Cement Thematic | March 2016 At the break of a new dawn Sandipan Pal ([email protected]); +91 22 3982 5436 Aashumi Mehta ([email protected]); +91 22 3010 2397 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
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Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
March 2016 2
Cement | At the break of a new dawn
Contents At the break of a new dawn .................................................................................................. 3
Story in charts ....................................................................................................................... 5
Emerging from multi-decadal low growth period .................................................................. 8
Strategic investments of past key to competitive resilience................................................ 17
ID-IS positive after a decade; pricing power over FY18-19 .................................................. 21
North to deliver 1.5-2x higher expansion in return ratios ................................................... 30
Subsiding downgrade risk to aid 30%+ EBITDA CAGR .......................................................... 34
At the break of a new dawn Confluence of multiple drivers after decade-long hiatus
The cement sector is emerging from a period of multi-decadal low growth (3% CAGR over FY13-16). Credible signs of infra pick-up should boost growth to 6% in FY17.
‘Incremental Demand – Incremental Supply’ (ID-IS) is returning to positive zone after a decade with capex cycle getting over, making a case for pricing power over FY18-19.
Early cycle of growth could be competitive with surplus capacity at 3.5x incremental demand. Strong growth headroom and access to critical resources would be the sources of competitive advantage.
Prefer cost leaders (to price-leverage stories) with higher operating flexibility and lower vintage risk. Logistics and regulatory hurdles key to incremental cost leadership.
North players to deliver 1.5-2x higher expansion in return ratios and earnings. Weakened B/S, credible recovery and better ID-IS aid stronger pricing outlook there.
Subsiding downgrade risk to aid 30%+ EBITDA CAGR over FY16-18. Play on quality, but keep an eye on entry valuations. Prefer UTCEM and SRCM in large caps, and JKCE and JKLC (North-centric) in midcaps.
Emerging from multi-decadal low growth; northern half to lead: The weakest phase of growth sub-normalcy (FY13-16, with 3% CAGR) seems behind, with credible signs of pick-up in infrastructure. Acceleration in 1/3rd of demand drivers (roads, rail, irrigation and low cost housing) should boost growth to 6% in FY17. We find stronger immediate growth drivers in place for North-Central-East India, followed by the West. Southern recovery should be gradual over 12-18 months.
Strategic investments during downturn key to competitive resilience ahead: The early phase of growth could turn out to be competitive, as surplus capacity stood at 3.5x incremental demand in FY17. Expanding players in MOSL coverage universe gained 6pp market share in the past 18 months. Market share gains would be contingent on (a) high utilization headroom created, (b) better reach led by low cost structure, and (c) strong institutional client mix to garner infra demand. With mounting entry barriers, long-term scalability and sustainability hinge on the level of preparedness (access to critical resources and funding), and ability to acquire costly resources. On growth visibility, we rate UTCEM, SRCM, JKLC, JKCE and DBEL higher.
Positive ID-IS makes a case for pricing power over FY18-19: ‘Incremental Demand – Incremental Supply’ (ID-IS) is returning to positive zone after a decade, as the capex cycle is nearing a pause. It makes a case for strong pricing power over FY18-19 after a modest trajectory in FY17. Cement companies gained on scale (3x) and strength (net worth, EBITDA up 5-10x) over the previous peak and ex-South utilizations are approaching the sweet zone of 85-90% (FY18). Yet, the presence of counter-balancing forces (consumption pattern, utilization disparity, de-consolidating M&A) may keep pricing trajectory less superlative to the previous up-cycle.
Logistics and regulatory hurdles key to incremental cost leadership: The period of hyperinflation in FY10-15 is behind, with (a) input commodities in deflationary zone, and (b) cement manufacturers already capturing production efficiencies significantly in the last 5-6 years. Going forward, incremental cost advantage would hinge on (a)
focus on logistics, material handling, and distribution management, (b) ability to combat regulatory risk (auction of critical resources like linkage coal, limestone, etc), and (c) lower vintage risk in plants with more operational flexibility (viz. fuel mix). We would prefer cost leaders over price-leveraged bets.
North to deliver 1.5-2x higher expansion in return ratios: Tangible signs of growth sustenance and favorable ID-IS render better pricing trajectory in North-Central, followed by West. Debt servicing ability of North-based players waned significantly in FY16. While not necessarily sufficient, this is a strong reason for better pricing rationality. North-Central players in MOSL universe should deliver 1.5-2x higher expansion in return ratios and earnings growth over FY16-18 v/s southern peers.
Subsiding downgrade risk to aid 30%+ EBITDA CAGR: Downgrades risk is waning with strengthening demand and price outlook. MOSL cement universe is poised for 30%+ EBITDA CAGR over FY16-18. However, valuations are back to premium zone, with rising credentials on (a) earnings inflection, and (b) upswing in FCFE and return ratios almost after a decade. Focus on quality (Sustainable, Profitable and Predictable growth), but keep an eye on entry valuations. Prefer UTCEM, SRCM and northern stocks (JKCE, JKLC). RAMCO, though expensive, is best bet for south.
Exhibit 8: Stronger investments (FY13-15) in land & limestone key for sustainable scalability ahead
Source: Company, MOSL
5.6
5.6
4.1 4.3
3.7 4.0
3.8
3.4
4.9
6.5
5.6 6.
4 6.
3 4.
8 3.
4 1.
9 2.5
1.5 2.
6 3.7
Jan-
13M
ar-1
3M
ay-1
3Ju
l-13
Sep-
13N
ov-1
3Ja
n-14
Mar
-14
May
-14
Jul-1
4Se
p-14
Nov
-14
Jan-
15M
ar-1
5M
ay-1
5Ju
l-15
Sep-
15N
ov-1
5Ja
n-16
Mar
-16
Growth TTM (%)
4 6 7 5 7 4 10 5 3 7 12 15 4 10-12
15 8 12
-24
8
FY00-05 FY05-10 FY10-15 FY15-17E FY17-20E
Rural Housing Urban HousingInfrastructure Commercial & ind. capexPan India
-10%
-3%
5%
13%
20%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
North East West South Central
80 80 72 60 67 75 70 55 60 55 65
20 20 28 40 33 25 30 45 40 45 35
ACC
Ambu
ja
ICEM
SRCM
UTC
EM
Orie
nt
RAM
CO JKLC
DBEL
JKCE
Indu
stry
Trade Non-Trade
11 11
2
16 17 9
5 1 1 0
4
15 18
10 6 4 6
22
5
36 44
34
UTC
EM
SRCM AC
C
ACEM
ICEM
Bcor
p
JKCE
Ram
co
Dalm
ia
JKLC
Orie
nt
Land as % of capexCapex as % of gross block
6 10
5 5
9
March 2016 6
Cement | At the break of a new dawn
Story in charts
Exhibit 9: Strong phase of capex cycle is largely behind
Source: Company, MOSL
Exhibit 10: Strong correlation between “Incremental demand over supply” (ID-IS) and price power
Source: Company, MOSL
Exhibit 11: However regional utilization disparity one of factor against superlative pricing trajectory (%)
Source: Company, MOSL
Exhibit 12: Till visibility on quantum of price trajectory, we stick to cost leaders with lesser exposure to regulatory and vintage risk. Comparative total cost and inflation
Source: Company, MOSL
Exhibit 13: Regional net debt/ EBITDA (x): Along with better demand and ID-IS, weakened B/S would aid further rationality to north pricing
Source: Company, MOSL
Exhibit 14: Trend in EV/EBITDA (x): Valuations are back in premium zone with credible greenshoots
Source: Company, MOSL
5 7 8 4 8 23
29
32
40
25
22
17
21
17
16
13
5% 5% 6%3%
5%
14% 16% 16%
19%
11% 9%
7% 8%6% 6%
4% (1
%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
Effective Cap. addition (MT) % of demand
-10 -6
4 -1
0 13 5
-10
-15
-13
-30
-10 -8 -13
-12 -7 -1
10
-19
3
-22
7 16
57
15
-13
18
-29
17 15
-26
0 -1
20 28
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
EFY
17E
FY18
E
ID - IS in mt (LHS) Change in EBITDA/t (%)
40%
60%
80%
100%
120%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
EFY
17E
FY18
EFY
19E
FY20
E
South Ex-south
1% 0% -1% -2%
-4%
-1%-2% -3%
-7%
-3%
-6%
2%
0
1,200
2,400
3,600
4,800
ACC
ACEM
UTC
EM
SHRE
E
JKCE
JKLC
BCO
RP
PRIS
M
DALM
IA
ICEM
RAM
CO
ORI
ENT
Direct Cost (INR/t) Indirect cost (INR/t)Inflation (FY16) RHS
0.3 0.2
1.0 0.6 0.8
2.3 2.1 2.0 1.9
0.3 0.4
1.1 1.2 1.3
3.7 4.1
4.8 4.3
2.1
3.1 3.8
3.2 3.4
4.9 5.4
4.2
2.8
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
North Ex-SRCM South
0
6
12
18
24
Jan-
04
Mar
-05
Apr-
06
May
-07
Jun-
08
Aug-
09
Sep-
10
Oct
-11
Nov
-12
Jan-
14
Feb-
15
Mar
-16
Large cap (Ex SRCM) MidCap
March 2016 7
Cement | At the break of a new dawn
Story in charts
Exhibit 15: As capex cycle ends, return ratio and margins to recover from low – a positive trajectory after a decade
Source: Company, MOSL
Exhibit 16: FCFE to improve meaningfully as capex cycle is largely over, barring select M&As (INR b)
Source: Company, MOSL
Exhibit 17: Weighted average ratings for cement companies under coverage based on 5-parameters framework ACC ACEM UTCEM SHREE BCORP DALMIA ICEM JKCE JKLC Ramco ORIENT PRISM
Intersection of Quality and Comfort quadrant offer
ideal entry avenues
Qualitative parameters
Valu
atio
n pa
ram
eter
s
VALUE QUADRANT
QUALITY QUADRANT
COMFORT QUADRANT
March 2016 8
Cement | At the break of a new dawn
Emerging from multi-decadal low growth period Credible signs of revival; Northern half to lead demand acceleration
Weakest period of growth (FY13-16 with CAGR of 3%) seems behind, with crediblesigns of pick-up in infrastructure.
Tangible acceleration in 1/3rd of demand drivers should boost growth to 6% in FY17. We find stronger immediate growth drivers in place for North-Central-East, followed
by West. Southern recovery should be gradual over 12-18 months.
Emerging out of weakest phase; conviction on sustenance of recovery The cement sector is emerging from a period of multi-decadal low growth (3% CAGR over FY13-16 versus long-term average of ~8%). In past two years, there were instances of intermittent positive signs of recovery which failed to sustain albeit. However our conviction on sustenance of recovery hereon stems from (a) credible pick-up in infrastructure spending since December 2015 (especially in roads and low cost housing), (b) stabilization of rural/housing crackdown, (c) imminent recovery in Andhra Pradesh (AP), and (d) low base effect.
Exhibit 19: Growth is bottoming out; sector now scouting for sustainable recovery
Source: IIP, MOSL
Growth trajectory hard to predict, but ~6% likely in FY17 There is rising momentum in roads (8-9% mix), irrigation, railways and low cost housing (12-15%). Therefore, initial recovery is likely to be driven by 1/3rd of drivers (Exhibit 21), which should boost growth to ~6% in FY17. It is improbable that growth picks up to near double digit without improvement or stabilization in larger drivers – rural (30-35%) and urban housing (15-20%). We anticipate return of 8-9% normalcy in FY18 (Exhibit 20) once non-infra legs start contributing positively.
6.2
5.6
5.7
5.6
4.7
4.1
3.9 4.3
4.2
3.7 4.
3 4.
0 3.
9 3.
8 3.
3 3.
4 4.0 4.
9 6.1 6.5
5.8
5.6 6.
2 6.4
6.3
6.3
5.6
4.8
4.3
3.4
2.2
1.9
1.5 2.
5 1.
6 1.
5 2.2 2.6 3.
7
Jan-
13Fe
b-13
Mar
-13
Apr-
13M
ay-1
3Ju
n-13
Jul-1
3Au
g-13
Sep-
13O
ct-1
3N
ov-1
3De
c-13
Jan-
14Fe
b-14
Mar
-14
Apr-
14M
ay-1
4Ju
n-14
Jul-1
4Au
g-14
Sep-
14O
ct-1
4N
ov-1
4De
c-14
Jan-
15Fe
b-15
Mar
-15
Apr-
15M
ay-1
5Ju
n-15
Jul-1
5Au
g-15
Sep-
15O
ct-1
5N
ov-1
5De
c-15
Jan-
16Fe
b-16
Mar
-16
Growth TTM (%) Growth bottoming out at 2% in 3QFY16; multiple signs for sustenance of
recovery
Bigger cogs of wheel need to stabilize for infra-led
growth sustainability
Exhibit 20: Broad based support key to demand normalization
Source: MOSL
4 6 7 5 7 4 10 5 3 7 12 15 4 10-12 15 8 12
-24
8
FY00-05 FY05-10 FY10-15 FY15-17E FY17-20E
Rural Housing Urban Housing InfrastructureCommercial & ind. capex Pan India
6 10
5 5
9
March 2016 9
Cement | At the break of a new dawn
A
Exhibit 21: Growth acceleration to come from infra-led demand drivers
Greenshoots of stabilization in weak links The negativity of rural and urban housing crackdown is yet to assuage. However, there are some factors that could make the pain easing off.
Rural: Benefits of populist budget, pay commission and La Nina Decline in rural spending was due to a confluence of multiple adversities: (a) deceleration of wage growth, (b) low (or no) hike in MSP, and (c) consecutive years of weak monsoon. The following support expectation of stabilization: (a) Populist fiscal boost to rural demand: In its latest union budget, the government hasannounced several measures aimed at rural India (Exhibit 23). Cabinet had givenapproval for the implementation of the rural housing scheme of PMAY with capitaloutlay of INR820b over FY17-19 for 10m rural households.(b) Pay commission: The latest pay commission would benefit over 5m employees,driving up housing demand, and boosting savings and discretionary consumption.(c) Probability of better monsoon in FY17: There is no instance of three consecutivedroughts in 100 years (La Nina phenomenon could emerge in 2016).
