Diversified Please refer to important disclosures at the end of this report Kesoram Industries Tyre imprints on cement Kesoram Industries (Kesoram) is a diversified player with presence in cement and tyre manufacturing. The company’s cement and tyre businesses are currently trading at attractive valuations coupled with being at a substantial discount to their peers and replacement costs. We have valued the cement business at a EV/tonne of US $65, which is at a considerable discount to the replacement costs of US$80/tonne. This gives an implied enterprise valuation of Rs1.4cr/tpd to the tyre business , which is at 35-63% discount to the peers such as Apollo Tyres (Rs3.8cr/tpd) and JK Tyre (Rs2.2cr/tpd). We Initiate Coverage on the stock, with a Buy recommendation. e Initiate Coverage on the stock, with a Buy recommendation. e Initiate Coverage on the stock, with a Buy recommendation. e Initiate Coverage on the stock, with a Buy recommendation. e Initiate Coverage on the stock, with a Buy recommendation. Favourable regional exposure: avourable regional exposure: avourable regional exposure: avourable regional exposure: avourable regional exposure: The company’s relative proximity to the western markets (40% of cement revenue derived from Maharashtra) is expected to cushion its cement operations from the short-term demand-supply mismatch likely to prevail in the south. Even in the south, we expect demand to start improving from 2HFY2011E with the political situation in Andhra Pradesh improving, which would result in increased government spending on infrastructure and housing projects. Poised to capitalise on presence in high-margin, high-growth T&B radial segment: oised to capitalise on presence in high-margin, high-growth T&B radial segment: oised to capitalise on presence in high-margin, high-growth T&B radial segment: oised to capitalise on presence in high-margin, high-growth T&B radial segment: oised to capitalise on presence in high-margin, high-growth T&B radial segment: The company is on expansion phase in the emerging T&B radial segment in its bid to capitalise on the prevailing scarce supply situation. The company expects to ramp up capacity from 140tpd (FY2010) to 225tpd by end FY2011E, taking its T&B radial capacity to 23% of its overall FY2011E tyre capacity, one of the highest in industry. SO SO SO SO SOTP TP TP TP TP-based target price of Rs437: -based target price of Rs437: -based target price of Rs437: -based target price of Rs437: -based target price of Rs437: At current levels, the stock is available at attractive valuations of P/BV of 0.7x and EV/EBITDA of 5x on FY2012 estimates. We have valued the company’s cement business at EV/tonne of US $65 and the tyre business at Rs2cr/tpd, which implies EV/Sales of 0.5x at capacity utilisation of 62%. At our SOTP target price of Rs437, the stock would trade at P/BV of 1.0x and EV/EBITDA of 5.7x on FY2012 estimates. July 16, 2010 BUY CMP Rs300 Target Price Rs437 Stock Info Sector Diversified Market Cap (Rs cr) 1,371 Beta 0.8 52 Week High / Low 419/298 Avg Daily Volume 45531 Face Value (Rs) 10 BSE Sensex 17,956 Nifty 5,394 Reuters Code KSRM.BO Bloomberg Code KSI@IN Abs. (%) 3m 1yr 3yr Sensex 2.1 16.5 17.3 Kesoram (23.7) (11.8) (43.6) Investment Period 12 months Shareholding Pattern (%) Promoters 26.1 MF / Banks / Indian FIs 35.0 FII / NRIs / OCBs 22.3 Indian Public / Others 16.6 Source: Company, Angel Research Key Financials Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E Net Sales Net Sales Net Sales Net Sales Net Sales 3,882 3,882 3,882 3,882 3,882 4,721 4,721 4,721 4,721 4,721 5,237 5,237 5,237 5,237 5,237 6,226 6,226 6,226 6,226 6,226 % chg 29.8 21.6 10.9 18.9 Net P Net P Net P Net P Net Profits rofits rofits rofits rofits 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303 % chg (1.1) (37.4) (7.7) 38.5 OPM (%) 14.6 13.4 12.6 13.5 EPS (Rs) EPS (Rs) EPS (Rs) EPS (Rs) EPS (Rs) 82.9 82.9 82.9 82.9 82.9 51.9 51.9 51.9 51.9 51.9 47.9 47.9 47.9 47.9 47.9 66.4 66.4 66.4 66.4 66.4 P/E (x) 3.6 5.8 6.3 4.5 P/BV (x) 1.0 0.9 0.8 0.7 RoE (%) 32.8 16.5 13.4 16.3 RoCE (%) 16.0 11.0 8.8 11.8 EV/Sales (x) 0.9 1.0 0.9 0.7 EV/EBITDA (x) 6.0 7.3 6.8 5.0 V. Srinivasan . Srinivasan . Srinivasan . Srinivasan . Srinivasan +91 22 4040 3800 Ext: 330 Email: [email protected] Rupesh Sankhe Rupesh Sankhe Rupesh Sankhe Rupesh Sankhe Rupesh Sankhe +91 22 4040 3800 Ext: 319 Email: [email protected]
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Kesoram Rayons

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Page 1: Kesoram Rayons

Initiating Coverage | DiversifiedInitiating Coverage | DiversifiedInitiating Coverage | DiversifiedInitiating Coverage | DiversifiedInitiating Coverage | Diversified

Please refer to important disclosures at the end of this report

Kesoram IndustriesTyre imprints on cement

Kesoram Industries (Kesoram) is a diversified player with presence in cement and

tyre manufacturing. The company’s cement and tyre businesses are currently trading

at attractive valuations coupled with being at a substantial discount to their peers

and replacement costs. We have valued the cement business at a EV/tonne of US

$65, which is at a considerable discount to the replacement costs of US$80/tonne.

This gives an implied enterprise valuation of Rs1.4cr/tpd to the tyre business ,

which is at 35-63% discount to the peers such as Apollo Tyres (Rs3.8cr/tpd) and

JK Tyre (Rs2.2cr/tpd). WWWWWe Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.

FFFFFavourable regional exposure:avourable regional exposure:avourable regional exposure:avourable regional exposure:avourable regional exposure: The company’s relative proximity to the western

markets (40% of cement revenue derived from Maharashtra) is expected to cushion

its cement operations from the short-term demand-supply mismatch likely to

prevail in the south. Even in the south, we expect demand to start improving from

2HFY2011E with the political situation in Andhra Pradesh improving, which would

result in increased government spending on infrastructure and housing projects.

PPPPPoised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:

The company is on expansion phase in the emerging T&B radial segment in its bid

to capitalise on the prevailing scarce supply situation. The company expects to

ramp up capacity from 140tpd (FY2010) to 225tpd by end FY2011E, taking its

T&B radial capacity to 23% of its overall FY2011E tyre capacity, one of the highest

in industry.

SOSOSOSOSOTPTPTPTPTP-based target price of Rs437: -based target price of Rs437: -based target price of Rs437: -based target price of Rs437: -based target price of Rs437: At current levels, the stock is available at attractive

valuations of P/BV of 0.7x and EV/EBITDA of 5x on FY2012 estimates. We have

valued the company’s cement business at EV/tonne of US $65 and the tyre business

at Rs2cr/tpd, which implies EV/Sales of 0.5x at capacity utilisation of 62%. At our

SOTP target price of Rs437, the stock would trade at P/BV of 1.0x and EV/EBITDA

of 5.7x on FY2012 estimates.