Exhibit 22: No instances of three consecutive years of deficit monsoon; La Nina could emerge in CY16
Source: MET, MOSL
Exhibit 23: Flagship rural schemes to receive higher budgetary allocation
Source: Budget data, MOSL
Rural Housing Urban housing
Industrial capex
Power Irrigation
Commercial RE
Railways and Metros
Road
0
10
20
30
40
0 4 8 12 16
-25
-11
3
17
31
1901
1907
1913
1919
1925
1931
1937
1943
1949
1955
1961
1967
1973
1979
1985
1991
1997
2003
2009
2015
Rainfall (% Departure) Deficient Excess
51 151 53
337
136 54 190
57
385
197
RKVY + Soilhealth card
PMGSY PMKSY MNREGA IAY
FY16 Budget (INR b) FY17 Budget(INR b)
Initial growth to come from 1/3rdof the drivers, others
to post gradual support
Better monsoon, populist budget and pay commission
support expectation of stabilization
Growth Outlook (%)
Dem
and
cont
ribut
ion
(%)
March 2016 10
Cement | At the break of a new dawn
B
East and Central India offer better rural resilience: Present monsoon adversity is lower in the East, parts of North and Central India, and Gujarat. The East and the South have posted the highest rural wage growth (firm and non-firm) over the past five years. In agriculture GSDP, East, Central and South India scored better over the same period (Exhibit 25). East and Central India account for ~61% of rural housing shortage (Exhibit 29) and 65% of kutcha-to-pucca house conversion need (Exhibit 24), and thus, render visibility of higher government scheme-related demand. Eastern India has been major a beneficiary (~50% of the total) of housing construction under Indira Awas Yojana (IAY) over the past 4-5 years, which is likely to continue. Government allocated INR82b for next 3 years for rural housing.
Exhibit 24: Regional contribution to pukka conversion
Source: Planning commission, MOSL
Exhibit 25: Agri GSDP & wage CAGR in past five years (%)
Source: State Budget, MOSL
Urban housing: Government impetus to low cost key In urban housing (25-30% contribution), private real estate, which accounts for half of cement demand, is reeling under multiple challenges – poor demand and affordability, liquidity stress, unsold inventories, etc – as evident in declining loan growth (Exhibit 26 and 27). Government efforts to curb black money and real estate bill could cut down transactions further over near-term. However, the government’s target to reduce housing shortage is gaining traction (East and Central India now, and AP/Telangana, Maharashtra and North India in coming days). Growing use of precast technology would be beneficial, as it increases cement intensity in housing.
Exhibit 26: Home loan growth of key lenders: Quantum of growth declined significantly (%)
Source: HFC, MOSL
Exhibit 27: Bank credit to developers has been underperforming overall credit growth (%)
Source: RBI, MOSL
East 45%
South 17%
Central 20%
West 11%
North 7%
4.6
3.1 3.4
6.8
0.5
4.6 4.0
1.2 1.9
8.6
6.3
4.8 3.8
1.4
5.7
Firm Non-firm CAGR Agr-GSDP
North East West South Central
0
10
20
30
40
50
Q1
2008
Q3
2008
Q1
2009
Q3
2009
Q1
2010
Q3
2010
Q1
2011
Q3
2011
Q1
2012
Q3
2012
Q1
2013
Q3
2013
Q1
2014
Q3
2014
Q1
2015
Q3
2015
Q1
2016
Q3
2016
-8
0
8
16
24
Jan-
12M
ar-1
2M
ay-1
2Au
g-12
Oct
-12
Jan-
13M
ar-1
3Ju
n-13
Aug-
13N
ov-1
3Ja
n-14
Apr-
14Ju
n-14
Sep-
14N
ov-1
4Ja
n-15
Apr-
15Ju
n-15
Sep-
15
RE loans growth Gross credit growth
Traditional real estate reeling under pressure; low
cost housing gaining sporadic momentum
Regional growth of rural development budget (INR b)
179 299
238 493 90 205
346 695
229 213
XI plan XII plan
CentralSouthWestEastNorth
March 2016 11
Cement | At the break of a new dawn
Government spending under ‘Housing for All by 2022’ could create strong cement demand (estimated at 278mt, >1x annual demand) over its execution horizon (Exhibit 28). The East and Central states account for 51% of the total housing shortage in India. While we understand that implementation of this project would carry challenges viz. land acquisition & approvals, lack of private participation, and needs 8-10x scale-up in execution, it could contribute 5-10pp of incremental growth in the East and Central markets, assuming 10-15years of horizon (Exhibit 30).
Exhibit 28: Cement demand potential from ‘Housing For All’ initiative Urban
Housing shortage (m)
Rural Housing
shortage (m)
Total shortage
(m)
House area (500sf/ house)
Cement usage
0.1bag/sf
Cement required
(mt)
Annual demand
(mt)
North 8 9 17 8,500 850 43 54
East 10 20 29 14,650 1,465 73 51
South 13 9 22 11,050 1,105 55 56
West 8 8 16 7,750 775 39 55
Central 8 20 27 13,650 1,365 68 46
India 46 65 111 55,600 5,560 278 262
Exhibit 29: Housing shortage – East and Central India stand out with maximum contribution to shortage (%)
Source: Industry, MOSL
Exhibit 30: Sensitivity of incremental regional demand growth from ‘Housing For All’ initiative (%)
Source:Industry, MOSL
Roads: Visibility for double-digit growth; North-Central-West at forefront Strongest momentum is visible on the ground, with investment plan of ~USD78b (INR5t) for the next five years. The segment is poised for 3-5x scale-up in investment (INR700b-750b v/s INR250b now) and execution (from 5-6km/day now to 30km/day – already reached 10-12km/day) over the next three years. It implies ~20% CAGR(inflation-adjusted) even at ~70% of planned budget. After 3x (YoY) pick-up inproject award in FY15, momentum was largely flattish in FY16. In the Union Budget,road capex for FY17 has been planned at INR1.03t (49% growth over FY16RE).10,000km of national highways would be awarded in FY17 and 50,000km of statehighways would be taken up for upgradation to national highways.
Seamless execution pick-up is probable, given (a) EPC contract is the preferred way to kick-start execution, (b) land acquisition risk is largely mitigated at the initial stage itself, and (c) various policy incentives (faster clearance, hybrid model, better financial exits) to entice private participation. The northern, central and western
North East South West CentralIncremental growth in
demand (%) based on 10/15 years of execution period
“Housing for All” aids demand potential of>1x present annual cement
demand
East and Central India account for 51% of the total
housing shortage in India
Traction and policy initiatives likely to drive
double-digit growth sustainability and gradual
private participation in roads
C
March 2016 12
Cement | At the break of a new dawn
states account for 70-75% of the ongoing execution under NHAI. The East has the lowest proportion of roads surfaced (Exhibit 31) and is catching up gradually, with ~34% of total non-NHAI projects to be awarded at this moment. Government spending would see a significant rise in North-Eastern states, with ~INR30b likely to be allocated to provide road connectivity of 6,000km+ over medium-term.
Concretization a game changer: 75-80% of NHAI’s recent road contracts are concrete-based. The recent release of almost 4,000km of stalled projects (of 8,600km) is also aimed for concretization. Cement intensity for concrete roads is almost 4x that of bitumen roads (400-500 tons per km per lane). Though concrete roads involve high initial capex (recent road orders cost at 1.5-1.6x earlier orders), they enjoy the benefits of lower maintenance and longevity.
Exhibit 31: Shortage in road surfaced (%)
Source: Planning commission, MOSL
Exhibit 32: Road project awards – execution trending up
Source: NHAI, MOSL
Exhibit 33: North, central and west aid 70-75% of NHAI projects under execution
Source: NHAI, MOSL
Exhibit 34: Region-wise distribution of non-NHAI road projects awarded (%)
Source: Road Ministry, MOSL
Railways: Planned scale-up of 2-3x; aids mid-teen growth A 2-3x scale-up is planned in investments in rail and metro rail projects over the next five years. Government-planned investment in railways is USD137b (INR9t) over FY15-19 (2.5x actual XIth plan spending, which was 90% of budget). Planned outlay for FY17 is US1.2t (24% higher than in FY16). It signifies mid-teen CAGR over the next five years, though progress has been modest so far. Overall, the northern, central and western regions have larger share of planned investments in rail: a) Dedicated Freight Corridor (DFC)—USD13b capex
78 43 66 85 71 65
53% 51%
95% 96%
76% 71%
North East South West Central India
Road surfaced/total road (%) Surfaced /state size
1305
4663
1735
1234
643
3360
5053
6380
1116
1435
4500
4500
6000
2351
753
635 16
82
2205
2693
1784
2248
1704
1925
2200
2000
3000
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
Project awards Completed
35% 22%
18% 20%
18% 24%
6% 16%
22% 18%
EPC PPP
North South East West Central
North, 30%
South, 5%
East, 34%
West, 28%
Central, 3%
D
March 2016 13
Cement | At the break of a new dawn
b) Connectivity within North-East states—USD5b capexc) High-speed railway corridor—Delhi-Mumbai and Delhi-Kolkatad) Bullet train in Mumbai-Ahmadabad and other GQ route subsequentlye) Coastal connectivityf) 9,400km of 2x-4x line works covering almost all states
The Dedicated Freight Corridor (DFC) is expected to consume total 18-20mt till 2021and would benefit nine states. Total capex stands at USD13b (INR800b), of which 16-17% has been incurred. The target to commission the eastern corridor is FY20-21 and the western corridor is FY18-19. However, progress is stronger in the eastern corridor compared to the western corridor (Rajasthan patch going well, while there is commercial dispute in the Maharashtra patch).
Exhibit 35: State-wise split for proposed DFC network…
Source: DFCC, MOSL
Exhibit 36: …shows highest benefits to North & Central
Source: DFCC, MOSL
Regional blend of metro projects: Investments to start/expand metro networks in Delhi, Jaipur, Lucknow and NCR (North), Nagpur and Ahmedabad and Mumbai (West) account for ~55% of total planned metro investment. The 400km Delhi Metro consumed 8mt cement. The 72km Hyderabad Metro (INR163b) consumed 2.6mt. Therefore, the potential demand from upcoming projects could be 20-25mt over the next 5-7 years. Based on industry interactions and various media updates, ~INR2,640b (USD40b-45b) worth of metro projects are likely to be executed over the next 9-10 years.
Irrigation: Mid-single digit growth; South and West major drivers Irrigation is largely state funded. Spending by states was up 1.8x (INR4,000b) between FY12-17 compared to the XIth plan. Average slippage in budget was ~80% with minimal slippage in west and south and maximum in east and central. Four states in the South and West (AP, Gujarat, Maharashtra and Karnataka) account for ~52% (v/s 66% in 11th plan) of total outlay (Exhibit 37). The Polavaram project in the South (INR160b over four years) would be a near-term contributor. However, the eastern and central states have shown the highest (125-185%) increase in irrigation budget. Assuming similar slippage like the 11th plan (actual was 70-85% of budget), there could be 8-9% irrigation-led consumption growth in East and Central India, and low-single digit growth in the West and South. The East and West have the lowest proportion of agricultural land under irrigation.
PUN, 88 HAR, 264
RAJ, 553
Gujarat, 588
MH, 150
UP, 1049
Bihar, 93
WB/JHK, 538
1.5
2.7
1.7 1.9
East Central West North
Incremental annual demand from DFCC (%)
DFC progress is stronger in eastern corridor compared
to western
While four southern and western states account for
52% of the irrigation budget, the highest
increase in budget is for East and Central India
E
March 2016 14
Cement | At the break of a new dawn
Power: Limited contribution to growth The power sector is expected to see flattish trend, with new thermal power capacity addition of 76-80GW over FY15-20 v/s 80GW in FY10-15. East and Central India would account for 64% of planned addition over FY14-19. Hydel power (higher cement intensity of 15-18% v/s 6-7% in thermal power) might see good growth in the North East. Given rising focus of the government on renewable power, incremental capex in power generation would be towards wind and solar power projects, which have lower cement intensity.
Exhibit 37: State budget of irrigation scale-up (INR b)
Source: Planning commission, MOSL
Exhibit 38: East and Central account for 64% of planned TPP
Source Industry, MOSL
Industrialization would benefit North West belt and AP the maximum Delhi-Mumbai Industrial Corridor (DMIC): The ambitious USD90b+ project covers ~1,500km between Delhi and Mumbai (Rajasthan and Gujarat account for 75-80% of the corridor). DMIC aims to expand India’s manufacturing and services base and develop a global manufacturing and trading hub. It proposes to incorporate nine mega industrial zones of 200-250 square kilometers, high-speed freight line, three ports, six airports, a six-lane intersection-free expressway connecting Mumbai and Delhi, and a 4,000MW power plant. Execution is moving at snail’s pace, but once it accelerates, the North and West corridors would get a better boost.
Amravati—the new capital of Andhra Pradesh: Developments in Amravati would provide AP with next leg of construction boost. However on the back of weak state balance sheet, the execution is expected to be gradual. The city would be situated in the Vijayawada-Guntur region. About USD75b would be spent, with expected timeline for phase-I completion by June 2018, provided funding arrangement is done on time. Smart cities: The government has allocated INR480b to the smart city project for the next five years—INR2b in the first year to each selected city and INR1b subsequently each year for the next three years. We note that pace of implementation has been weaker than initial expectation, and remains futuristic. State-wise, Uttar Pradesh has the highest number of smart cities planned; region-wise, the South has the highest number of smart cities planned.
144 247 328 942
690 1000
833 1286
258 574
XI plan XII plan
Central
South
West
East
North
North, 5%
South, 18%
East, 46%
West, 13%
Central, 18%
Despite anemic progress, North, South and West will
get maximum benefits when urbanization kicks in
F
G
March 2016 15
Cement | At the break of a new dawn
North-Central and East regions to lead growth pace We are region-agnostic for the long term, but for the next 2-3 years, we expect variance in regional growth trends (north-central-east growing higher) to continue due to strong underlying fundamental drivers. In Exhibit 39, we rate regional growth outlook for the next 2-3 years, based on: a. Regional intensity of demand drivers,b. Near-term recovery probability of demand avenues (used as weight), andc. Political equations in states (key to various infrastructure decisions).
The outcome of this exercise suggests that the East, Central and North India markets will be better-growing. The West would catch up once industrial activity picks up and rural concerns in Maharashtra recede. Likelihood of AP/Telangana recovery by mid-CY16 provides a silver lining to the de-growing South, though partially offset by weaker immediate outlook in other states (TN, Karnataka and South Maharashtra).
Exhibit 39: We rate demand outlook by evaluating key parameters in scale of 5 Key drivers North East West Central South Rural Housing 3 5 2.5 4 3 Urban Housing (Pvt.) 2 3 3 3 4 Urban Housing (Govt.) 4 5 3 4 3 Road 5 3 4 4 3 Railways and Metros 5 3 4 5 2 Irrigation 2 3 4 3 5 Power and others 2 4 3 4 4 Commercial RE 4 3 4 3 4 Industrial capex 4 3 5 3 4 Political Equation 5 3 5 4 4 Weighted avg SCORE 3.8 3.8 3.6 3.8 3.4
Exhibit 40: Growth convergence gradual – East, North and Central to lead in near term (%)
Source: Company, MOSL
-10%
-3%
5%
13%
20%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
North East West South Central
East, North and Central India score high on early
cycle growth potential
We are region agnostic for medium-term but prefer
northern half in the beginning
March 2016 16
Cement | At the break of a new dawn
Exhibit 41: Volume growth across regions have shown improvement (%)
Source: Company, MOSL Exhibit 42: Project LOI has risen meaningfully; on-ground execution to follow (INR b)
Source: CMIE, MOSL
Exhibit 43: Budget allocation (%) to cement intensive sectors improved
Source: Budget data, Company
Exhibit 44: Projects added monthly to cement intensive sectors
Source: CMIE, MOSL
Exhibit 45: Subsidy cut eased off pressure in FY16-17 for uptick in infra spending in FY17
Subsidy (as % of GDP) Capital expenditure (as % of GDP)
Volume accelerates in North-Central India, steady East and contraction of de-
growth in South
NDA government has targeted 2-2.5x scale-up in
infra spending in 2015-19 v/s the XIth plan
March 2016 17
Cement | At the break of a new dawn
Strategic investments of past key to competitive resilience Prefer utilization levers, scalability and favorable market/client mix
The early phase of growth could turn out to be competitive, as surplus capacity stoodat 3.5x incremental demand in FY17. Expanding players in MOSL coverage universegained 6pp market share in the past 18 months.
Market share gains would be contingent on (a) high utilization headroom created, (b)better reach led by low cost structure, and (c) strong institutional client mix to garnerinfra demand.
With mounting entry barriers, long-term scalability and sustainability hinge on level ofpreparedness (access to critical resources and funding), and ability to acquire costlyresources. On growth visibility, we rate UTCEM, SRCM, JKLC, JKCE and DBEL higher.
Early growth phase could turn out to be competitive On the back of high unutilized capacity headroom, during the early phase of recovery cycle, there could be interim focus on market share gain by the cement players. This was evident in the North-Central market in the form of extremely competitive pricing in early part of 4QFY16 as demand picked up. Companies with significantly expanded capacity have shown aggression in pricing strategy (Exhibits 46 & 47). Surplus capacity in the system would still remain above comfort zone (3.5x of incremental demand) in FY17 (Exhibit 48)
Exhibit 46: Growth trends of Type B (capacity expanding) and Type A (non-expanding)
Source: Company, MOSL
Exhibit 47: Volume market share between Type A and Type B categories (%)
Players with recent capacity expansion (Type B) have
been gaining major share in incremental volumes
Type A players are hardly growing, with loss of 6pp
market share in 18 months
March 2016 18
Cement | At the break of a new dawn
Exhibit 48: Surplus capacity as multiple (x) of incremental demand
Source: Company, MOSL
Creation of scale during down cycle to aid initial boost Among the large caps, UTCEM and SRCM offer greater growth headroom with consistent expansion over the past 3-4 years. Among midcaps, DBEL, JKLC, ORCMNT and JKCE have created capacity headroom. ACC, ACEM, ICEM, and PRISM should underperform. The magnitude of outperformance hinges on: (a) Higher utilization in better growing markets, cost competence, and balance
sheet strength to survive price competition and augment market reach, and(b) Strong hold on institutional clients, as infra-led demand is more immediate.
Exhibit 49: Region-wise market mix of key cement companies (%)
Source: Company, MOSL
Exhibit 50: Regional utilization levers by key companies (FY16 volume/FY18 capacity) (%) North & Central East West & South Overall
Company Region Company Region Company Region Utilization (%)
Producible Surplus capacity (mt) Multiple (x) of incremental demand
24 37 38 60
20 50 49
19
21 18 19
2
18
30 17
10
20
45
0 23 2
40 22
70
12
5
18 17
13 41
3
17
30
45 15
30
22
18 21
19 2
81
20 50
75
33 15 25
ACC
Ambu
ja
BCO
RP
ICEM
SRCM
Prism
UTC
EM
Orie
nt
RAM
CO JKLC
DBEL
JKCE
Indu
stry
North East Central West South
Surplus capacity in the system would still remain
above comfort zone at least in FY17
SRCM, JKLC and JKCE offer better mix in preferred
growth market of northern half of India
Utilizations, both overall and at regional level, are
essential to growth headroom
PRSM and ICEM have lower utilization levers, ACC to
suffer in north
March 2016 19
Cement | At the break of a new dawn
Exhibit 51: Higher institutional client base to help grab infra-led demand
Source: Company, MOSL
Path to scalability: Preparedness, cost and strategic prowess Amidst rising structural overhangs, long-term scalability and sustainable market share gains hinge on the following: a) Ability to begin capex cycle at the right opportunity (defined by balance sheet
strength).b) Preparedness for organic expansion, with lower regulatory hurdles (access to
critical resources of land, limestone and approvals).c) Cost leadership and management prowess to combat regulations (high cost
limestone auction) and competition (brands, dealer network, ability to replicatehome market’s cost structure in new regions, etc).
Exhibit 52: Net Debt/ EBITDA (x) FY17E for MOSL cement universe (proforma)
Source: Company, MOSL
Exhibit 53: Better preparedness for land & limestone: Land as %age of capex in FY13-15
Source: Company, MOSL
80 80 72 60 67 75 70 55 60 55 65
20 20 28 40 33 25 30 45 40 45 35
ACC
Ambu
ja
ICEM
SRCM
UTC
EM
Orie
nt
RAM
CO JKLC
DBEL
JKCE
Indu
stry
Trade Non-Trade
-1.2 -2.8
2.6 -1.3
6.5
3.7 3.9 3.9 3.7
1.7
4.5 3.0
ACC
ACEM
UTC
EM
SHRE
E
BCO
RP
DALM
IA
ICEM JKCE
JKLC
RAM
CO
Orie
nt
PRIS
M
11 11 2
16 17 9
5 1 1 0 4
15 18 10
6 4 6
22
5
36 44
34
UTC
EM
SRCM AC
C
ACEM
ICEM
Bcor
p
JKCE
Ram
co
Dalm
ia
JKLC
Orie
nt
Land as % of capex Capex as % of gross block
UTCEM, SRCM, JKLC, JKCE and DBEL have higher institutional exposure
High limestone reserves are a distinct advantage, as
mineral allocation would gradually be through
auction route – hence, tougher and costlier
With Holcim’s strategy of limited expansion, not many players (barring
SRCM) can expand immediately without
hurting the balance sheet
UTCEM, JKLC, SRCM, JKCE and RAMCO better placed
with limestone for brownfield expansion
March 2016 20
Cement | At the break of a new dawn
Edge on cost and balance sheet critical to combat structural overhangs Cost structure of cement companies is likely to rise due to auction route of resource acquisition – limestone and linkage coal (from FY17-18). After failure of limestone auctions in Gujarat, Rajasthan and Maharashtra, the quantum of bids offered for the Chhattisgarh block (won by SRCM) came as surprise. At 59% of IBM* price of limestone (INR500-600/ton), RM cost would be higher by INR200-300/ton for newer plants, which is 7-8% of the existing average cost and 20-30% of the current EBITDA/ton (Exhibit 54). Thus, superior cost structure would be key to win competitive auctions in advantageous markets and achieve better scalability.
Reserve price for IBM* (INR/ton) 483 Floor price for bidding (%) 24% Winning bid by SRCM 59% Cost of limestone mining (INR/ton) 285 Limestone royalty (INR/ton) 80 DMF @ 30% and NMET @2% 26 Total cost of limestone (INR/ton) 390 Additional cost from existing (INR/ton) 285 RM cost (INR/ton) for OPC (Cement: Limestone = 0.8: 1) 356 PPC (Cement: Limestone = 1: 1) 285 PSC (Cement: Limestone = 1.2: 1) 237 Average cost/ton in MOSL universe 3,579 Percentage increase in cost for PPC (%) 8 Average FY16 EBITDA/ton in MOSL universe 657 Percentage increase in cost for PPC (%) 36
Note: *IBM – Indian Bureau of Minerals
Superior cost structure key to win competitive auctions
in future
March 2016 21
Cement | At the break of a new dawn
ID-IS positive after a decade; pricing power over FY18-19 But we prefer cost leaders to contest regulatory and vintage risk
Incremental Demand – Incremental Supply’ (ID-IS) is returning to positive zone after adecade, as the capex cycle is nearing a pause. It makes a case for strong pricing powerover FY18-19 after a modest trajectory in FY17.
Companies have gained on scale (3x) and strength (net worth, EBITDA up 5-10x) overprevious peak and ex-South utilizations are 4approaching sweet zone of 85-90%(FY18).
Yet, presence of counter-balancing forces (consumption pattern shift, utilizationdisparity, de-consolidating M&A) may keep pricing trajectory less superlative toprevious up-cycle.
We would prefer to play on cost leaders (with more flexibility, less regulatoryvulnerability and superior logistics management) than on price-leveraged bets.
ID-IS approaching positive zone, portends return of pricing power by FY18 The capex cycle is nearing a pause (Exhibit 55). The effective supply as percentage of demand should decline from 8% in FY15 to 1-4% in FY18 (based on time of commencement of some uncertain expansion). Historical precedents (Exhibit 56) suggest a strong correlation between “Pricing Power”, and “Incremental demand over Incremental supply (ID-IS)”. With waning supply, and new entry risk and demand acceleration, industry ID-IS is moving into a positive zone in FY18, almost after a decade. It creates a strong case for return of pricing power over FY18-19.
Exhibit 55: The capex cycle is largely behind; barring SRCM, no major organic plan
Source: Company, MOSL Exhibit 56: High correlation between ID-IS and change in profitability (i.e. price power)
Source: MOSL
5 7 8 4 8 23
29
32
40
25
22
17
21
17
16
13
5% 5% 6% 3%
5%
14% 16% 16%
19%
11% 9% 7% 8%
6% 6%
4% (1
%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
Effective Cap. addition (MT) % of demand
-10 -6
4
-1
0 13 5 -10 -15 -13 -30 -10 -8 -13 -12 -7 -1
9
-19
3 -22
7 16
57
15
-13
18
-29
17 15
-260 0
23 24
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
ID - IS in mt (LHS) Change in EBITDA/t (%)
The effective supply as percentage of demand
should decline from 8% in FY15 to 1-4% in FY18
Visibility of capacity addition post 2HFY17
limited coupled with lack of execution progress in ~60%
announced capacity
Positive ID-IS similar to FY06 level makes a case for
strong pricing power by FY18
March 2016 22
Cement | At the break of a new dawn
Exhibit 57: Industry has shown instances of superlative pricing in the periods of high growth and utilization
Source: MOSL, Company
Gain on strength and scale should aid better resilience Industry consolidation didn’t improve post FY11 largely due to aggressive expansion by mid-cap players and lack of action in Holcim. Yet we find that the cement companies have gained on scale (~3x) and strength (net worth and EBITDA up 5-10x) compared to the start of previous up-cycle (Exhibit 58) which should induce better rationality in pricing behavior once the early phase of competitive gets over. Ex-south utilizations are approaching sweet zone of 85-90% (by FY18) auguring positively for a demand-led price uptrend ahead (Exhibit 64).
Exhibit 58: Significant improvement in scale, market share and quality of cement players Top 4 Mid Cap
INR b FY05 FY17E Scale up (x) FY05 FY17E Scale
up (x) Net worth (INR b) 12 143 12 6 28 4 Avg EBITDA (INR b) 4 27 6 1.4 8.7 6 Market share (%) 34 37 1 20 23 1 Avg Capacity (mt) 13 39 3 4 13 3 Net Debt/EBITDA (x) 0.7 -0.7 -1 1.8 3.7 2
But trajectory to pricing power could be less superlative versus past The cement prices increased at 10-12% CAGR (Exhibit 57) during the period with volume growth of 9-10% and near-peak industry utilizations. While FY18’s ID-IS is similar to that of FY06 in absolute terms, but as a percentage of industry demand or surplus capacity, it is much lower than in FY06-07 (Exhibit 59). Moreover, the industry has the following four counter-playing factors unlike previous up-cycle which might limit the pricing growth to similar magnitude.
Exhibit 59: ID-IS as % of total demand or surplus capacity would be lower in next cycle compared to FY06-07 Growth (%) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E ID-IS -1 0 13 5 -10 -15 -13 -30 -10 -8 -13 -12 -7 -1 9 (ID-IS) as % of total demand (0) 0 9 3 (6) (8) (7) (14) (4) (4) (6) (5) (3) (0) 3(ID-IS) as % of surplus capacity 1 63 32 (1) 17
-10
0
10
20
30
-10
6
22
38
54
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
EFY
17E
Price Chg (INR/bag) Price Chg (%) - RHS
Cement prices increased by 13.3% CAGR on volume CAGR
of over 9%
We factor in ~7% CAGR price change over
FY16-18E
Several mid-sized players have grown significantly on
scale and are gradually moving towards critical
mass
March 2016 23
Cement | At the break of a new dawn
Factor # 1: Early demand cycle may witness competitive strategy Delay in recovery made players with under-utilized capacity more savvy on market share gains, resulting in aggressive pricing strategy. This is evident from volatility, which brought down prices to 5-year or 7-year lows in various parts of North and Central India (Exhibit 60). Even the Tier I brands, with historically profit-focused strategies in general, got into competitive pricing, leading to sharp dip in realizations. With the last leg of capex conclusion/stabilization continuing till FY17-end, we apprehend that modest price delta in the early cycle of demand recovery.