July 16, 2010

BUYCMP Rs300Target Price Rs437

Stock Info

Sector Diversified

Market Cap (Rs cr) 1,371

Beta 0.8

52 Week High / Low 419/298

Avg Daily Volume 45531

Face Value (Rs) 10

BSE Sensex 17,956

Nifty 5,394

Reuters Code KSRM.BO

Bloomberg Code KSI@IN

Abs. (%) 3m 1yr 3yr

Sensex 2.1 16.5 17.3

Kesoram (23.7) (11.8) (43.6)

Investment Period 12 months

Shareholding Pattern (%)

Promoters 26.1

MF / Banks / Indian FIs 35.0

FII / NRIs / OCBs 22.3

Indian Public / Others 16.6

Source: Company, Angel Research

Key Financials

Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E

Net SalesNet SalesNet SalesNet SalesNet Sales 3,882 3,882 3,882 3,882 3,882 4,721 4,721 4,721 4,721 4,721 5,237 5,237 5,237 5,237 5,237 6,226 6,226 6,226 6,226 6,226

% chg 29.8 21.6 10.9 18.9

Net PNet PNet PNet PNet Profitsrofitsrofitsrofitsrofits 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303

% chg (1.1) (37.4) (7.7) 38.5

OPM (%) 14.6 13.4 12.6 13.5

EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) 82.9 82.9 82.9 82.9 82.9 51.9 51.9 51.9 51.9 51.9 47.9 47.9 47.9 47.9 47.9 66.4 66.4 66.4 66.4 66.4

P/E (x) 3.6 5.8 6.3 4.5

P/BV (x) 1.0 0.9 0.8 0.7

RoE (%) 32.8 16.5 13.4 16.3

RoCE (%) 16.0 11.0 8.8 11.8

EV/Sales (x) 0.9 1.0 0.9 0.7

EV/EBITDA (x) 6.0 7.3 6.8 5.0

VVVVV. Srinivasan. Srinivasan. Srinivasan. Srinivasan. Srinivasan

+91 22 4040 3800 Ext: 330

Email: [email protected]

Rupesh SankheRupesh SankheRupesh SankheRupesh SankheRupesh Sankhe

+91 22 4040 3800 Ext: 319

Email: [email protected]

Page 2: Kesoram Rayons

July 16, 2010 2

Kesoram Industries | Initiating Coverage

Peer Comparison - Trading attractively

Cement

Kesoram, which derives close to 40% of its cement revenues from Maharashtra, is

better placed than its southern peers who have major presence in Andhra Pradesh.

The company derives only 14% of its revenue from Andhra Pradesh and is expected to

face lower pricing pressure. In terms of relative operating performance, we expect the

company to report lower operating profit per tonne as compared to larger players like

ACC (pan-India presence), Ambuja (present in the high-growth northern region).

However, we expect Kesoram to clock slightly better operating profit per tonne as

compared to its south-based peers with pre-dominant presence in Andhra Pradesh

like India Cements due to the geographical advantage it derives due to its presence in

western region.

On the valuation front, currently the large pure cement players in the country such as

ACC, Ambuja, Ultratech are trading at US $88-106 on FY2012E capacity. In case of

Kesoram, despite its well-spread geographic presence and superior realisations wehave valued its cement business at EV/tonne of US $65, which is at a

considerable discount to its replacement cost of US $80/tonne, and almost at par

with the current valuations of its southern peers, India Cements and Madras Cements.

Despite Kesoram having a well-spread

geographic presence and superior

realisations we have valued its cement

business at EV/tonne of US $65, whichis at a considerable discount to itsreplacement cost of US $80/tonne, and

almost at par with its southern peers,

India Cements and Madras Cements

Source: Company, Angel Research

Exhibit 2: Installed capacity of cement players

26

23 23

14

11

75

30

2725

16

12

75

30

27 27

1614

75

0

5

10

15

20

25

30

35

ACC Ambuja Ultratech Ind Cem. Mad Cem. Kesoram JK Lakshmi

FY10 FY11E FY12E

(mtp

a)

Exhibit 1: Kesoram v/s other cement players

Source: Company, Angel Research; Note: *Target EV/Tonne of cement business

Realisation/tonneRealisation/tonneRealisation/tonneRealisation/tonneRealisation/tonne EBITDEBITDEBITDEBITDEBITDA/tonneA/tonneA/tonneA/tonneA/tonne EV/T EV/T EV/T EV/T EV/Tonne (US $)onne (US $)onne (US $)onne (US $)onne (US $)

(Rs)(Rs)(Rs)(Rs)(Rs) FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E

ACC 3,447 3,619 856 961 95 88

Ambuja 3,500 3,500 858 846 112 106

Grasim 3,932 4,295 952 1,113 97 86

India Cements 2,833 3,042 435 552 70 65

JK Lakshmi Cem 3,075 3,073 782 809 42 39

Madras Cements 3,149 3,236 620 672 71 64

Ultratech 3,045 3,198 822 928 98 88

Kesoram 2,963 3,075 476 636 65*

Page 3: Kesoram Rayons

July 16, 2010 3

Kesoram Industries | Initiating Coverage

SOTP-based Target Price of Rs437

We have arrived at a SOTP target price of Rs437 for the company by valuing its

cement business at EV/tonne of US $65. The tyre business has been valued at

Rs2cr/tpd, which implies EV/Sales of 0.5x at a capacity utilisation of 62%. The captive

power plants (CPP) have been assigned a value of Rs4cr/MW. The rayon and other

businesses have been valued at market cap-to-sales of 1x.

Kesoram recently increased its capacity by 552tpd at its new Uttarakhand tyre facility

including a 140tpd Truck and Bus (T&B) radial capcacity. On the operating front, we

expect the company to register OPMs in line with its peers on aided by the high

proportion of T&B radial tyres (23%) in its overall capacity.

On the valuation front, Kesoram’s tyre business is currently trading at an implied

EV/tpd of Rs1.4cr, which is at 35-63% discount to peers, Apollo Tyres (Rs3.8cr/tpd)

and JK Tyre (Rs2.2cr/tpd). For our target price, we have assigned a target EV/tpd of

Rs2cr (also at a discount to peers) for the company's tyre business.

Kesoram’s tyre business is currently

trading at an implied EV/tpd of Rs1.4cr,

which is at 35-63% discount to peers,

Apollo Tyres (Rs3.8cr/tpd) and JK Tyre

(Rs2.2cr/tpd)

Tyre

Source: Company, Angel Research

Exhibit 4: Installed capacity of tyre players

850 823787

400

950988

787

500

1,200

988

884

500

0

200

400

600

800

1,000

1,200

1,400

Apollo Kesoram JK Tyres Ceat

FY10 FY11E FY12E

(tpd)

Exhibit 3: Kesoram v/s other tyre players

Source: Company, Angel Research; Note: Implied EV/tpd; Annual sales/tpd, EBITDA/tpd computedbased on capacity utilisation

(Rs cr)(Rs cr)(Rs cr)(Rs cr)(Rs cr) Annual Sales/tpdAnnual Sales/tpdAnnual Sales/tpdAnnual Sales/tpdAnnual Sales/tpd EBITDEBITDEBITDEBITDEBITDA/tpdA/tpdA/tpdA/tpdA/tpd EV/tpd EV/tpd EV/tpd EV/tpd EV/tpd

FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E

Apollo 6.7 5.5 0.9 0.7 5.3 3.8

CEAT 6.9 7.3 0.5 0.6 2.3 2.3

JKT 8.3 7.8 0.8 0.8 2.5 2.2

Kesoram 5.7 6.4 0.6 0.6 - 1.4*

Page 4: Kesoram Rayons

July 16, 2010 4

Kesoram Industries | Initiating Coverage

Tyre business available at implied EV/tonne of 1.4cr/tpd

Kesoram's current tyre capacity stands at 823tpd and is set to go up to 988tpd in

FY2011 of which the high-margin T&B radial tyres segment would account for around

23% (225tpd). The tyre business is currently available at an implied EV/tpd of Rs1.4cr

based on our FY2012E estimates, which is at a substantial discount to peer valuations.

The implied value is excluding the EV of cement business, captive power plants (CPP),

rayon and others and investments. The CPPs have been assigned a value of

Rs4cr/MW.

We have assigned a target EV/tpd of

Rs2cr to the company's tyre business,

which is still at a discount to peer

valuations

We have assigned a target EV/tpd of Rs2cr to the company's tyre business, which is still

at a 10-47% discount to the current valuation of peers such as Apollo Tyres and

JK Tyre.