Exhibit 60: North volume uptick co-existed with interim price disruption
Source: Company, MOSL
Factor #2: Consumption pattern shift towards institutional demand While the previous super-cycle was led by growth in retail demand, the current recovery hinges on infrastructure, and mostly by government projects. Given that institutional buyers are bulk purchasers and not brand conscious, the realization growth is unlikely to be as strong as in the previous cycle. However, with rising acceptance of PPC among government agencies for large institutional consumption (was mainly OPC earlier), there is improvement scope in profitability. PPC mix in India is currently 60-65% and is likely to grow to 70-75% in 5-6 years.
Can it lead to a dual pricing scenario? While the prevalent pricing strategy is competitive, with gradual normalization of demand, a scenario of dual pricing may arise. Tier-II brands could focus more on institutional sales, reducing competitive intensity for tier-I brands (ACC, ACEM, UTCEM, Lafarge, etc) in the retail vertical. Consequently, the realization gap between the two sets could widen.
Factor #3: M&A not consolidating always; albeit recent instances positive The previous up-cycle (FY04-08) witnessed several M&A transactions, aiding industry consolidation. However industry didn’t see further consolidation since FY11 due to (a) gain in market share or regional diversification by mid-sized players, and (b) lack of expansion from Holcim (Exhibit 61). Going forward, market share gain byestablished players through inorganic means may see overhangs of (a) CCI norms (ahurdle that was not present in previous cycle), and (b) weak balance sheet of mostmid-caps, at least for next 2-3 years. Rather, we see strong strong appetite from (a)private equity players (Blackstone, Baring Asia, Apollo Global, Temasek are fewactive names), and (b) non-traditional groups (JSW, Wonder Cement, Emami,Piramal). Therefore, unlike the previous cycle, M&A may lead to fragmentation(instead of consolidation) in many instances. De-consolidating M&As would be a riskto pricing due to unknown behavior of new players,
-10
-2
6
14
22
200
225
250
275
300
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Volume growth (%) North Pricing(INR/bag)LHS
Companies with underutilized capacity
aggressive on market share gains
Rise in consumption from institutional side to limit
realization growth
Entry of non-traditional group poses a risk to price
discipline
Unlike previous cycle, CCI norms may bar some M&A
from being consolidating
March 2016 24
Cement | At the break of a new dawn
However, recent M&A announcements (UTCE-JPA and BCROP-Reliance Cement) have been a respite and would lead to strong consolidation in Central India. Despite its large size of 22.4mt, UTCEM-JPA may not face CCI hurdles given the complementary market positioning of the two companies.
Factor #4: High regional disparity in utilization a concern In the last 15 years, instances of superlative pricing power were very limited and were evident only in periods of high demand growth and near-maximum utilization of 85-100%. While expecting a similar peak at pan-India level is ultra-ambitious, two aspects raise hope: (a) Ex-South consumption utilization to reach 85-90% by FY18-19 (75-80% now),(b) Industry utilization understated (Exhibit 63 & 65) due to rise in split grinding
units (clinker utilization up 7-8pp to 76%).
However, high regional disparity of utilizations (Exhibit 64), which was not chronic in the previous up cycle, is concerning. Inter-regional transportation of cement is not easy due to high freight cost and need of established distribution network. Yet, continuation of strong discipline is essential to prevent such dumping.
Barring recent M&As in central India, industry didn’t
see improvement in consolidation
Continuation of discipline essential to prevent
dumping risk to higher utilization regions
March 2016 25
Cement | At the break of a new dawn
Exhibit 63: Utilization is understated due to excess split grinding capacity in the system
Source: Company, MOSL
Exhibit 64: Regional utilization disparity unlike previous up-cycle, could be an impediment for superlative price (%)
Source: Company, MOSL
Exhibit 65: Excess grinding capacity – a broad estimate for regions North Central East West South
Nameplate Capacity (mt) 87 54 60 59 140
Clinker capacity (mt) 60 33 33 41 96
OPC (1x) 35% 35% 5% 55% 40%
PPC (1.32x) 65% 60% 55% 43% 50%
PSC (1.75x) 0% 5% 40% 2% 10%
Producible Capacity (mt) 73 40 48 48 119
Excess grinding (%) 16% 26% 20% 18% 15%
Prefer to play on cost leaders now than on pricing leverage bets We factor in modest (3-5%) price growth in FY17 (v/s 1-3% cost inflation), considering (a) demand growth just surpassing supply threshold (5-6%), and (b) two consecutive years of weak pricing in FY15/16 keeping the base low. However, the industry should witness pricing power in FY18-19 (factoring in 7-8%). Yet we would prefer to play on cost leaders (more flexibility, less regulatory vulnerability and superior logistics management) than on price-leveraged bets due to likelihood of less superlative pricing trajectory and various regulatory hurdles hurting the players with inferior cost structure.
Exhibit 66: Comparative total cost structure and inflation in FY16
Source: Company, MOSL
-3 -4 -9 -7-12 -13
6 15 44 52 55 51 45 45 57 53 58 -2 -3-6 -4
-8 -8
3 7
16
17 17 15
12 12 14 13 14
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
Excess Grinding Cap (MT) % of reported capacity
40%
60%
80%
100%
120%
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
E
FY19
E
South Ex-south
1% 0% -1% -2%
-4%
-1%-2% -3%
-7%
-3%
-6%
2%
0
1200
2400
3600
4800
ACC
ACEM
UTC
EM
SHRE
E
JKCE
JKLC
BCO
RP
PRIS
M
DALM
IA
ICEM
RAM
CO
ORI
ENT
Direct Cost (INR/t) Indirect cost (INR/t) Inflation (FY16) RHS
Excess grinding impact highest in north-central and
east
Cost leadership would be critical to enhance margins
and market coverage
SRCM, UTCEM, ACEM , JKLC and ORCMNT have better
cost structure, while DBEL, Ramco and JKCE shown
improvement
March 2016 26
Cement | At the break of a new dawn
Edge on cost would be crucial to withstand price volatility and enhance market coverage early in the demand recovery cycle. Price-levered companies (bottom quartile of cost) are likely to gain once healthy pricing power kicks in; however, timeline for this is hard to ascertain. SRCM, UTCEM, followed by ACEM (among large caps), JKLC and DBEL (among multi-region midcaps), and RAMCO and ORCMNT (among southern bets) have superior cost structure. ACC and ICEM would be pricing leverage plays.
Exhibit 67: Sensitivity of EBITDA/ton to 1% change
Source: Company, MOSL
Prefer more flexibility and less vulnerability While input costs are showing favorable trends, companies with more flexible cost structure would be at the forefront to derive maximum benefits. At several vintage plants, use of pet coke as fuel is unviable. These plants would
lose out on cost savings. Companies with higher number of older plants would continue to suffer from
inferior cost, limited scope for improvement, high maintenance and upgradecost, etc (ACC, ICEM, CENT, JKCE, BCORP have high number of older plants).
Similarly, higher dependency on linkage coal in existing fuel mix would makeplayers like ACC, PRSC, BCORP, ORCMNT and ICEM prone to regulatory risk ofmandatory auction of coal linkage from FY17/18. (Exhibit 68)
Shift in limestone mine acquisition process towards auction route would inflatecost for companies with lower reserves.
Exhibit 68: Fuel mix across companies (%)
Source: Company, MOSL
7
4 4 4
9
5
7 6 6
3
5 4
6 5 4 3
7
4 5 5 5
3 5
4
ACC
ACEM
UTC
EM
SRCM
BCO
RP
PRIS
M
JKLC
JKCE
ORC
MN
T
RAM
CO
ICEM
DBEL
FY17 FY18
30 25 20 20 10
60
5
45
44 25
15
65
20
30
15 40 30
5
10 2
5
5
8
5 10
25 30 15
17 35
60 100
10
60 75 90
30 30 55
ACC
ACEM
UTC
EM
SHRE
E
BCO
RP
DALM
IA
ICEM JKCE
JKLC
RAM
CO
ORI
ENT
PRSI
M
Imported Linkage E-Auc Pet Other (AFR, WHR)
ACC and ICEM offer better pricing leverage plays due
to higher sensitivity
According to the CMA, modern cement plants
consume 68-93units/ton of power versus 100-
120units/ton for older plants
Higher linkage coal dependence and barrier to
switch fuel mix pose risks to medium-term cost structure
March 2016 27
Cement | At the break of a new dawn
Pet coke use a massive transformation – advantage to sustain in immediate future: Pet coke mix in fuel has increased meaningfully from 20-25% to 45-50% over the last 2-3 years. Rise in use of pet coke is attributable to the sharp ~50% decline in prices (linked to oil) over the last two months. Our analysis suggests that any North-based cement plant (RIL pet coke sourcing) is currently saving 40%/25% by using pet coke compared to linkage/imported coal on landed basis (Exhibit 69). While emission (SoX, NoX) has been a concern for pet coke, we understand most players would incur INR40-50m capex per plant to offset the environmental impact.
Exhibit 69: Comparative landed cost of different fuels (INR/’000 Kcal)
Manufacturing efficiencies largely captured; headroom declining The period of hyperinflation in FY10-15 is behind (cost CAGR of 8-9%, coal price CAGR of 6-7%, freight cost CAGR of 11%, led by diesel deregulation and higher lead distances). Input commodities viz. pet coke, diesel, imported coal, which account for 55-60% of variable cost, are in deflationary zone since FY16 (Exhibit 70). Moreover, cement manufacturers captured production efficiencies significantly in the last 5-6 years (Exhibit 71): a. Captive power usage up from 59% in FY08 to 77-80%b. Blended cement mix up from 25% in FY01 to >75%c. Process optimization largely in place (wet dry kiln, efficient plant layout, new
technology for better power and fuel usage)d. Multi-fuel boilers (plants put up after 2007 have flexibility to optimize fuel
mixpet coke mix from 25-100%).
Barring waste head recovery (WHRS) and alternate fuel (AFR), headroom for further reduction in direct cost is declining. ACC, ACEM and UTCEM are using 3-6% AFR mix v/s maximum of 25-30% in developed countries. AFR is 60-70% cheaper than the average cost of fuel from existing sources. In WHRS usage, SRCM (16 %) has been pioneer in India, while the focus has just started rising, with UTCEM (5%), ACEM (1.5%) and many midcaps gradually investing in the same.
RIL Pet coke price (INR/t)
Any North plant is currently saving 40%/25% in pet coke
versus linkage/imported coal on landed basis
59 71 77
3.1 3.2
4.4
FY08 FY10 Now
Captive power mix (%)
Purchase power rate (INR/kwh)
Indian plants best in power consumption (unit/ton)
82
92
100
100
102
110
112
118
118
140
141
Indi
aSp
ain
Germ
any
Japa
nKo
rea
Braz
ilIta
lyCh
ina
Mex
ico
Cana
daU
SA
Trend in pet coke prices
Continuous improvement in Captive Power mix (%)
March 2016 28
Cement | At the break of a new dawn
Exhibit 70: Cost moderation continues to percolate (%)
Source: Company, MOSL Exhibit 71: Significant improvement across companies in energy efficiency parameters
Logistics the key to incremental edge in future Contribution of freight cost as a percentage of realizations has risen by 8-10pp over the past eight years (Exhibit 72). Some of the structural overhangs are: a) Higher lead distance due to (1) shrinking limestone and other inputs from low-
hanging sources, and (2) higher inter-regional sales (low demand),b) Deregulated diesel prices (factored in, but would be susceptible to oil prices in
future),c) Rail freight hike and non-availability of rakes, andd) Greater focus on consistency of customer service with need for timely delivery.
Exhibit 72: Cost mix (%): Freight cost key inflation driver in past (update)
Contribution of freight cost has risen significantly by 8-
10pp over the past eight years
March 2016 29
Cement | At the break of a new dawn
Focus on logistics, material handling, and distribution management would rise in planning and core strategy (Exhibit 73). This would be aimed at (a) lower cost, (b) improving market reach, and (c) higher volume growth. Strategically-located split grinding units, efficient bulk handling structure and distribution network would be the key factors to induce efficiency in freight cost (Exhibit 75)
Exhibit 73: Logistics strategies adopted by various players Company Visibility of better logistics management
UTCEM Efforts to bulk terminus (6 terminus and upcoming Mumbai), and grinding unitsin east and north would be beneficial going forward
SRCM Traditionally been at the forefront in managing logistics efficiency, with large
number of split grinding facilities. UP and Bihar split grinding to aid benefits FY17onwards.
ACC RFID implementation in key plants; But vintage issue keeps freight cost high. ACChas 5 split grinding units versus ACEM with 8 split grinding units for 7 plants.
ACEM ACEM with 8 split grinding units for 7 plants, making existing freight costcompetitive. New grinding unit at Sankrail to benefit in east.
JKCE Historically sub-normal but expansion in north with split grinding unit in Jajjhar
and railway siding connectivity with clinker unit at Nimbhera to aid meaningfulimprovement in freight cost by ~INR100/ton
JKLC Surat grinding unit to benefit home market. But delay in Orissa grinding and
railway siding (delayed by a quarter due to local issues) may keep near-term coststructure and market reach sub-optimal in east.
ORCMNT Historical advantage of plant locations near input sources (incl. coal mine at
Singreni) would dilute in new plant at Gulbarga (Karnataka). Railway siding atGulbarga (by FY17) would aid some improvement.
RAMCO Vizak unit to benefit on transport to east market where. Home market is wellsupported by strategic location of clinker and split grinding units.
Exhibit 74: Comparative freight cost of key cement companies (INR/ton)
Source: Company, MOSL Exhibit 75: Integrated units v/s split grinding units (number)
Source: Company, MOSL
-16
-8
0
8
16
400
650
900
1,150
1,400
ACC
ACEM
UTC
EM
SHRE
E
BCO
RP
DALM
IA
ICEM JKCE
JKLC
RAM
CO
ORI
ENT
FY16 Freight cost(INR/ton) YoY Growth(%)
13
7
15
3 3 3 2 1
7 7 5
2 5
8
16
8
4 4 2 1 2 2
4 1
ACC
ACEM
UTC
EM
SRCM JKCE
JKLC
BCO
RP
PRSC
DBEL
ICEM
RAM
CO
Orie
nt
Integrated location Grinding location
SRCM, JKLC, DBEL and ORCMNT are historically
strong strategic or locational advantage
More split grinding to enhance market reach at
lower freight cost viz. ACC v/s ACEM
March 2016 30
Cement | At the break of a new dawn
North to deliver 1.5-2x higher expansion in return ratios Waning B/S, credible recovery and better ID-IS aid stronger price outlook
Tangible sign of growth sustenance and most favorable ID-IS render betterpricing trajectory for north-central regions, followed by west.
Debt servicing ability of North-players waned significantly in FY16. While notnecessarily sufficient, this is a strong reason for better pricing rationality.
North-central players in MOSL universe to deliver 1.5-2x higher expansion inreturn ratios and earnings growth over FY16-18 compared to southern peers.
Capex concluding: North, Central & West India offer better pricing outlook North, Central and West India are expected to see better pricing dynamics due to (a) higher utilization and ID-IS value (Exhibit 72), (b) better industry consolidation and lower new entry risk and (c) credible sign of demand recovery. Despite growing the fastest and having a strong retail base, the East might see immediate pressure of new entry risk (SRCM, JKLC, Emami) and some de-consolidating M&A (Lafarge assets). Southern discipline should continue, with high leverage pressure, though upside risk is limited.
Exhibit 76: Regional trend in ID-IS; all regions turning positive by FY18
ID-IS FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E North & Central 0 0 -4 -11 -2 2 8 7 East 1 2 -1 0 -3 -2 1 2 West 0 -2 0 2 -1 1 4 6 South -11 -12 -7 -3 -7 -2 3 3
Source: Industry, MOSL
Exhibit 77: Market share of top-5 players: East seeing deterioration (%)
Exhibit 78: Total capacity addition in FY15-18 (mt) and % new entry
Source: Company, MOSL
83 90
71
52
86
52.8
73
87
72
46
72
52.3
81 77
74
53
77
53
North East West South Central Industry
FY10 FY14 FY18
13.1 19.1 9.4 8.8 2.0
25
70
20
North East West South Central
Capacity addition mt (FY15-18) new entry as % of total
Regional ID-IS shows better pricing outlook in the North
and West
East has seen deterioration in consolidation
Amidst concluding capex, impact of entry behavior or
capacity stabilization comparatively higher in East
March 2016 31
Cement | At the break of a new dawn
Can the East be the next South? Present dynamics of East India (production utilization down from 85% in FY13 to 75% in FY16) are being compared with those of the South over FY10-16. While our immediate pricing outlook for the East is inferior, we do not expect a South-like crisis due to (a) no issue on growth (South de-grew on AP turmoil), (b) more stable retail-driven consumption pattern, (c) limitation of consistent capacity addition in future due to lack of limestone availability in east (unlike South), and (d) possibility of lower inflow from Central India going ahead. A major portion of recent addition in the East is split grinding, with clinker units in other regions (except SRCM, ACC and JKLC) and therefore, dispatch would be viable only at remunerative price points.
Deteriorating balance sheets strong reason for price discipline in North Before recent price upswing, high competition led cement prices to 5-years’ low in various parts of North and Central India. We analyze performance of ~22 listed cement companies (covering 70-75% of industry capacity), which highlights that ~19% of capacity holders continue to make PAT loss in 3QFY16 (v/s peak of 25% in 3QFY14), while ~15% made loss at EBITDA – interest in 3QFY16 (v/s peak of 24%) Exhibit 79. Profit sub-normality clearly shifted towards North due to dismal pricing. In the sample of North capacity (which is 65% of total North and Central India capacity), 45% are making net loss (PAT-level), while in the sample of South capacity (which is 50% of total South capacity), only 15% made net loss in 3Q (Exhibit 80).
Exhibit 79: % of players making PAT loss from our sample of 75% industry capacity
Source: Industry, MOSL
Exhibit 80: % of capacity holders making net loss in North versus South
Source: Industry, MOSL
5 18 8 8
2
9 3 2 1 3 5 2 7 21 25 17 21 14 22 11 16 16 19
3
9 8
4
1
8
3 1 1
2 4
2
6
11 8
5 5 5
8
3
6 7 9
Jun-
10
Sep-
10
Dec-
10
Mar
-11
Jun-
11
Sep-
11
Dec-
11
Mar
-12
Jun-
12
Sep-
12
Dec-
12
Mar
-13
Jun-
13
Sep-
13
Dec-
13
Mar
-14
Jun-
14
Sep-
14
Dec-
14
Mar
-15
Jun-
15
Sep-
15
Dec-
15
% of Capacity No of players
0
25
50
75
100
Jun-
10
Sep-
10
Dec-
10
Mar
-11
Jun-
11
Sep-
11
Dec-
11
Mar
-12
Jun-
12
Sep-
12
Dec-
12
Mar
-13
Jun-
13
Sep-
13
Dec-
13
Mar
-14
Jun-
14
Sep-
14
Dec-
14
Mar
-15
Jun-
15
Sep-
15
Dec-
15
% of North Capacity % of South capacity
East carries new entry and deconsolidation risk, but
South-like concern unwarranted
In our sample (75% of India capacity), almost 19% of
capacity holders continue to make net loss…
…and almost 80% of those holders are in North-Central
India
March 2016 32
Cement | At the break of a new dawn
The North-Central players have seen significant deterioration in debt servicing ability over the last 12-24 months. Analyzing the financials of our sample set, we note that interest coverage (ICR) of the North pack stood at 0.3x (including SRCM and JPA) and 0.75x (excluding SRCM and JPA) as on 3QFY16 (Exhibit 81). Incidentally, the ICR is in similar zone from where the South gained pricing discipline in FY14. Similarly, net debt/EBITDA of the North sample stood at 4.8x excluding SRCM (2x including SRCM) and may surpass the South level by FY17 if southern discipline sustains (Exhibit 82). If the thesis of discipline led by balance sheet stress works, we see limited headroom for price disruption in North-Central India.
Though above argument suggests for a stronger pricing growth in north, the risk to the thesis could be strength of balance sheets of Shree Cement and 3 PAN India players (who account for ~30% of North-Central capacity versus <20% in the South). Therefore, they have greater control on pricing discipline in north and strength to withstand price competition. However, over February and March 2016, the INR50-70/bag increase in north-central prices, with better sustainability till date, shows early playing out of the thesis in anticipated direction.
Exhibit 81: Comparison of interest coverage (EBIT/interest) for regional players
Source: Company, MOSL
Exhibit 82: Combined Net debt/ EBITDA (x) across regions
Source: Company, MOSL
0.0
1.0
2.0
3.0
4.0
Mar
-11
Jun-
11
Sep-
11
Dec-
11
Mar
-12
Jun-
12
Sep-
12
Dec-
12
Mar
-13
Jun-
13
Sep-
13
Dec-
13
Mar
-14
Jun-
14
Sep-
14
Dec-
14
Mar
-15
Jun-
15
Sep-
15
Dec-
15
North (Ex SRCM) South North (ex-JPA, SRCM)
At this point, south gain price discipline
0.3 0.2 1.0 0.6 0.8
2.3 2.1 2.0 1.9
0.3 0.4 1.1 1.2 1.3
3.7 4.1 4.8
4.3
2.1
3.1 3.8
3.2 3.4
4.9 5.4
4.2
2.8
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
North Ex-SRCM South
Deteriorating balance sheets a strong, albeit not sufficient reason for price
discipline in the North
Southern interest servicing ability reached bottom of its
strength in 1HCY14; similar stress was seen in North in
3QFY16
Net debt/EBITDA of North sample (ex SRCM ex JPA)
stood at 4.8x, weaker than South
North is here
March 2016 33
Cement | At the break of a new dawn
North to deliver 1.5-2x higher expansion in return ratios We estimate north-central players in MOSL universe to deliver 1.5-2x higher expansion in return ratios (Exhibit 83) and earnings growth (Exhibit 84) over FY16-18 compared to southern peers, led by superior growth visibility and stronger pricing outlook. Concern of balance sheet weakness should gradually normalize once price strength returns.
Exhibit 83: Regional comparison for RoCE expansion
Source: Company, MOSL
Exhibit 84: Regional comparison for EBITDA growth over FY16-18
Source: Company, MOSL
10 12 13 9 8 15 4 11 8 5 8 5
21 21 22 15
10 20 15
28
15 17 22
11
ACC
ACEM
UTC
EM
DBEL
ICEM
Ram
co
ORC
MN
T
SRCM JKCE
JKLC
PRIS
M
BCO
RP
FY16 FY18E
Pan India South players North and central players
39 38 33 29 16 15
96
33 35 60 44 49
ACC
ACEM
UTC
EM
DBEL
ICEM
Ram
co
ORC
MN
T
SRCM JKCE
JKLC
PRIS
M
BCO
RP
EBITDA FY16-18E CAGR(%)
Pan India South Players North and central players
Northern peers to outperform on improving
dynamics led by better pricing and demand outlook
March 2016 34
Cement | At the break of a new dawn
Subsiding downgrade risk to aid 30%+ EBITDA CAGR Focus on Quality; but keep an eye on entry valuations
Downgrades risk is waning with strengthening demand and price outlook.MOSL cement universe is poised for 30%+ EBITDA CAGR over FY16-18.
Valuations are back to premium zone, with rising credentials in (a) earningsinflection, and (b) upswing in FCFE and return ratios almost after a decade.
“Sustainable, Profitable and Predictable” growth is the key to overcomevaluation discomfort, as demand-pricing surprise is hard to quantify.
Prefer UTCEM and SRCM in large caps. In mid-caps, we prefer north-centric stocks(JKCE, JKLC). RAMCO, though expensive, is the best bet for south.
Downgrade risk easing off; FCFE and RoCE at inflection after a decade With both volume and pricing showing strength, especially in north-central zone, we expect limited headroom for consensus downgrades ahead. We are 7-8% below consensus in FY17 and at par in FY18 due to our assumptions of modest pricing trajectory in early phase. If happens so, MOSL cement universe is poised for 30%+ EBITDA CAGR over FY16-18. Valuation multiples should appear less demanding as profitability normalizes, and return ratios and FCFE enter upward trajectory after a decade (Exhibit 85 and 86) with capex approaching end barring select M&As.
Exhibit 85: As capex cycle ends, return ratio and margins to recover from low
Source: Company, MOSL
Exhibit 86: FCFE to improve meaningfully as capex is largely over (INR b)
Valuations back to premium zone However, on the back of credible sign of recovery on ground, the cement stocks are back in premium valuation zone (Exhibit 87 and 88) with large caps (ex SRCM) trading at 15x/11x FY17/18E (US$150/ton) and mid-caps trading at 10-12x/7-8x FY17/18E (US$85-100/ton). Our thesis of outperformance of north based stocks has played out to a good extent (Refer note link).
Exhibit 87: Trend in EV/EBITDA
Source: Company, MOSL
Exhibit 88: Trend in EV/ton
Source: Company, MOSL
Exhibit 89: Stock return according to region since October 2015 to January 2016(%)
Source: Company, MOSL
Exhibit 90: Stock return according to region since February 2016 to March 2016(%)
Sticking to quality to derive comfort on valuations Industry dynamics are gradually improving with demand growth poised for gradual acceleration, supply near a pause, and cost inflation largely behind. While valuations (after recent bounce back) are back in premium zone, in our views, stocks that offer greater sustainability and predictability of growth should aid greater comfort on valuations. We identify companies with better quality characteristics based on 5-parameters scorecard.
5-parameters framework matrix: Combination of Quality and ComfortA. Growth levers and scalability: Timely capacity addition in the recent past.
Better preparedness for access to critical resources, cost efficiency and balancesheet strength for sustainable market share gains (Weight 25%)
B. Market mix: Market size and diversification or higher utilization levers in regionswith better visibility of demand-price recovery (Weight 20%)
C. Cost leadership – genesis of superior growth and profitability: Edge on existingcost structure, focus on logistics management, resilience to regulatory risk,lower vintage issue and more flexibility in operations (Weight 25%)
D. Liquidity comfort: Balance sheet strength and debt servicing ability in case ofprice disruption and delay in recovery (Weight 15%)
E. Capital efficiency and strategic prowess: Credentials in strategy, dividendpayout, capital allocation, etc (Weight 15%)
Exhibit 91: Weighted average ratings for cement companies under coverage based on 5-parameters framework ACC ACEM UTCEM SHREE BCORP DALMIA ICEM JKCE JKLC Ramco ORIENT PRISM
Exhibit 92: Quadrants of quality versus valuation comfort
UTCEM SHREE
BCORP ICEM
JKCE JKLC
RAMCO
ORIENT PRISM
ACEM
DALMIA
ACC
We evaluate quality based on sustainability, efficiency,
near-term resilience and strategic prowess
Intersection of Quality and Comfort quadrant offer
ideal entry avenues
Qualitative parameters
Valu
atio
n pa
ram
eter
s
VALUE QUADRANT
QUALITY QUADRANT
COMFORT QUADRANT
March 2016 37
Cement | At the break of a new dawn
Quality quadrant: Relatively expensive stocks with market leadership, superiorsustainability and predictability of earnings growth. Rich valuations are genesisof scarcity premium.
Comfort quadrant: Stocks at valuation discount, mostly the midcaps whichtrade at discount to large caps, but quality factors in place for future re-rating.
Value quadrant: Companies with cheap valuations but fundamental inferiority,long-drawn concerns. May offers price leverage play once absolute pricingpower returns
Prefer UTCEM, SRCM and north-centric play Based on the above framework, intersection of Quality and Comfort quadrant offers ideal entry avenues. We prefer UTCEM, followed by SRCM. ACEM scores better in quality parameters over ACC which is, albeit a better operating leverage play if pricing power surprises. In mid-caps, north-centric stocks offer stronger fundamentals and earning outperformance viz. JKCE, JKLC, Heidelberg etc. Therefore, comfort quadrant valuations for such stocks should aid good entry points. While we expect south to lag on earning growth, RAMCO remains the best bet for southern recovery despite rich valuations. We also like ORCMNT (play on west recovery and operational stabilization) and DBEL (potential of second round of re-rating).