Exhibit 6: Implied value of tyre business (FY2012E) (Rs cr)

Market cap - (a) 1,371

Net Debt - (b) 2,858

EV of firm - c =(a+b) 4,229

EV of cement business - (d) 2,121

CPP - (e) 300

Rayon and other businesses (f) 256

Investments (g) 203

EV of tyre business h=(c - d - e - f - g) 1,349

Installed capacity (tpd) 988

EV/tpd 1.4

Source: Angel Research

Exhibit 5: SOTP Valuation (FY2012E)

SegmentsSegmentsSegmentsSegmentsSegments VVVVValuation Paluation Paluation Paluation Paluation Parameterarameterarameterarameterarameter (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr)

Cement 7.3mtpa x US $65/tonne 2,121

CPP 75MW x Rs4cr 300

Tyre 988 (tpd) xRs2cr 1,976

Rayon & Others 1x Mcap/sales 256

Enterprise VEnterprise VEnterprise VEnterprise VEnterprise Valuealuealuealuealue 4,6524,6524,6524,6524,652

Investments 30% discount to market value 203

Net Debt 2,858

Fair value 1,998

No. of shares (cr) 4.6

VVVVValue Palue Palue Palue Palue Per Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs) 437437437437437

CMP (Rs) 300

Upside PUpside PUpside PUpside PUpside Potential (%)otential (%)otential (%)otential (%)otential (%) 4646464646

Source: Angel Research

Page 5: Kesoram Rayons

July 16, 2010 5

Kesoram Industries | Initiating Coverage

Investment Arguments

Favourable regional exposure

Kesoram’s diversified operations is expected to cushion its cement operations from

the expected short-term demand-supply mismatch likely to prevail n the South. The

company’s cement plants are located at two locations - Sedam (5.6mtpa) in Karnataka

and Karimnagar (1.7mtpa) in Andhra Pradesh and derives a major portion of its

revenue from Maharashtra (40%), Karnataka (37%) and a significantly lesser portion

from Andhra Pradesh (14%). Further, we believe that the huge investment planned in

major segments such as housing, infra and real estate would aid a revivial in the

cement demand growth in the southern region over the next few quarters resulting in

higher despatches and stability in prices. Overall, we expect the southern region to

register 9.7% CAGR in demand over FY2010-12E.

Exhibit 8: State-wise cement consumption

Source: CMA, Angel Research

We believe that the huge investment

planned in major segments such as

housing, infra and real estate would aid

a revivial in the cement demand growth

in the southern region over the next few

quarters resulting in higher despatches

and stability in prices

39.7%

36.8%

14.2%

9.3%

Maharashtra Karnataka Andhra Pradesh Others

Source: Company, Angel Research

Exhibit 7: Kesoram cement revenues - Geographical break-up (FY2010)

State (mn tonnes)State (mn tonnes)State (mn tonnes)State (mn tonnes)State (mn tonnes) FY05FY05FY05FY05FY05 FY06FY06FY06FY06FY06 FY07FY07FY07FY07FY07 FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 CACACACACAGR GR GR GR GR (%)(%)(%)(%)(%)

FY05-09FY05-09FY05-09FY05-09FY05-09

Andhra Pradesh 8.6 11.5 12.6 14.7 18.0 20.4

Tamil Nadu 9.6 11.1 12.8 14.5 15.9 13.5

Karnataka 8.1 9.4 11.1 11.8 11.5 9.2

Maharashtra 15.9 16.8 18.2 20.6 21.9 8.3

Kerala 6.1 6.5 7.0 7.1 7.9 6.5

Page 6: Kesoram Rayons

July 16, 2010 6

Kesoram Industries | Initiating Coverage

Since 2HFY2010, southern region has faced weakness in cement demand due to

political concerns in Andhra Pradesh (AP), which is the leading cement consuming

state in the south.With the political situation in AP now improving, we expect demand

in the region to revive with the government spending on infrastructure and housing

projects increasing. The cement consumption in the region is expected to grow from

59mn tonnes (mt) to 71mt over FY2010-12E, registering a CAGR of 9.7%. However,

capacity utilisation is expected to reduce from 73% to 70% during the period due to

the 25% increase in overall capacity to 110mn tonnes.

Exhibit 10: Demand-supply dynamics in the southern region

PPPPParameter (mn tonnes)arameter (mn tonnes)arameter (mn tonnes)arameter (mn tonnes)arameter (mn tonnes) FY07FY07FY07FY07FY07 FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

Installed Cap (mtpa) 54 57 67 88 100 110

Growth (%) 5.5 5.6 17.5 31.3 13.6 10.0

Production 50 54 60 64 70 77

Growth (%) 10.9 8.6 10.4 7.2 9.0 10.0

Comsumption 44 49 54 59 64 71

Growth (%) 12.9 10.7 10.4 8.7 8.8 10.2

Utilisation (%) 92 95 89 73 70 70

Source: CMA, Angel Research

Cement consumption in the southern

region is expected to grow from 59mn

tonnes (mt) to 71mt over FY2010-12E,

registering a CAGR of 9.7%

Exhibit 9: Growth in cement consumption in the southern region

4449

5459

64

71

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

FY07 FY08 FY09 FY10 FY11E FY12E

CAGR of 10.3%over FY07-10

CAGR of 9.7%over FY10 -12E(m

nto

nnes)

Source: CMA, Angel Research

The cement consumption in the western region is expected to grow from 37mn tonnes

to 45mn tonnes during FY2010-12E, buoyed by strong demand from the infrastructure

and industrial segments. The major states in the region (Maharashtra, Gujarat and

Rajasthan) have been the favoured destination for infrastructure and industrial

investments owing the favourable policies of the respective state governments. This is

expected to be maintained going ahead as well, resulting in strong demand for cement.

These states are also expected to be major beneficiaries of investments in other

infrastructure segments such as ports, power, roads and railways. Thus, overall capacity

of the western region is expected to increase from 36mtpa to 44mtpa over

FY2010-12E. However, with consumption in the region expected to grow at a slower

pace during the period, capacity utilisation is expected to decline from 86% in FY2010

to 84% in FY2012E.

Page 7: Kesoram Rayons

July 16, 2010 7

Kesoram Industries | Initiating Coverage

Major investments in housing, infra projects to drive cement demand

India's housing sector is expected to account for more than 63% of the total cement

demand during the Eleventh Plan. Various central government schemes such as Bharat

Nirman Yojna and Jawaharlal Nehru Urban Renewal Mission (JNNURM), which are

aimed at increasing rural housing and slum rehabilitation, are expected to be the

major drivers for cement demand in the housing sector. The government is also carrying

out other schemes such as the Indira Awaas Yojna, Rajiv Gandhi Awaas Yojna and the

Two Million Housing programme to reduce the rural housing shortage. In addition to

the measures undertaken by the central government, the state governments are also

implementing a number of housing schemes. The country's overall housing shortage

estimated at 78.7mn at the end of CY2008 is expected to decline to 75.5mn by the

end of CY2014.

Central government schemes such as

Bharat Nirman Yojna and Jawaharlal

Nehru Urban Renewal Mission (JNNURM)

are expected to be the major drivers for

cement demand from the housing sector

Source: Company, Angel Research

Exhibit 12: Cement demand drivers in the Eleventh Plan

Housing Infrastructure Commercial Industrial Investment

63%

22%

12%

3%

Exhibit 11: Demand-supply dynamics in the western region

FY07FY07FY07FY07FY07 FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

Installed Cap (mtpa) 29 29 32 36 42 44

Growth - - 10.3 12.5 16.7 4.8

Production (mn tonnes) 28 29 28.9 31 34 37

Growth (%) 9.5 1.8 (1.0) 8.8 10.0 10.0

Comsumption (mn tonnes) 28 32 34 37 41 45

Growth (%) 9.1 14.0 5.4 9.0 10.0 10.5

Utilisation (%) 98 100 89 86 81 84

Source: CMA, Angel Research

Page 8: Kesoram Rayons

July 16, 2010 8

Kesoram Industries | Initiating Coverage

Source: Crisil Research, Angel Research

Exhibit 14: Investments in irrigation projects in India

212

281 290 285 293 306370

459

612

728

0

100

200

300

400

500

600

700

800

FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E

CAGR of 24.2%

over FY

09-13E

(Rs

bn)

Source: Crisil Research, Angel Research

Exhibit 13: Housing Shortage in India

(mn

units

)

64.362

59.4 59.253.8

15.118.4 19.3 20.6 21.7

0

10

20

30

40

50

60

70

CY01 CY06 CY08 CY10E CY14E

Rural Urban

States like Andhra Pradesh, Maharashtra,

Gujarat and Karnataka (where Kesoram

has a significant presence) top the list of

major investment destinations in the

irrigation space

Source: Crisil Research

Exhibit 15: Irrigation Cost Structure

Cement Steel Machinery Administrative & Others Labour

30%

20%20%

20%

10%

India's investment in the irrigation space is expected to be a substantial Rs2,169bn

over FY2009-13E, with the government carrying out schemes such as NREGAto promote

the agrarian economy. With cement accounting for 30% of the total irrigation costs,

there is a huge opportunity for the cement players. Notably, states like Andhra Pradesh,

Maharashtra, Gujarat and Karnataka (where Kesoram has a significant presence) top

the list of major investment destinations in the irrigation space. Hence, the company is

expected to benefit from the large scale investments in this sector.