Critical mass matters for midcaps Midcap cement companies are trading at 45% discount to large cap on EV/EBITDA and EV/ton v/s long-term average of 25-35% discount. While the risks of market concentration and liquidity justify some discount, we believe that magnitude will narrow, as profitability improves and free cash generation helps them to de-leverage their balance sheets. Over the last decade, many mid-sized players have grown significantly on (a) scale (recent expansion), and (b) retail reach (lack of infra demand in past) and are gradually moving towards critical mass for self-sustaining growth (Exhibit 58). We find higher quality comfort and potential re-rating scope in the JKCE and JKLC (north-centric), DBEL (south-east) due to better growth outlook.
Exhibit 93: Midcap discount to large cap at peak (%)
Source: Company, MOSL
45
26
-100
-60
-20
20
60
Apr-
06
Sep-
06
Feb-
07
Jul-0
7
Dec-
07
May
-08
Oct
-08
Mar
-09
Aug-
09
Jan-
10
Jun-
10
Nov
-10
Apr-
11
Sep-
11
Feb-
12
Jul-1
2
Dec-
12
May
-13
Oct
-13
Mar
-14
Aug-
14
Jan-
15
Jun-
15
Nov
-15
Discount (%) Average
Midcaps at near-peak valuation discount
March 2016 38
Cement | At the break of a new dawn
Exhibit 94: Valuation table
Reco CMP INR
TP INR
PE (x) EV/EBITDA (x) EV/Ton (USD) at CMP Imp. TP EV/EBITDA
Large cap asset multiple of 1.5-1.6x of set-up cost fair in our view Over FY07-16, large cap cement players have generated average RoIC of ~26% (peak 30%+), while regional players generated 15-16% (peak 25%+). Likewise, capacity addition (derived from change in gross block and capacities) shows present cumulative cost of capacity at USD117/ton for pan-India and USD94/ton for regional players, with marginal addition happening at USD130-140/ton. Therefore, the quality large cap players should garner an maximum valuation multiple of 1.5-1.6x (USD200-220/ton) on set-up cost of USD130-140/ton, given medium-term RoIC expectation at ~25% (post tax ~18%) versus cost of capital of ~12%. We expect the industry to return to this normalcy in dynamics by FY18.
Exhibit 97: Change in capex cost (USD/ton)
Source: Company, MOSL
Exhibit 98: Long-term average RoIC of pan-India players
Source: Company, MOSL
Exhibit 99: Annual returns by large cap stocks: Difference is quite significant (%) Year ACC ACEM UTCEM SRCM **GAP
FY05 61% 58% 14% 56% 4
FY06 56% 53% 42% 76% 2 FY07 87% 59% 91% 131% 2
FY08 3% 11% 9% 15% 6
FY09 -40% -40% -43% -52% 1
FY10 41% 23% 56% 155% 7
FY11 18% 31% 25% 26% 2
FY12 17% 16% 14% 2% 8
FY13 18% 25% 53% 80% 5
FY14 -13% -3% 5% 22% (2)
FY15 29% 26% 43% 91% 3
40
65
90
115
140
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E
Pan India Regional
0
12
24
36
48
FY07 FY09 FY11 FY13 FY15 FY17E
Large Cap Mid Cap
Picking the winner is important even for a
homogeneous sector like cement
March 2016 40
Cement | At the break of a new dawn
Exhibit 100: Industry dynamics over multiple phases FY00-05 FY05-10 FY10-15 FY15-17 FY18-20
Stock Info Bloomberg ACC IN Equity Shares (m) 187.7 52-Week Range (INR) 1,678/1,173 1, 6, 12 Rel. Per (%) 0/3/-2 M.Cap. (INR b) 258.2 M.Cap. (USD b) 3.9 Avg Val ( INR m) 467 Free float (%) 49.7 Financials Snapshot (INR b) Y/E Dec 2015 2016E 2017E Net Sales 114.3 126.4 143.1 EBITDA 11.7 16.3 22.8 PAT 6.0 9.1 14.1 EPS (INR) 32.0 48.4 75.0 Gr. (%) -30.3 51.3 55.1 BV/Sh (INR) 449.3 467.5 488.3 RoE (%) 7.2 10.6 15.7 RoCE (%) 9.8 14.0 20.7 P/E (x) 42.7 28.2 18.2 P/BV (x) 3.0 2.9 2.8 EV/EBITDA (x) 19.5 14.4 10.0 EV/Ton (x) 115 109 105 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 50.3 50.3 50.3
DII 18.2 17.7 15.6
FII 15.3 13.2 16.7
Others 16.2 18.8 17.4
FII Includes depository receipts Stock Performance (1-year)
Growth and profitability to lag peers Vintage and regulatory risk high; price leverage play still away
Utilization levers low Lack of expansion led to loss in ACC’s market share from 11% to 9% over CY10-15. It has limited headroom for growth in North and Central India, as utilization is near optimum level. The addition of 2.5mt capacity in Jamul (Chhattisgarh) and restoration of mining in the East might help in CY16, though. Cost structure to improve in CY16 ACC’s cost structure is inferior to its large cap peers. We expect some improvement in CY16 from efforts towards (a) logistics efficiencies (reduction in demurrage, with increasing use of RFID/GPS, enabling savings of INR60-70/ton), (b) rise in AFR and pet coke usage target to 50-60% (savings of INR30/ton), (c) manpower rationalization, and (d) lower electricity consumption (limited headroom albeit). Lower clinker purchase in the East (post mining commencement) would benefit, as well. While cost saving strategies are in place, there has been disappointment in past in timely implementation of the same. However, vintage and regulatory risk structural concerns Legacy issues – vintage plants, higher fixed overheads, limitation in usage of pet coke, etc – would curb ACC’s ability to match peers’ profitability. High dependence on linkage coal (35-45% fuel mix) carries the overhang of impending auction of linkage coal from CY17-18, which could have a cost impact of INR1.5b-1.75b (INR80/ton). Price leverage play still some time away Due to weak cost structure, ACC is the most sensitive large cap to play price recovery (4% FY17E EPS sensitivity v/s 2-2.5% for UTCEM/ACEM for INR1/bag change in price). However, we believe it is not yet time to play the price recovery theme, given (a) the expectation of delayed and gradual return of pricing power in the industry, and (b) the incremental risk to ACC’s cost structure making it lag peers in terms of profitability. Cheap valuation, but low in pecking order, neutral ACC trades at a discount to peers at an EV of 14.4x CY16E and 10x CY17E EBITDA, and at USD105/ton. Yet, it remains low in the pecking order due to (a) lower qualitative score (Exhibit 85), (b) sub-normal growth and profitability, and relatively higher risk to cost structure, and (c) no immediate pricing trigger. We downgrade our stock recommendation to Neutral. We value ACC at INR1,500 (11x CY17E EBITDA), with upside of 10%. Our 3-years target price is INR1,950/share (@9x FY20E EBITDA, upside of 40%).
1,100
1,250
1,400
1,550
1,700
Mar
-15
Jun-
15
Sep-
15
Dec-
15
Mar
-16
ACCSensex - Rebased
ACC
March 2016 43
Exhibit 1: True PAN India exposure (%)
Source: MOSL, Company
Exhibit 2: Lost market share consistently (%)
Source: MOSL, Company
Exhibit 3: Expect growth underperformance to continue
Source: MOSL, Company
Exhibit 4: Utilization levers low in north-central region
Source: MOSL, Company
Exhibit 5: Cost structure inferior to peers (INR/Ton)
Source: MOSL, Company
Exhibit 6: Profitability lags with vintage risk (INR/ton)
Stock Info Bloomberg ACEM IN Equity Shares (m) 1,551.9 52-Week Range (INR) 266/185 1, 6, 12 Rel. Per (%) 11/12/0 M.Cap. (INR b) 360.1 M.Cap. (USD b) 5.4 Avg Val ( INR m) 499 Free float (%) 49.7 Financials Snapshot (INR b) Y/E Dec 2015 2016E 2017E Net Sales 93.7 230.8 264.0 EBITDA 14.4 35.8 48.9 PAT 8.5 16.0 22.7 EPS (INR) 5.5 8.1 11.4 Gr. (%) -37.8 47.4 41.7 BV/Sh (INR) 67.8 98.5 104.7 RoE (%) 8.2 8.2 11.2 RoCE (%) 12.3 14.5 20.9 P/E (x) 42.0 28.5 20.1 P/BV (x) 3.4 2.3 2.2 EV/EBITDA (x) 20.9 14.5 10.4 EV/Ton (USD) 156 135 130 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 50.3 50.3 50.4
DII 16.7 12.8 9.8
FII 25.1 29.1 32.1
Others 7.9 7.9 7.8
FII Includes depository receipts Stock Performance (1-year)
Re-rated in line with anticipation
Profit normalization in operating markets to benefit Concerns on growth strategy, but medium-term headroom in place ACEM has lagged peers on expansion and is likely to grow slower than the industry. Holcim-Lafarge’s global communication indicates conservative expansion strategy ahead; however, it considers India (18%/13% of capacity/EBITDA) as a better growing market in its portfolio and therefore, may trigger expansion decision once conviction on growth revives. ACEM’s favorable distribution of utilization (70-72%) in better growing regions – the North and the East – aids medium-term respite on growth (compared to ACC). Market mix was at wrong end; normalization benefit to follow Market mix has been a drag for ACEM in the last 12-15 months due to dismal price trend in the North and West (80% exposure v/s 65-70% for UTCEM/ACC) and no exposure to the South, where discipline boosted profitability. Now, with signs of tangible volume and price recovery in north, ACEM is well poised to benefit. Core strength intact ACEM’s core strengths are intact, with (a) efficient operations and cost initiatives (fuel mix, alternative fuels, logistics), (b) balance sheet strength (net cash of INR20b+ after ACC buyout), (c) annual standalone OCF of INR20b-25b over CY16-17, and (d) high payout (60-65%). Holcim’s focus on de-bottlenecking, synergies and payout would enhance the strength. Potential decline in government subsidies would be a drag on profitability as it accounts for INR180-200/ton of EBITDA. Long drawn restructuring overshadows potential benefits The potential synergy benefits from ACC-ACEM integration of INR7-8b remains elusive as restructuring process is still awaiting clearance from FIPB. ACEM being the strongest franchise in India, we expect benefits to percolate favorably. Overhang of Lafarge merger has subsided, with the company planning to sell the entire asset. Recent bounce back long awaited We upgraded ACEM in 3QFY16 on the back of its attractive valuation discount (report link). The stock has delivered 16% return since then. We expect ACEM’s standalone EBITDA to grow at a CAGR of ~38% over CY15-17 on the back of better demand and pricing outlook in operating markets. ACC transaction would be a drag on return ratios unless synergies percolate. We value ACEM at INR263 (12 x CY17E EBITDA; USD150/ton of prorata capacity including ACC). Buy. Our 3-years target price is INR320/share (@10x FY20E EBITDA, upside of 40%). 180
Stock Info Bloomberg UTCEM IN Equity Shares (m) 274.4 52-Week Range (INR) 3,370/2,531 1, 6, 12 Rel. Per (%) 6/17/22 M.Cap. (INR b) 878.6 M.Cap. (USD b) 13.2 Avg Val ( INR m) 9030.3 Free float (%) 38.3 Financials Snapshot (INR b) Y/E Mar 2015 2016E 2017E Net Sales 238.1 268.2 314.0 EBITDA 43.0 56.3 75.9 PAT 20.9 29.9 44.4 EPS (INR) 76.2 109.1 161.8 Gr. (%) 3.8 43.1 48.4 BV/Sh (INR) 750.2 841.8 983.4 RoE (%) 10.6 13.7 17.7 RoCE (%) 13.2 17.2 22.2 P/E (x) 42.0 29.4 19.8 P/BV (x) 4.3 3.8 3.3 EV/EBITDA (x) 20.4 15.0 10.6 EV/Ton (USD) 197 190 181 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 62.8 61.7 61.7
DII 7.6 7.1 5.9
FII 18.4 20.2 21.3
Others 11.2 11.0 11.2
FII Includes depository receipts Stock Performance (1-year)
Best pick for impending upturn Right levers in place; JPA deal a bold call on the cycle
Pan India growth levers in place: UTCEM renders the most predicable and profitable growth visibility due to its (a) pan-India presence, with 17-18% market share (#1 or #2 across regions), (b) strong utilization headroom led by recent expansions, and (c) resilience in profit strength (UTCEM’s EBITDA/ton improved to 50-100% premium v/s ACC, ACEM). Top quartile growth and profitability over past 2-3 years raise comfort on operating prowess. Edge on efficiencies key to strong and stable margins: UTCEM delivered strong margins (18-20%), with lowest variance, led by (a) consistent efforts in cost savings (rise in pet coke/AFR/WHRS mix, sea route transport, and operating efficiency), and (b) benefits of healthy profitability of white cement. It witnessed strongest savings in direct cost in past 12 months, with further benefits from logistics measures expected ahead (split grinding facilities in North, West and East; bulk terminus). Mounting entry barriers, UTCEM is prepared: Rising entry barriers give natural scarcity premium to UTCEM for its scale and growth sustainability (strong preparedness in terms of land and limestone access – can add 20-35mt of brownfield capacity). From its existing assets, it would generate INR30b-50b of growth capital from operations (after meeting fixed commitment), which would aid self-sustaining growth. JPA deal a bold call on cycle; dilutive to RoCE, but would add strategic value: JPA deal would expand UTCEM’s capacity by 33% (to 92mt) and capital employed by 45-50%. Deal valuation at USD110/ton looks attractive in M&A context, but it is 30-40% higher than UTCEM’s book. Therefore, sub-normal profitability, low utilization and fresh debt should lead to dilution in EPS (for 2-3 years) and RoCE (over medium-term). However we expect the transaction would strengthen UTCEM’s competitive position with complementary market reach, synergies (price and cost), and sufficient limestone reserves (value accretion of 5-7% likely). Dilution in B/S strength would be short-lived, in our view, and should normalize over 2-3 years. Preferred pick: At the critical juncture demand recovery, UTCEM’s strong focus on growth and cost efficiency make it most predictable play. Impact of JPA deal would be contingent on pace of recovery of the sector. It is a strong bet on the cycle upturn, and in our view, the success in asset creation should overshadow any near-term concerns for long-term investors. We value UTCEM at INR3,800 (13x FY18E EBITDA; USD220/ton). Our 3-year target price is INR5,300 (@11x FY20E EBITDA, 65% upside)
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UltraTech Cem.Sensex - Rebased
Ultratech Cement
28 March 2016 53
What does JPA deal offer? Assets that are part of MoU: UTCEM entered into an MoU with JPA for 22.4mt (clinker 16.2mt) of cement assets at a valuation of INR165b. The deal comprises (a) 11.4mt in Satna Cluster, 4.8mt in the North and 6.2mt in the South, (b) 325MW of captive power plants, and (c) 40 years+ of limestone reserves. With 94.5mt capacity (by mid-FY17), UTCEM would become the 4th largest capacity holder in the world (outside China). What makes the assets attractive for UTCEM? (a) Demand cycle at the cusp of acceleration, (b) organic expansion getting costly and time consuming (land, limestone and approvals), and (c) JPA portfolio of 12 plants offering complementary market reach to its existing asset base – creating strong strategic sense. Regulatory hurdles? CCI, MMDR both seems surmountable: Complementary market mix keeps us optimistic on CCI nod, despite large size of the deal. 50% of capacities fall in Satna cluster, where UTCEM had no presence. State-wise combined entity’s market share wouldn’t cross 20-30%, while share in the central region would be ~30%. CCI’s “CR4 conditions” demands (a) post M&A market share of <70% for top 4 and (b) HHI index of <1500 in relevant market. In our assessment, we find easy adherence of the conditions at all cluster (HHI 100-1400) barring some border-line case in north (albeit UTCEM is confident based on their internal evaluation). Post addition of Mining concession rule to MMDR Act (awaiting RS approval), the long-pending hurdle is close to be subsided. The management is optimistic deal conclusion in 12-15 months (by 1QFY18). Good valuation for UTCEM, in our view: At INR165b (plus INR4.7b for under construction GU of 4mt), implied EV is ~USD110/ton. Adjusting for MP asset of 4.9mt (IN54b), the incremental assets (17.5mt) come at ~USD100/ton. Currently, JPA has sub-normal utilization (60-70%) and EBITDA (~INR500/ton) due to operating constraints like working capital management. Assuming 6-7% pricing CAGR in FY16-18 and UTCEM’s brand premium of INR200-250/ton (v/s JPA), the target assets may generate EBITDA of INR1,100-1,200/ton (v/s INR1,300-1,400 for UTCEM) within 12 months of integration (FY19). This, at 70-75%, makes the transaction valued at 10x 1-year forward EBITDA. RoCE dilutive over medium-term: The deal (45-50% addition in capital employed) would keep UTCEM’s RoCE weaker than peers over medium-term due to (a) new assets being higher than book, and (b) profitability sub-normal. We expect EPS dilution for initial 2-3 years. However it may offer 5-7% accretion to SoTP. Synergy benefits not guided, but qualitative hints strong: Barring natural brand premium, we expect synergies to emerge from (a) logistics – complementary locations to reduce lead distances in North and Central India, (b) greater market reach in coastal AP and HP, and (c) resolution of operational bottlenecks boosting utilization. Lower capex aggression ahead, B/S weakness should be short-lived: We expect UTCEM’s net debt/EBITDA to rise to 2.9x (v/s 0.6x now) on conclusion of the deal, before gradually declining to 1.7-2x, with asset ramp-up and disciplined capex. Being well within UTCEM’s gearing threshold of 3.5x net debt/EBITDA and 0.75x net DER, the management guided no major investment in organic capex for the next 2-3 years, barring select investments in acquisition of critical resources (land and limestone).