Page 9: Kesoram Rayons

July 16, 2010 9

Kesoram Industries | Initiating Coverage

Set to capitalise on presence in high-margin, high-growth T&Bradial segment

The Rs22,500cr Indian tyre industry (FY2009) registered volume CAGR of 8.5% over

the FY2005-09 with production of 1.2mt in FY2009. The replacement market

contributed 60% to overall industry revenues followed by the OEMs at 25% and exports

around 15%. Going forward, we expect strong demand for vehicles across segments,

aided by an overall recovery in the macro-economic factors and underlying structural

demand drivers, which will propel robust growth in tyre demand. Hence, we expect

the tyre industry to register a higher 9-10% volume CAGR over FY2010-12E, driven

by around 9% CAGR in replacement demand, 10% CAGR in OEM demand and

around12% CAGR in exports in the mentioned period. This is also supported by the

fact that, the Indian tyre industry is operating at around 90% capacity utilisation levels.

Consequently, on FY2010E installed capacity of 4,540tpd, capacity addition of around

1,165tpd would be needed over FY2010-12E.

Radialised tyres enjoy a premium of 20% in pricing over cross-ply due to their longevity

and higher fuel efficiency. In India, although radialisation has currently crossed the

98% mark in the passenger car segment, its penetration has been at a low 9.1% in the

T&B segment as against a global average of 50%. Going ahead, we expect radialisation

in the segment to gather momentum on account of improvement in the road

infrastructure and increasing proportion of vehicles allowing fitment of radial tyres

and have a 15% share in the T&B segment. Currently, despite the low penetration

levels of T&B radial tyres, the entire demand could not be met through domestic

supply and hence requiring import of the same. Thus, with the penetration levels of

the radial tyres in the T&B segment set to increase going ahead, players who have

T&B tyre capacity are set to enjoy superior profitability.

Going forward, we expect a strong

demand for vehicles across segments,

aided by an overall recovery in

the macro-economic factors and

underlying structural demand drivers,

which will propel robust growth in tyre

demand

The highest number of PPP projects are

being executed in the states of Andhra

Pradesh, Karnataka and Rajasthan, which

would again benefit Kesoram

The infra projects carried out under PPP model are expected to lend a boost to the

cement demand in the southern and western region. Road projects account for 60%

of the total number of projects and 45% of the total value of PPP projects (that are

currently operational or under implementation) are worth Rs1,020bn. The component

of cement in the total construction cost of road projects is substantial and augurs well

for cement manufacturers. The highest number of PPP projects are being executed in

the states of AP, Karnataka and Rajasthan, which would again benefit Kesoram.

Source: Industry, Angel Research

Exhibit 16: Penetration of radialisation in T&B segment (FY2009)

100 96 95

71

5748

20

9.1

65

0

20

40

60

80

100

120

Wes

tern

Euro

pe

Nort

hA

mer

ica

Cen

tral

Euro

pe

Afr

ica/

Mid

dle

East So

uth

Am

eric

a

Asi

a

East

ern

Euro

pe

India

Worl

d

(%)

Page 10: Kesoram Rayons

July 16, 2010 10

Kesoram Industries | Initiating Coverage

Profit of about Rs5,155cr would be

required over FY2010-12E to meet

reinvestment needs, implying about

Rs1,963cr of profit in FY2012E compared

to Rs360cr in FY2009

Tyre Sector: Earnings far below reinvestment needs, resulting supply short-age to improve RoEs

The tyre industry demand is growing at about 9% CAGR. Consequently, on FY2010E

installed capacity of 4,540tpd, capacity addition of about 1,339tpd would be needed

over FY2010-12E. Radial tyres require more than twice the capex per tpd as compared

to cross-ply (Rs5cr v/s Rs2.5cr). Therefore, investment requirement over FY2010-12E

is estimated at Rs8,302cr, of which equity would be Rs4,151cr. Inclusive of dividend

payout, profit of about Rs5,155cr would be required over FY2010-12E to meet

reinvestment needs, implying about Rs1,963cr of profit in FY2012E compared to

Rs360cr in FY2009. Paucity of supply is likely to increase tyre realisations significantly,

as no cross-ply capacity is expected to be added over next three years. Thus, based on

our FY2012E profit estimates, the tyre companies are trading at highly attractive

valuations of 4.9x P/E and 1.0x P/BV on FY2012E estimates.

Exhibit 17:Exhibit 17:Exhibit 17:Exhibit 17:Exhibit 17: Earnings far below reinvestment needs

PPPPParticulars (Rs cr)*articulars (Rs cr)*articulars (Rs cr)*articulars (Rs cr)*articulars (Rs cr)* FY2010EFY2010EFY2010EFY2010EFY2010E

Industry capacity (tpd) 4,540

Total sales 21,111

Revenue per tonne 4.65

Next three years requirements (tpd; 9% CAGR) 1,339

Investment per tonne 5

Total capex 6,695

Working capital 1,607

Total investment needed (FY2010-12E) 8,302

Debt 4,151

Equity 4,151

Total profit opportunity incl. dividend (FY2010-12E) 5,155

Net profit in FY2009 360

Net profit in FY2012E (15% CAGR over FY2010-12E) 1,963

Current market cap 9,646

P/E (x; FY2012E net profit) 4.9

P/BV (x; FY2012E net worth) 1.0

Source: Industry, Angel Research; Note: *Top 6 listed players

Page 11: Kesoram Rayons

July 16, 2010 11

Kesoram Industries | Initiating Coverage

Exhibit 18: Dupont Analysis - Cross -ply v/s radial (FY2010)

PPPPParticulars (Rs cr/tpd)articulars (Rs cr/tpd)articulars (Rs cr/tpd)articulars (Rs cr/tpd)articulars (Rs cr/tpd) CrossCrossCrossCrossCross-ply-ply-ply-ply-ply RadialRadialRadialRadialRadial

Investment per tonne 2.5 5.0

(less) Accumulated depreciation 1 -

Net investment per tonne 1.5 5.0

Working capital per tonne 0.9 1.1

Total investments 2.4 6.1

Sales 4.7 5.7

Expenses 4.2 4.4

Operating profit 0.5 1.2

Depreciation 0.1 0.3

Interest cost 0.1 0.3

PBT 0.2 0.6

Tax 0.1 0.2

PAT 0.2 0.4

OPM (%) 10 21.5

RoE(%) 13.5 13.5

RoCE (%) 15.7 15.7

Margins to increase on account of high investment in radial tyres

Manufacturing of radial tyres is a far more capital-intensive than cross-ply. Investment

per tpd is 2x of cross-ply at Rs5cr/tpd. However, the selling prices of radial tyres are

about 20% higher than cross-ply tyres. Taking into account the difference in capital

requirements and consequent impact on asset turnover, interest costs and depreciation

to generate similar RoCE and RoE, the tyre companies would need to earn EBITDA

margins of about 21.5% as compared to about 10% being earned on cross-ply tyres.

This assumption also implies 5% higher operating expenses per tpd , in absolute

terms, for radial tyres. Thus, higher capital requirements will help protect margins

from upward-bound input costs, as the business model evolves bearing in mind final

RoEs rather than margins. With the sector set for a structural shift (higher investment

needs in radialisation) and apparent pricing flexibility will result in an improvement in

RoCE and RoE of tyre manufacturers going forward.

With a total tyre capacity of 823tpd as of FY2010, Kesoram is well equipped to ride

the buoyant auto industry. In FY2010, the company commissioned a 552tpd

green-field tyre capacity (including 140tpd T&B radial capacity) at Uttrakhand at a

capital outlay of Rs1,792cr. The company expects to increase T&B radial tyre capacity

by an additonal 85tpd in FY2011. Currently, the high-margin passenger car radial

(PCR) and T&B radial tyres constitute close to 17% of Kesoram's overall installed tyre

capacity, which is set to rise and touch 31% levels in FY2011.

Source: Angel Research

Currently, the high-margin passenger car

radial (PCR) and T&B radial tyres

constitute close to 17% of Kesoram's

overall installed tyre capacity, which is set

to rise and touch 31% levels in FY2011

Kesoram expects to increase its T&B radial

tyre capacity by an additonal 85tpd in

FY2011

With the tyre sector set for a structural

shift (higher investment needs in

radialisation) and apparent pricing

flexibility will result in an improvement in

RoCE and RoE of tyre manufacturers

going forward

Page 12: Kesoram Rayons

July 16, 2010 12

Kesoram Industries | Initiating Coverage

PPPPParticulars (tpd)articulars (tpd)articulars (tpd)articulars (tpd)articulars (tpd) FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E

BalasoreBalasoreBalasoreBalasoreBalasore 351351351351351 351351351351351

T&B cross-ply 271 271

Car radial 80 80

UttaranchalUttaranchalUttaranchalUttaranchalUttaranchal 552552552552552 637637637637637

T&B radial 140 225

Truck & farm tyre 317 317

LCV's & motor cycles 95 95

TTTTTotal capacityotal capacityotal capacityotal capacityotal capacity 823823823823823 988988988988988

Incremental capacityIncremental capacityIncremental capacityIncremental capacityIncremental capacity 552552552552552 165165165165165

Capex (Rs cr) 1,792 800

Investment per tpdInvestment per tpdInvestment per tpdInvestment per tpdInvestment per tpd 3.23.23.23.23.2 4.84.84.84.84.8

Exhibit 21: Tyre capacity addition

Source: Angel Research

Company Company Company Company Company FY10 FY10 FY10 FY10 FY10 FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E TBR % of TBR % of TBR % of TBR % of TBR % of

TBR TBR TBR TBR TBR OthersOthersOthersOthersOthers TBRTBRTBRTBRTBR OthersOthersOthersOthersOthers TBRTBRTBRTBRTBR OthersOthersOthersOthersOthers total FY12E total FY12E total FY12E total FY12E total FY12E

Apollo 18 832 78 872 270 930 22.5

CEAT - 400 100 400 100 400 20.0

JK 111 676 111 676 167 717 18.9

Kesoram 140 683 225 763 225 763 22.8

Exhibit 20: Break-up of tyre capacity

Source: Company, Angel Research; Note: TBR refers to T&B radial tyres

Exhibit 19: Increasing share of radial tyres in overall tyre capacity

Cross Ply Radial Radial as a (%) of total capacity

271

683 683 683

140

305 305

0.0

17.0

30.9 30.9

0

5

10

15

20

25

30

35

0

100

200

300

400

500

600

700

800

FY09 FY10 FY11E FY12E

(tpd)

(%)

Source: Company, Angel Research;Note: Radial tyres includes T&B radials and PCRs

Page 13: Kesoram Rayons

July 16, 2010 13

Kesoram Industries | Initiating Coverage

Financial Overview

Top-line to register 14.8% CAGR on strong volume in tyre segment

TTTTTyreyreyreyreyre

We expect the tyre business to be the primary contributor to the company's top-line

and account for 64% of overall revenues in FY2012E. Volumes of the segment are

estimated to increase on higher capacity utilisation. We expect capacity utilisation to

increase from 37% in FY2010 to 62% in FY2012E. Overall, the tyre business is

expected to register a CAGR of 22.0% over FY2010-12E, primarily on substantial

increase in sales volume.

Top-line of tyre business is expected to

increase on higher capacity utilisation

Source: Company, Angel Research

Exhibit 23: Tyre segment Revenue

1,755

2,850

3,438

4,242

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY09 FY10 FY11E FY12E

(Rs

cr)

CAGR of 22.0% over FY10-12E

Cement

The segment is expected to register muted growth in top-line due to marginal growth

in volume and decline in realisation. We estimate cement prices to remain under

pressure in FY2011E and expect it to improve slightly in FY2012E. As a result, we

expect the company's net realisation to decline at a CAGR of 0.8% over FY2010-12E.

However, we expect the company to clock moderate utilisation levels of 82% and 89%

in FY21011E and FY2012E, respectively. Thus, the division is estimated to post a

CAGR of 4.7% in net sales over FY2010-12E.

The segment is expected to register muted

growth in top-line due to marginal growth

in volume and decline in realisation

Source: Company; Angel Research

Exhibit 22: Revenue Mix

FY2010 FY2012E

Cement Tyre Others

43%

52%

5%

32%

64%

4%

Cement Tyre Others

Page 14: Kesoram Rayons

July 16, 2010 14

Kesoram Industries | Initiating Coverage

Bottom-line to log 13.1% CAGR

We expect the company to post 13.1% CAGR in bottom-line over FY2010-12E to

Rs303cr. The muted growth in Bottom-line as compared to operating profit is expected

on the back of higher depreciation, interest and tax expenses. Depreciation and

interest cost are set to register CAGR 22.8% and 58.7% over FY2010-12E respectively,

on high capex.

Operating profit to record CAGR of 15.3%

On the operating front, in FY2010, the tyre segment contributed 20.1% to overall

operating profits, which is expected to increase to a substantial 44.7% by FY2012E

with the division set to register a significant 54.8% CAGR in operating profit over

FY2010-12E. Thus, the company’s operating profit would register 15.3% CAGR over

FY2010-12E. Overall OPM would be impacted by the fall in cement realisations and

increase by a marginal 10bp during the period.

Source: Company, Angel Research

Exhibit 25: Segment-wise contribution to EBITDA

13.5%20.1%

48.0% 44.7%

79.5% 73.0%

43.7% 48.5%

7.0% 6.9% 8.3% 6.8%

0

20

40

60

80

100

FY09 FY10 FY11E FY12E

Tyre Cement Rayon & Others

(%)

Source: Company, Angel Research

Exhibit 24: Operating profit growth

566

632 659

840

0

100

200

300

400

500

600

700

800

900

FY09 FY10 FY11E FY12E

(Rs

cr)

Page 15: Kesoram Rayons

July 16, 2010 15

Kesoram Industries | Initiating Coverage

PPPPParticularsarticularsarticularsarticularsarticulars FY2005FY2005FY2005FY2005FY2005 FY2006FY2006FY2006FY2006FY2006 FY2007FY2007FY2007FY2007FY2007 FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010FY2010FY2010FY2010FY2010 FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E

Cement businessCement businessCement businessCement businessCement business

Installed capacity (mtpa) 2.9 2.9 4.6 5.3 5.3 7.3 7.3 7.3

Production (mtpa) 3.1 3.1 3.5 4.5 5.4 5.5 5.9 6.5

Capacity utilisation (%) 107.3 107.6 76.7 84.5 102.6 75.9 82.0 89.0

Sales quantity (mtpa) 3.1 3.1 3.5 4.5 5.4 5.4 5.9 6.5

Realisation per tonne (Rs) 2,046 2,321 3,280 3,720 3,723 3,323 3,010 3,055

TTTTTyre businessyre businessyre businessyre businessyre business

Installed capacity (mn tyres) 1.6 1.7 2.0 2.1 3.7 12.1 14.2 14.2

Production (mn tyres) 1.5 1.5 1.7 2.0 2.4 4.5 8.1 8.8

Capacity utilisation (%) 95.3 91.1 88.1 95.1 65.2 37.1 57.0 62.0

Sales quantity (mn tyres) 1.5 1.6 1.7 2.0 2.4 4.0 8.1 8.85

Exhibit 28: Key Assumptions

Source: Company, Angel Research

Return Ratios to remain moderate

We expect Kesoram's RoCE and RoE to remain stable going ahead, as most of the

capital expenditure in the tyre business would get converted into operating assets and

start contributing to earnings. We expect the company to clock moderate RoEs of

13.4% and 16.3% in FY2011E and FY2012E, respectively.