Zone/Region (mt) Pre* JPA Post
North 19 4.8 23.8
Satna cluster 11.4 11.4
East 11.4 11.4
West 20.4 20.4
South 15.5 6.2 21.7
All India 66.3 22.4 88.7
Overseas 3.6 3.6
Total 69.9 22.4 92.3
Ultratech Cement
28 March 2016 54
Exhibit 1: Global positioning to improve significantly post acquisition of JPA
Source: Industry, MOSL
Exhibit 2: Consistently created growth levers with expansion
Source: Company, MOSL
Exhibit 3: Market mix balance to enrich further (%)
Source: Company, MOSL
Exhibit 4: Utilization (%) levers to aid growth performance
Source: Company, MOSL
Exhibit 5: Consistent focus kept cost structure superior and inflation impact low (INR/ton)
Source: Company, MOSL
CNBM, 400
Lafarge-Holcim, 390
Anhui Conch, 264
Jidong , 100
Heidelberg, 128
Cemex, 94
UTCEM*,92
Itla cementi, 65
Votorantim, 54
Buzzi , 45 Top 10 cement companes by capacity globally
UTCEM, 92
Hol-Laf, 61.3
SRCM, 23.5
Dalmia, 24
Chettinad , 16.8
Ramco, 16
BCORP, 16
ICEM, 15.5
JKCE, 10.5
JKLC, 9.2 Top 10 cement companies in India by capacity
Stock Info Bloomberg SRCM IN Equity Shares (m) 34.8 52-Week Range (INR) 13,345/9,350 1, 6, 12 Rel. Per (%) 11/11/24 M.Cap. (INR b) 438.9 M.Cap. (USD b) 6.6 Avg Val ( INR m) 240 Free float (%) 35.2 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 72.4 84.3 102.9 EBITDA 16.9 21.6 29.9 PAT 5.9 11.4 17.3 EPS (INR) 169.1 328.1 496.5 Gr. (%) 27.0 94.0 51.3 BV/Sh (INR) 1,612 1,899 2,349 RoE (%) 10.8 18.7 23.4 RoCE (%) 11.4 19.0 27.8 P/E (x) 74.5 38.4 25.4 P/BV (x) 7.8 6.6 5.4 EV/EBITDA(x) 24.9 19.0 13.2 EV/Ton(USD) 245 222 199 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 64.8 64.8 64.8
DII 15.4 4.9 5.6
FII 13.6 13.6 11.3
Others 6.2 16.7 18.3
FII Includes depository receipts Stock Performance (1-year)
Consistent outperformer Poised to lead in growth and return ratios
On the cusp of next phase of expansion Notwithstanding regional concentration, SRCM has delivered the strongest and most consistent growth in the industry (14% in FY13-16 v/s ~4% for the industry). This was achieved by doubling capacity to 25.5mt over the last 3-4 years and entry into the fast growing East market. After creating leadership in the North (20-25% capacity share), SRCM is on cusp of replicating the same in the East (existing 4mt to double) and South (entry with 4mt in Gulbarga). This, along with another 4mt of additional lines in north would take SRCM’s capacity at 38-40mt by FY20. Differentiating, self-sustainable and low cost expansion aid comfort SRCM aims to add 12-15mt over FY17-20 spending ~INR60b implying US$65-75/ton of incremental capex (v/s industry practice of US$90-130/ton) thanks to its strong preparedness in limestone and land. SRCM’s differentiated expansion strategy and on-time execution drives our conviction in its growth capability. It has followed a strategy of small but regular expansions aligned with market demand, which helps to achieve (a) quick payback and (b) minimum pressure on balance sheet. Interestingly, during doubling of capacity, SRCM’s net cash grew from INR14b (FY13) to INR17b (FY16) – which speaks volume on its growth sustenance. Absolute cost leadership – ahead of the curve initiatives Being the pioneer in many cost initiatives in India, SRCM is the lowest cost producer (30-35% lower than industry average). It enjoys (a) best in class energy efficiency (earliest adoption of pet coke, WHRS, AFR, 100% CPP), (b) single location largest kiln in the North (12mt), aiding economies of scale, and (c) pioneer in split grinding strategy (savings on logistics, open wagon transport). SRCM’s cost competence and balance sheet strength make it favorably placed for growth, scalability and profitability with (a) wide market reach, (b) quick utilization ramp-up, and (c) ability to garner critical resources (land, limestone) by overcoming regulatory hurdles stand it in good stead. Consistent outperformer; look for right entry opportunity Its strategic prowess and superior track record render to SRCM the most premium valuations in the sector. With the sector poised for recovery, we remain confident of SRCM delivering consistent outperformance. With 30% EBITDA CAGR over FY15-18, we expect SRCM to post industry leading return ratios (RoCE of 28% by FY18). We upgrade the stock to Buy, with a revised target price of INR14,435 (EV of 15x FY18E EBITDA and USD220/ton). Our three-year price target is INR20,000 (12x one-year forward EBITDA, 60% upside). Look for the right entry opportunity.
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Shree CementSensex - Rebased
Shree Cement
March 2016 60
Exhibit 1: Consistent expansion aids volume levers
Source: MOSL, Company
Exhibit 2: Capacity expansion without hurting B/S strength
Benefits of scale creation to unfold Further re-rating hinges on consistency, discipline and structure
Benefits of scale creation to unfold in recovery cycle DBEL’s strategy of aggressive leverage-backed expansion would help it reap benefits as the demand cycle turns favorable. Capacity of 24mt (effective stake of 21.9mt) and utilization of 50% (FY16E) should help it to garner benefits of operating leverage. Stabilization of expansion in Karnataka and the North East, and recovery in southern demand and North East infrastructure plan would be key triggers.
Market mix much balanced now Over the last three years, DBEL’s entry into the East and North East rendered strong balance to market mix. With 9% share in the South and 12% share in the East, it has created brand recall in both regions, strengthening realizations. In the duopolistic North East region, with Star Cement focusing more on retail, DBEL is likely to reap strong volume share in the impending infra-led demand.
Cost advantage percolating Under the new operating leadership, there has been significant improvement in efficiencies (energy consumption down 6% YoY, pet coke use up 72% v/s 32% a year ago, higher blended cement, lower lead distance, inter-unit synergies, etc). Cost of production is down ~15% since FY14 and utilization ramp-up would aid further benefits ahead. With pricing support in the South, DBEL is generating industry-leading profitability.
Simplification of structure raising comfort Partial progress has been made to simplify corporate structure through (a) KKR exit in equity plus cash deal (valuation not decretive), (b) stake increase in OCL and Bokaro, and (c) amalgamation of east operations (OCL and Bokaro) and Adhunik and power subsidiary with DCBL. Rise in stake in Calcom and subsequent merger of all subsidiaries are pending for value uncloaking (accumulated loss benefits in the North East), but timeline remains elusive.
Stage one re-rating done, rest hinges on disciplined growth Concerns of high gearing (net debt/EBITDA of 5x) should abate, with steady asset sweating and disciplined capital allocation. On the back of moderating capex, we expect net debt/EBITDA to improve to 3x by FY18. With strong profitability and growth show, DBEL has seen the first round of re-rating. At an EV of 8.4x FY17E and 6.0x FY18E EBITDA and USD81/ton for the 4th largest group, the stock is trading at discount. Further re-rating hinges on (a) consistent operations, (b) further simplification of holding structure, and (c) rationality in capital allocation and de-leveraging. We value DBEL at USD95/ton (implied EV/EBITDA of 7x FY18E) or INR960/share.