Source: Company, Angel Research

Exhibit 27: Margin trend

14.613.4

12.613.5

9.8

5.04.2

4.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY09 FY10 FY11E FY12E

Net Sales (LHS) OPM (RHS) NPM (RHS)

(Rs

cr)

(%)

Source: Company, Angel Research

Exhibit 26: Net Profit Performance

(Rs

cr)

379

237219

303

0

50

100

150

200

250

300

350

400

FY09 FY10 FY11E FY12E

Page 16: Kesoram Rayons

July 16, 2010 16

Kesoram Industries | Initiating Coverage

Slowdown in demand

Any slowdown in cement demand from the end user industries like housing, construction

and infrastructure would impact the company’s performance and our estimates.

Increase in input costs

The prices of commodities like rubber and other crude-related products, which bottomed

out towards end FY2009, have bounced back considerably since then. For instance,

the NYMEX crude prices have more than doubled from US $34/ barrel in February

2009 to around US $80 currently. The natural rubber prices have also increased to

Rs175/kg after bottoming out at Rs50/kg towards end FY2009. We believe that the

tyre manufacturers might not be able to fully pass on the full increase in the raw

materials costs. Hence, any substantial increase in the raw material costs would always

lead to margin erosion. The rising prices of coal, fuel, fly ash and other raw materials

used in the manufacture of cement will exert additional pressure on the margins of the

cement business.

Concerns

High debt/equity ratio

Kesoram had a debt-equity ratio of 2.2x in FY2010, which is a concern. However, by

FY2012E we expect the company to improve the debt/equity ratio to1.5x.

Source: Company, Angel Research

Exhibit 29: Proportion of debt, equity in total capital

38.3%31.6% 35.2% 40.6%

61.7%68.4% 64.8% 59.4%

0

10

20

30

40

50

60

70

80

90

100

FY09 FY10 FY11E FY12E

Equity Debt

(%)

Source: C-line, Angel Research

Exhibit 30: Natural rubber price trend

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Jan-

08

Mar-

08

May-

08

Jul-

08

Sep-0

8

Nov-

08

Jan-

09

Mar-

09

May-

09

Jul-

09

Sep-0

9

Nov-

09

Jan-

10

Mar-

10

May-

10

Collapseof price

Prices haverisen sharply again

(Rs/

10

0kg

)

Page 17: Kesoram Rayons

July 16, 2010 17

Kesoram Industries | Initiating Coverage

Outlook

Cement

We expect the industry to add around 42mn tonnes of capacity through FY2010-12E.

Such huge capacity additions would eventually result in an oversupply situation in the

market, while demand is not expected to keep pace with the supply. The southern

region, especially Andhra Pradesh, which has witnessed the highest capacity addition

is expected to continue to face low prices over the next few quarters. However, going

ahead, demand is expected to pick up in the region post the monsoons due to increased

government spending on irrigation and housing as the political situation in the state

has been improving. We expect this to augur well for Kesoram, which would register

better cement realisations from the latter part of 2HFY2011E onwards.

Tyre

India's growing auto sector is expected to drive a healthy 9% CAGR for tyres despite

the changing business economy (rising input costs) for the industry. Raw material

prices (rubber) are increasing, but we do not expect any significant impact on the

operating front, going forward. This is also supported by the fact that the tyre industry

has been operating at 90% capacity utilisation over the last 3-4 years, implying either

strong demand or constraints on the supply side, both of which would push up the

tyre prices. Taking cue from these signals the tyre makers are positive about sustained

improvement in demand on the back of which have been planning higher investments

for the next 2-3 years. We expect the excess demand situation to continue in turn

enabling the prices to remain at healthy levels.

Valuation

At current levels, the stock is available at attractive valuations of P/BV of 0.7x and EV/

EBITDA of 5x on FY2012 estimates. We have valued the company’s cement business

at EV/tonne of US $65 and the tyre business at Rs2cr/tpd, which implies EV/Sales of

0.5x at capacity utilisation of 62%. At our SOTP target price of Rs437, the stock would

trade at P/BV of 1.0x and EV/EBITDA of 5.7x on FY2012 estimates.

Page 18: Kesoram Rayons

July 16, 2010 18

Kesoram Industries | Initiating Coverage

Source: Company, Angel Research

Exhibit 32: One-year forward EV/EBITDA band

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

(Rs

cr)

3x 5x 7x 9x

Exhibit 31: SOTP Valuation (FY2012E)

SegmentsSegmentsSegmentsSegmentsSegments VVVVValuation Paluation Paluation Paluation Paluation Parameterarameterarameterarameterarameter (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr)

Cement 7.3mtpa x US $65/tonne 2,121

CPP 75MW x Rs4cr 300

Tyre 988 (tpd) xRs2cr 1,976

Rayon & Others 1x Mcap/sales 256

Enterprise VEnterprise VEnterprise VEnterprise VEnterprise Valuealuealuealuealue 4,6524,6524,6524,6524,652

Investments 30% discount to market value 203

Net Debt 2,858

Fair value 1,998

No. of shares (cr) 4.6

VVVVValue Palue Palue Palue Palue Per Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs) 437437437437437

CMP (Rs) 300

Upside PUpside PUpside PUpside PUpside Potential (%)otential (%)otential (%)otential (%)otential (%) 4646464646

Source: Angel Research

Source: Company, Angel Research

Exhibit 33: One-year forward EV/Sales band

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

(Rs

cr)

0.5x 0.75x 1x 1.25x

Page 19: Kesoram Rayons

July 16, 2010 19

Kesoram Industries | Initiating Coverage

Company Background

Kesoram Industries, established in 1919, operates under the two business segments

of cement and tyres. It is also involved in the manufacture and sale of other products

like rayon yarn, spun pipes, etc. The company's Vasavadatta cement plant at Sedam

in Karnataka has a capacity of 5.6mtpa, while the Karimnagar plant in Andhra Pradesh

has capacity of 1.7mtpa. Kesoram installed its first tyre plant at Balasore in Orissa in

1992, with a capacity of 10 lakh tyres per annum. In all, Kesoram's total tyre capacity

is expected to touch 998tpd in FY2012E.

Source: Company

Exhibit 34: Kesoram's business structure

Kesoram

CementRayon TP &Chemicals

Tyres

FY2010Sales - Rs260crEBIT - Rs14cr

FY2010Sales - Rs1,913cr

EBIT - Rs482cr

FY2010Sales - Rs2,850cr

EBIT - Rs46cr

Source: Industry, Angel Research

Exhibit 35: South India market share (FY2010)

India Cements Madras Cements Ultratech Cement ACC

Grasim Kesoram Others

18.9%

15.9%

10.4%

11.1%

2.2%

11.6%

30.0%

Source: Company, Angel Research

Exhibit 36: Timeline

1919 Company incorporated to manufacture textiles rayon yarn, cement spun

pipes and fire bricks. The first plant was set up in Hooghly, West Bengal

1969 Set up first cement plant (Kesoram Cement) at Karimnagar with 0.8mtpa

capacity

1986 New cement plant commissioned at Vasavadatta, Karnataka, with

0.5mtpa capacity

1992 In March, commissioned tyre plant in Balaosore, Orissa for the

manufacture of 10 lakh tyres per annum

1992-2010 Cement capacity was increased at both Kesoram Cement and Vasavadatta

2009 Greenfield tyre project of 552tpd capacity set up in Uttarakhand

Page 20: Kesoram Rayons

July 16, 2010 20

Kesoram Industries | Initiating Coverage

Source: Ministry of Finance

Sector-wise investment in PPP projects

SectorSectorSectorSectorSector TTTTTotal numberotal numberotal numberotal numberotal number V V V V Value ofalue ofalue ofalue ofalue of

of projectsof projectsof projectsof projectsof projects contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)

Airports 5 19,111

Education 1 93.3

Energy 24 17,111

Ports 43 66,499

Railways 4 1,602

Roads 271 102,005

Tourism 29 2,467

Urban Development 73 15,288

TTTTTotalotalotalotalotal 450450450450450 224,175224,175224,175224,175224,175

Source: Ministry of Finance

State-wise investment in PPP projects

State/Union TState/Union TState/Union TState/Union TState/Union Territoryerritoryerritoryerritoryerritory TTTTTotal numberotal numberotal numberotal numberotal number V V V V Value ofalue ofalue ofalue ofalue of

of projectsof projectsof projectsof projectsof projects contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)

Andhra Pradesh 63 39,279

Bihar 2 422

Chandigarh 14 15

Chhattisgarh 4 838

Delhi 9 10,877

Goa 2 250

Gujarat 27 18,712

Haryana 2 756

Jharkhand 6 681

Karnataka 95 39,492

Kerala 11 11,973

Madhya Pradesh 37 7,789

Maharashtra 285 34,026

Orissa 16 7,623

Pudducherry 2 2,286

Punjab 19 1,544

Rajasthan 49 5,253

Sikkim 24 17,111

Tamil Nadu 30 12,452

Uttar Pradesh 5 2,108

West Bengal 5 2,055

Inter-State 13 8,634

TTTTTotalotalotalotalotal 450450450450450 224,175224,175224,175224,175224,175

Annexure - I

Page 21: Kesoram Rayons

July 16, 2010 21

Kesoram Industries | Initiating Coverage

Profit & Loss Statement Rs crore

Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E

Gross salesGross salesGross salesGross salesGross sales 2,516 2,516 2,516 2,516 2,516 3,440 3,440 3,440 3,440 3,440 4,292 4,292 4,292 4,292 4,292 5,021 5,021 5,021 5,021 5,021 5,585 5,585 5,585 5,585 5,585 6,595 6,595 6,595 6,595 6,595

Tyre 1,112 1,389 1,947 2,850 3,438 4,242

Cement 1,156 1,719 2,051 1,913 1,902 2,097

Others 248 332 294 260 244 256

Less: Excise duty 312 451 411 300 348 369

Net SalesNet SalesNet SalesNet SalesNet Sales 2,204 2,204 2,204 2,204 2,204 2,990 2,990 2,990 2,990 2,990 3,882 3,882 3,882 3,882 3,882 4,721 4,721 4,721 4,721 4,721 5,237 5,237 5,237 5,237 5,237 6,226 6,226 6,226 6,226 6,226

Total operating income 2,204 2,990 3,882 4,721 5,237 6,226

% chg 36.6 35.6 29.8 21.6 10.9 18.9

Total Expenditure 1,820 2,334 3,315 4,088 4,578 5,386

Net Raw Materials 921 1,106 1,653 2,232 2,557 3,025

Other Mfg costs 473 584 784 1,049 1,012 1,179

Personnel 129 158 186 225 252 290

Other 297 486 692 582 757 892

EBITDEBITDEBITDEBITDEBITDAAAAA 385 385 385 385 385 656 656 656 656 656 566 566 566 566 566 632 632 632 632 632 659 659 659 659 659 840 840 840 840 840

Tyre 68 124 104 157 316 375

Cement 376 579 613 569 288 408

Others (4) 8 54 54 55 57

% chg 233.2 70.5 (13.6) 11.6 4.2 27.5

(% of Net Sales) 17.4 21.9 14.6 13.4 12.6 13.5

Depreciation& Amortisation 58 89 112 173 226 261

EBITEBITEBITEBITEBIT 326 326 326 326 326 566 566 566 566 566 455 455 455 455 455 459 459 459 459 459 433 433 433 433 433 579 579 579 579 579

% chg 444.3 73.6 (19.7) 1.1 (5.8) 33.8

(% of Net Sales) 14.8 18.9 11.7 9.7 8.3 9.3

Interest & other Charges 34 54 121 109 261 275

Other Income 49 40 76 125 120 100

(% of PBT) 14.3 7.3 18.5 26.3 41.1 24.7

Recurring PBTRecurring PBTRecurring PBTRecurring PBTRecurring PBT 342 342 342 342 342 553 553 553 553 553 410 410 410 410 410 476 476 476 476 476 292 292 292 292 292 405 405 405 405 405

% chg 322.3 61.7 (25.9) 16.1 (38.6) 38.5

PBT (reported)PBT (reported)PBT (reported)PBT (reported)PBT (reported) 342 342 342 342 342 553 553 553 553 553 410 410 410 410 410 476 476 476 476 476 292 292 292 292 292 405 405 405 405 405

Tax 76 169 30 238 73 101

(% of PBT) 22.3 30.6 7.4 50.1 25.0 25.0

PPPPPAAAAAT (reported)T (reported)T (reported)T (reported)T (reported) 266 266 266 266 266 383 383 383 383 383 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303

ADJADJADJADJADJ. P. P. P. P. PAAAAATTTTT 266 266 266 266 266 383 383 383 383 383 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303

% chg 452.9 44.3 (1.1) (37.4) (7.7) 38.5

(% of Net Sales) 12.1 12.8 9.8 5.0 4.2 4.9

Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs) 58 58 58 58 58 84 84 84 84 84 83 83 83 83 83 51.9 51.9 51.9 51.9 51.9 47.9 47.9 47.9 47.9 47.9 66.4 66.4 66.4 66.4 66.4

FFFFFully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs) 58 58 58 58 58 84 84 84 84 84 83 83 83 83 83 52 52 52 52 52 48 48 48 48 48 66 66 66 66 66

% chg 452.9 44.3 (1.1) (37.4) (7.7) 38.5

Page 22: Kesoram Rayons

July 16, 2010 22

Kesoram Industries | Initiating Coverage

Balance Sheet Rs crore

Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E

SOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDS

Equity Share Capital 46 46 46 46 46 46

Preference Capital - - - - - -

Reserves& Surplus 609 936 1,284 1,495 1,682 1,953

Shareholders FShareholders FShareholders FShareholders FShareholders Fundsundsundsundsunds 654 654 654 654 654 982 982 982 982 982 1,330 1,330 1,330 1,330 1,330 1,540 1,540 1,540 1,540 1,540 1,727 1,727 1,727 1,727 1,727 1,999 1,999 1,999 1,999 1,999

Minority Interest - - - - - -

Total Loans 873 1,215 2,142 3,341 3,175 2,925

Deferred Tax Liability 112 143 126 328 328 328

TTTTTotal Liabilitiesotal Liabilitiesotal Liabilitiesotal Liabilitiesotal Liabilities 1,640 1,640 1,640 1,640 1,640 2,340 2,340 2,340 2,340 2,340 3,598 3,598 3,598 3,598 3,598 5,210 5,210 5,210 5,210 5,210 5,230 5,230 5,230 5,230 5,230 5,252 5,252 5,252 5,252 5,252

APPLICAAPPLICAAPPLICAAPPLICAAPPLICATION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDS

Gross Block 1,676 1,895 2,718 4,514 4,514 5,214

Less: Acc. Depreciation 722 811 913 1,082 1,308 1,569

Net BlockNet BlockNet BlockNet BlockNet Block 954 954 954 954 954 1,084 1,084 1,084 1,084 1,084 1,804 1,804 1,804 1,804 1,804 3,432 3,432 3,432 3,432 3,432 3,206 3,206 3,206 3,206 3,206 3,645 3,645 3,645 3,645 3,645

Capital Work-in-Progress 151 635 865 413 800 100

Goodwill - - - - - -

InvestmentsInvestmentsInvestmentsInvestmentsInvestments 29 29 29 29 29 48 48 48 48 48 62 62 62 62 62 51 51 51 51 51 62 62 62 62 62 62 62 62 62 62

Current Assets 870 1,206 1,576 1,857 1,870 2,152

Cash 27 41 57 80 29 67

Loans & Advances 220 450 550 318 550 550

Other 623 715 969 1,459 1,291 1,535

Current liabilities 365 633 708 544 708 708

Net Current AssetsNet Current AssetsNet Current AssetsNet Current AssetsNet Current Assets 506 506 506 506 506 573 573 573 573 573 867 867 867 867 867 1,314 1,314 1,314 1,314 1,314 1,162 1,162 1,162 1,162 1,162 1,444 1,444 1,444 1,444 1,444

Mis. Exp. not written off - - - - - -

TTTTTotal Assetsotal Assetsotal Assetsotal Assetsotal Assets 1,640 1,640 1,640 1,640 1,640 2,340 2,340 2,340 2,340 2,340 3,598 3,598 3,598 3,598 3,598 5,210 5,210 5,210 5,210 5,210 5,230 5,230 5,230 5,230 5,230 5,252 5,252 5,252 5,252 5,252

Page 23: Kesoram Rayons

July 16, 2010 23

Kesoram Industries | Initiating Coverage

Cash Flow Statement Rs crore

Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E

Profit before tax 342 553 410 475 292 405

Depreciation 58 51 112 173 226 261

Change in Working Capital (155) (54) (263) (423) 101 (244)

Less: Other income 49 40 76 125 120 100

Direct taxes paid 71 136 64 36 73 101

Cash Flow from OperationsCash Flow from OperationsCash Flow from OperationsCash Flow from OperationsCash Flow from Operations 125 125 125 125 125 374 374 374 374 374 119 119 119 119 119 65 65 65 65 65 425 425 425 425 425 220 220 220 220 220

(Inc)/ Decin Fixed Assets (404) (703) (1,052) (1,345) (387) -

(Inc)/ Dec in Investments 0 (19) (14) 10 (10) -

(Inc)/ Dec in loans and advances - - - - - -

Other income 49 40 76 125 120 100

Cash Flow from InvestingCash Flow from InvestingCash Flow from InvestingCash Flow from InvestingCash Flow from Investing (354) (354) (354) (354) (354) (682) (682) (682) (682) (682) (990) (990) (990) (990) (990) (1,209) (1,209) (1,209) (1,209) (1,209) (278) (278) (278) (278) (278) 100 100 100 100 100

Issue of Equity - - - - - -

Inc./(Dec.) in loans 251 342 927 1,199 (166) (250)

Dividend Paid (Incl. Tax) 21 27 32 32 32 32

Others - - - - - -

Cash Flow from FCash Flow from FCash Flow from FCash Flow from FCash Flow from Financinginancinginancinginancinginancing 231 231 231 231 231 315 315 315 315 315 895 895 895 895 895 1,167 1,167 1,167 1,167 1,167 (198) (198) (198) (198) (198) (282) (282) (282) (282) (282)

Inc./(Dec.) in Cash 2 7 23 22 (50) 38

Opening Cash balancesOpening Cash balancesOpening Cash balancesOpening Cash balancesOpening Cash balances 25 25 25 25 25 27 27 27 27 27 34 34 34 34 34 57 57 57 57 57 80 80 80 80 80 29 29 29 29 29

Closing Cash balancesClosing Cash balancesClosing Cash balancesClosing Cash balancesClosing Cash balances 27 27 27 27 27 34 34 34 34 34 57 57 57 57 57 80 80 80 80 80 29 29 29 29 29 67 67 67 67 67

Page 24: Kesoram Rayons

July 16, 2010 24

Kesoram Industries | Initiating Coverage

Key Ratios

Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E

VVVVValuation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)

P/E (on FDEPS) 5.2 3.6 3.6 5.8 6.3 4.5

P/E (on basic, reported EPS) 5.2 3.6 3.6 5.8 6.3 4.5

P/CEPS 4.2 2.9 2.8 3.3 3.1 2.4

P/BV 2.1 1.4 1.0 0.9 0.8 0.7

Dividend yield (%) 1.5 2.0 2.3 2.3 2.3 2.3

EV/Sales 1.0 0.8 0.9 1.0 0.9 0.7

EV/EBITDA 5.7 3.8 6.0 7.3 6.8 5.0

EV / Total Assets 1.3 1.1 0.9 0.9 0.9 0.8

PPPPPer Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)

EPS (Basic) 58.1 83.8 82.9 51.9 47.9 66.4

EPS (fully diluted) 58.1 83.8 82.9 51.9 47.9 66.4

Cash EPS 70.8 103.3 107.4 89.7 97.3 123.3

DPS 4.6 5.9 7.0 7.0 7.0 7.0

Book Value 143.1 214.7 290.8 336.7 377.6 437.0

Dupont Analysis Dupont Analysis Dupont Analysis Dupont Analysis Dupont Analysis (%)

EBIT margin 17.4 21.9 14.6 13.4 12.6 13.5

Tax retention ratio 77.7 69.4 92.6 49.9 75.0 75.0

Asset turnover (x) 1.6 1.6 1.4 1.1 1.0 1.2

ROIC (Post-tax) 22.3 23.7 18.2 7.4 9.6 12.2

Cost of Debt (Post Tax) 3.5 3.6 6.7 2.0 6.0 6.8

Leverage (x) 1.1 0.9 1.2 1.7 1.8 1.4

Operating ROE 42.3 42.8 31.6 16.4 16.1 20.0

Returns (%)Returns (%)Returns (%)Returns (%)Returns (%)

ROCE (Pre-tax) 25.4 30.4 16.0 11.0 8.8 11.8

Angel ROIC 24.4 29.5 15.8 10.7 8.5 11.3

ROE 49.6 46.9 32.8 16.5 13.4 16.3

TTTTTurnover ratios (x)urnover ratios (x)urnover ratios (x)urnover ratios (x)urnover ratios (x)

Asset Turnover (Gross Block) 1.5 1.7 1.7 1.3 1.2 1.3

Inventory / Sales (days) 52 50 48 58 59 51

Receivables (days) 36 32 31 36 36 32

Payables (days) 61 78 74 56 50 48

Working capital cycle (ex-cash) (days) 80 79 74 91 94 85

Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)

Net debt to equity 1.2 1.2 1.5 2.1 1.8 1.4

Net debt to EBITDA 2.1 1.7 3.6 5.1 4.7 3.3

Interest Coverage (EBIT / Interest) 9.7 10.5 3.8 4.2 1.7 2.1

Page 25: Kesoram Rayons

Kesoram Industries

Disclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest Statement KKKKKesoramesoramesoramesoramesoram

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

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decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

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risks of such an investment.

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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have

investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Ratings (Returns) :

Page 26: Kesoram Rayons

Kesoram Industries

Research Team

Fundamental:

Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]

Vaibhav Agrawal VP-Research, Banking [email protected]

Vaishali Jajoo Automobile [email protected]

Shailesh Kanani Infrastructure, Real Estate [email protected]

Anand Shah FMCG , Media [email protected]

Deepak Pareek Oil & Gas [email protected]

Sushant Dalmia Pharmaceutical [email protected]

Rupesh Sankhe Cement, Power [email protected]

Param Desai Real Estate, Logistics, Shipping [email protected]

Sageraj Bariya Fertiliser, Mid-cap [email protected]

Viraj Nadkarni Retail, Hotels, Mid-cap [email protected]

Paresh Jain Metals & Mining [email protected]

Amit Rane Banking [email protected]

Jai Sharda Mid-cap [email protected]

Sharan Lillaney Mid-cap [email protected]

Amit Vora Research Associate (Oil & Gas) [email protected]

V Srinivasan Research Associate (Cement, Power) [email protected]

Aniruddha Mate Research Associate (Infra, Real Estate) [email protected]

Mihir Salot Research Associate (Logistics, Shipping) [email protected]

Chitrangda Kapur Research Associate (FMCG, Media) [email protected]

Vibha Salvi Research Associate (IT, Telecom) [email protected]

Pooja Jain Research Associate (Metals & Mining) [email protected]

Technicals:

Shardul Kulkarni Sr. Technical Analyst [email protected]

Mileen Vasudeo Technical Analyst [email protected]

Derivatives:

Siddarth Bhamre Head - Derivatives [email protected]

Jaya Agarwal Derivative Analyst [email protected]

Institutional Sales Team:

Mayuresh Joshi VP - Institutional Sales [email protected]

Abhimanyu Sofat AVP - Institutional Sales [email protected]

Nitesh Jalan Sr. Manager [email protected]

Pranav Modi Sr. Manager [email protected]

Sandeep Jangir Sr. Manager [email protected]

Ganesh Iyer Sr. Manager [email protected]

Jay Harsora Sr. Dealer [email protected]

Meenakshi Chavan Dealer [email protected]

Gaurang Tisani Dealer [email protected]

Production Team:

Bharathi Shetty Research Editor [email protected]

Simran Kaur Research Editor [email protected]

Bharat Patil Production [email protected]

Dilip Patel Production [email protected]

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.

Tel : (022) 3952 4568 / 4040 3800

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302