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Dalmia Bhar.Sensex - Rebased
Dalmia Bharat
March 2016 65
Exhibit 1: With Steady growth in capacity, DBEL has utilization levers in place
Source: MOSL, Company
Exhibit 2: De-risked market mix over time (%)
Source: MOSL, Company
Exhibit 3: Cost of capacity creation at good valuation
Source: MOSL, Company
Exhibit 4: Proximity to input sources reduces lead distance to 300KM – very competitive compared to peers
Source: MOSL, Company
Exhibit 5: Improving power consumption (KWh/ton)
Source: MOSL, Company
Exhibit 6: Variable cost seen steady improvement (INR/ton)
Source: MOSL, Company
11.5 3.6 6.75 21.85
40 36
71
51
South North East East Overall
Capacity(mt) Utilization(%)
25 44
12
13
62 43
FY15 FY17E
East North East South
74
70 69
67 68
FY14 2QFY15 4QFY15 1QFY16 2QFY16
1,70
3
1,57
0
1,61
3
1,67
0
1,56
5
1,52
0
1,46
8
1,41
0
3QFY
14
4QFY
14
1QFY
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2QFY
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3QFY
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4QFY
15
1QFY
16
2QFY
16
74 115 130 90
OCL Calcom Adhunik Bokaro
EV/ton(USD)
*
*Incremental stake from 48% to 77% came at USD 93/ton
Dalmia Bharat
March 2016 66
Exhibit 7: Profitability remains healthy and in top quartile (INR/ton) thanks to south pricing and cost savings
Source: MOSL, Company
Exhibit 8: DBEL break up of EBITDA and trend in net DER
INR b FY14 FY15 FY16 FY17 FY18
EBITDA (INR b) 5.3 3.8 12.2 15.1 19.0
South (INR b) 2.7 1.1 7.4 9.1 11.2
OCL (INR b) 2.2 2.5 3.0 3.6 4.6
North East & Bokaro (INR b)
0.5 0.3 1.7 2.4 3.3
Net Debt (INR b) 38.3 61.3 65.1 61.9 60.6
Net DER (x) 1.2 2.0 1.7 1.5 1.3
Net Debt/EBITDA (x) 7.2 16.0 5.3 4.0 3.1
Source: MOSL, Company
Exhibit 9: Pre and Post amalgamation of (a) East operations (OCL and Bokaro) and (b) Adhunik and power assets with DCBL
Source: MOSL, Company
50
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950
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1,850
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FY12
FY13
FY14
FY15
FY16
E
FY17
E
Range of EBITDA/ton for MOSL universe DALMIA
Dalmia Bharat
March 2016 67
Exhibit 10: Simplified corporate structure to be beneficial (KKR exit)
Source: MOSL, Company
Exhibit 11: Trend in EV/Ton
Source: MOSL, Company
Exhibit 12: Trend in EV/EBITDA (x)
Source: MOSL, Company
Exhibit 13: Scenario Analysis DBEL Base case Bull case Bear case
Stock Info Bloomberg ICEM IN Equity Shares (m) 307.2 52-Week Range (INR) 112/64 1, 6, 12 Rel. Per (%) 13/17/4 M.Cap. (INR b) 26.0 M.Cap. (USD b) 0.4 Avg Val ( INR m) 314 Free float (%) 71.8 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 40.9 43.6 48.6 EBITDA 7.5 8.2 9.4 PAT 1.2 1.9 2.8 EPS (INR) 4.8 6.8 10.4 Gr. (%) NA 42.4 52.9 BV/Sh (INR) 120.4 126.8 135.8 RoE (%) 3.2 5.1 6.9 RoCE (%) 7.8 8.5 9.9 P/E (x) 18.0 12.6 8.3 P/BV (x) 0.7 0.7 0.6 EV/EBITDA(x) 7.9 6.9 5.7 EV/Ton(USD) 60 60 59 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 28.2 28.2 28.2
DII 14.0 14.8 12.8
FII 28.7 23.1 34.0
Others 29.1 33.8 25.1
FII Includes depository receipts Stock Performance (1-year)
Leverage play in the South Non-core investments, legal hurdles impediments to re-rating Southern recovery gradual, ICEM to grow in line ICEM is among the leaders in the southern region, with strong presence and good brand recall. At 60% utilization, volume growth would be gradual (estimate 5% CAGR in FY16-18) on the back of southern discipline. With 45% of its capacity (16mt) in Andhra Pradesh (AP), the benefits of AP recovery would percolate from FY17. Cost structure lags; could improve from historical high base Despite strategically located plants, ICEM has historically had higher cost structure due to (1) high dependence on grid power, (2) increase in lead distance, and (3) constraints of vintage issue in Tamil Nadu (TN) plants. Amidst constraints, ICEM would see benefits of (a) higher pet coke use (50% by 1HFY17 v/s 25% now), and (b) captive power plants in AP and TN and Indonesian coal mine, as utilization improves. Non-core investments and legal hurdles As on March 2015, ICEM had invested around INR21b (INR70/share) in non-cement assets such as shipping, IPL franchise, land bank, captive coal mines, infrastructure, etc, which amounts to 50-55% of the current book value. It has taken steps such as (a) spin-off of IPL, and (b) merger of subsidiary, Trinetra Cement and RMC business (awaiting court approval). However, significant inter-group company loans and potential diversification into the infrastructure business raise concerns of suboptimal capital efficiency. Various government and legal inquiries on the promoter as well as the group could limit the re-rating of the stock. Play on southern recovery, but cheap valuations a mirage ICEM offers an alternative play on southern demand recovery on the back of (a) 14mt of capacity (9% share) in the South and Maharashtra, (b) strong brand, and (c) leveraged balance sheet (INR34.5b, net DER of 1x and net debt/EBITDA of 4.7x). No major capex visibility (barring replacement of old mills) should trigger gradual de-leveraging, if price strength sustains in the South. The stock trades at an EV of 6.9x FY17E and 5.7x FY18E EBITDA, and at USD59/ton. We value the stock at INR90 (EV of 6x FY18E EBITDA and USD60/ton), considering the overhangs of capital allocation and legal hurdles. Neutral.
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India CementsSensex - Rebased
India Cements
March 2016 71
Exhibit 1: At 60% utilization in disciplined south market, growth to follow regions trends
Stock Info Bloomberg JKCE IN Equity Shares (m) 69.9 52-Week Range (INR) 742/425 1, 6, 12 Rel. Per (%) 34/1/5 M.Cap. (INR b) 43.9 M.Cap. (USD b) 0.7 12M Avg Val (INR M) 21 Free float (%) 33.0 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E
FII Includes depository receipts Stock Performance (1-year)
Superior growth headroom White cement business a cushion Medium-term growth levers strong Post 3mt expansion, JKCE’s North capacity is operating at ~66% utilization (new plant at near maximum and older units at ~50%). This coupled with 60% utilization in the South plant provides headroom to outperform industry growth. Market mix is healthy, with North and West India accounting for ~70% of its dispatches and likely to benefit from incremental demand from mega infrastructure projects such as DFCC and DMIC. JKCE has limestone reserve of 375mt to add a further 5-6mt in its North line with lower incremental capex. Vintage issues partially offset by induced efficiencies JKCE’s gray cement profitability lagged peers in the past due to (a) older plants (low operating efficiency) and (b) higher lead distance/freight cost (absence of split grinding). New plants at Mangrol and Jhajjar offer better cost structure (energy/total cost lower by INR150/300 per ton); railway siding (from 2QFY16) enables savings on in-bound logistics (factored in 2HFY16 cost). While blended operating efficiency may be diluted, as contribution from older plant increases, JKCE’s gray cement cost structure would remain better than past, with induced efficiencies and economies of scale. White cement a cash cow JKCE is the second largest player in the duopolistic white cement industry in India, with 40% market share. Moderation in white cement growth (owing to lower exports to the Middle East) would be offset by healthy growth in putty and 0.2mt expansion in Katni (Madhya Pradesh) by FY16-end. With INR3b-3.5b of steady EBITDA cushion, white cement business remains a cash cow. Middle East a drag on return ratios UAE white cement plant (0.6mt) has been a drag on return ratios (INR9b capital employed 20% of overall capital employed), with net loss due to (a) weaker demand in the Middle East (oil price fall), and (b) unavailability of grid power hurting profitability (resolution nearing). We expect breakeven in FY17. Preferred leverage play on earning growth of north-west market JKCE is in early stage of evaluating Madhya Pradesh expansion. With lower immediate capex and FCFE of INR3.5b-4b in FY17-18, it offers visibility of deleveraging from the FY16 peak of INR27.5b (1.7x). We maintain Buy with a target price of INR757 (EV of USD90/ton on blended capacity, 8x FY18E grey cement EBITDA and 8x FY18E white cement EBITDA).
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J K CementsSensex - Rebased
J K Cement
March 2016 76
Exhibit 1: Strong utilization lever in place at both regions
Source: MOSL, Company
Exhibit 2: Near Pan-India market reach cement (%)
Source: MOSL, Company
Exhibit 3: Steady putty volume offsetting deterioration of growth in white cement
Source: MOSL, Company
Exhibit 4: EBITDA breakup: White cement renders resilience amidst earning volatility of grey cement (INR b)
Source: MOSL, Company
Exhibit 5: Historically inferior grey cement cost structure shown improvement post new plants stabilizing (INR/t)
Source: MOSL, Company
Exhibit 6: Operating efficiency better at new plant
Stock Info Bloomberg JKLC IN Equity Shares (m) 117.7 52-Week Range (INR) 410/253 1, 6, 12 Rel. Per (%) 19/-6/-2 M.Cap. (INR b) 39.7 M.Cap. (USD b) 0.6 12M Avg Val (INR M) 61 Free float (%) 54.1 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Sales 25.9 30.3 36.1 EBITDA 2.8 4.5 7.3 NP -0.3 1.0 3.1 Adj EPS (INR) -2.4 8.4 26.1 EPS Gr. (%) -119.1 -446.9 210.0 BV/Sh. (INR) 107.7 112.0 129.3 RoE (%) -2.2 7.7 21.6 RoCE (%) 4.7 9.7 17.2 P/E (x) -138.2 39.8 12.9 P/BV (x) 3.1 3.0 2.6 EV/EBITDA (x) 18.7 11.3 6.8 EV/Ton (USD) 88 85 74 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 45.9 45.9 45.9
DII 19.4 18.4 17.0
FII 13.7 14.4 13.3
Others 21.0 21.3 23.7
FII Includes depository receipts Stock Performance (1-year)
Right levers and quality in place Near-term constrained by liquidity and Durg operations
Among the fastest growing regional players JKLC is among the two fastest growing regional players, with (a) high operating leverage (60% capacity expansion in FY14-16 to 9.3mt), and (b) favorable market mix (North, Gujarat and East), enabling it to benefit from a good blend of infrastructure, industrial and retail demand. Its plant efficiency has enabled it to consistently operate at high utilization in past (100-105% in FY12-14). JKLC delivered 10% volume CAGR over FY12-16 (v/s 3-4% for India and the markets it operates in).
Medium-term sustainability and scalability in place JKLC’s North plants are operating at 80-85%, while its East plant is stabilizing at 77% (within 12 months). Its ability to maximize utilization, upcoming expansions – Surat grinding (1mt by April 2016), Udaipur (1.7mt by October 2016) and Orissa grinding (1mt by FY17-end), and recovery in operating markets render headroom to sustain growth. Its existing limestone reserves, with potential to add 6-7mt, offer visibility of cost effective scalability.
Existing cost structure among the lowest JKLC is one of the most efficient players, with (a) superior power/fuel consumption (72kWh/704kcal/ton), (b) self-sufficiency in power in the North (74 MW +21MW LT contract with VS Lignite), (c) high pet coke mix (80-85%), and (c) split grinding units and concentrated market keeping logistics cost under control. Two dampeners – Durg operations and constrained liquidity Despite brand establishment (Pro-plus, Platinum) and 75-80% utilization, EBITDA in Durg (East) is negative, as cost is 20-25% higher than in the North (expensive power – no CPP, no grinding support hurting market reach). Orissa grinding, WHRS (8-9MW), and railway siding by 1HCY17 would be critical for normalization of profit and return ratios (Durg operations account for 45-50% of standalone capital employed). Liquidity is a matter of concern, given net debt/EBITDA of 6.3x and decline in EBITDA to INR400/ton (due to dismal prices in the North West and sub-normal prices in the East). However, on the back of normalization of pricing in north in 4QFY16, we draw some comforts. With moderating capex, JKLC would require 2.5-3% YoY uptick in pricing in FY17 (v/s our estimate of 4-5%) to address its fixed commitment. Play on north-central recovery, provided east operations normalize We value JKLC at INR410/share (EV of 8x FY18E EBITDA and USD85/ton). Volume/pricing CAGR of 10%/7% over FY16-18 translates into 60% EBITDA CAGR. If prevailing concerns subside, JKLC offers one of the better quality and scalable regional plays on recovery. Buy.
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JK Lakshmi Cem.Sensex - Rebased
J K Lakshmi Cement
March 2016 81
Exhibit 1: Utilization lever in place, JKLC demonstrated ability to operate at maximum utilization
Stock Info Bloomberg ORCMNT IN Equity Shares (m) 204.9 52-Week Range (INR) 199/129 1, 6, 12 Rel. Per (%) 5/-2/1 M.Cap. (INR b) 27.3 M.Cap. (USD b) 0.4 12M Avg Val (INR M) 24 Free float (%) 62.5
Cost efficient play on west-south recovery RoCE of new plant critical; growth ambition might hurt balance sheet
Recent sub-normalcy an outcome of pricing adversity and teething trouble ORCMNT’s recent operating weakness (EBITDA bottomed at INR200/ton in 3QFY16) was attributable to (a) demand-price adversity in Maharashtra (55-60% mix) and (b) sub-normal start-up cost structure and higher OPC mix in new plant atKarnataka (25-30% higher) due to low utilization (26-27% in 3Q), which negated thebenefits of improvement in existing operating efficiencies.
Moats make ORCMNT’s cost structure peer-leading Despite weak branding and lower realizations, its profit resilience emerges from the following: (a) its three plants, located in the form of a ‘golden triangle’, address one consolidated market, (b) niche marketing strategy of penetrating rural and semi-urban markets through a network of loyal dealers makes it difficult for completion to match ORCMNT’s service and reach in these markets, (c) high PPC mix (80% v/s 50-60% for the markets in which ORCMNT operates, and (d) lower lead distance of 300-330km due to proximity to both input resources (Singareni Coal Mines at 40km; fly ash within 100km) and end-market.
Replicating the cost critical hurdle While legacy benefits of logistics would be lower at its new plant at Karnataka, we note that the plant is more efficient, with (a) single vertical roll mill kiln, (b) lower energy consumption (fuel consumption of 680kcal/ton v/s 700-740kcal/ton for existing plants; power consumption of 70kwh/ton v/s 76kwh/ton for existing plants), and (c) end-market Hyderabad is only at 180km. Benefits of linkage coal (45% mix) would subside with impending auction. Gradual shift to pet coke, railway siding and captive power plant (CPP) at new plant (50MW including waste heat recovery), and uptick in utilization should re-instate cost advantage.
Growth headroom created; tide to turn in favor, as West picks up 3mt greenfield at Gulbarga (Karnataka) (1.6x scale-up) aids impetus to growth from FY17. We expect 20% volume CAGR over FY16-18, assuming utilization at 40% in FY17 and 55% in FY18. Revival outlook is strong in Maharashtra and Telengana. For RoCE-breakeven, the new plant needs 12-15% price rise v/s 3QFY16.
Growth ambition might hurt balance sheet We like ORCMNT for its cost efficiency and recovering market mix (Maharashtra and Telengana). But its aim for 15mt capacity by 2020 (could be inorganic-heavy) remains a risk to balance sheet comfort. In our view, ORCMNT can expand 25-30% (2-3mt; evaluating in MP) in the next 3-4 years without hurting net debt/EBITDA. We value the stock at INR170/share (EV of USD90/ton and 8x FY18E EBITDA). Buy.
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Orient CementSensex - Rebased
Orient Cement
March 2016 86
Exhibit 1: Strategic plant locations makes freight competent
Source: Company, MOSL
Exhibit 2: Maharashtra market is core dependency (%)
Source: Company, MOSL
Exhibit 3: One of the cost leaders historically (INR/ton)
Source: MOSL, Company
Exhibit 4: Cost and utilization sub normal in new plant
Source: MOSL, Company
Exhibit 5: Efficient cost structure among southern peers
INR/ton Ramco
Orient ICEM Dalmia
Direct Cost 1,597 1,437 1,899 1,597
Direct cost as % of Realization 32 41 38 32
Indirect cost 934 747 1,020 895
Indirect cost as % of Realization 19 22 21 18
Source: Company, MOSL
Exhibit 6: Realizations (INR/ton) weaker than peers
Source: Company, MOSL
South 32%
Maha-rashtra
55%
MP, CHGR, GUJ 13%
1,000
2,000
3,000
4,000
5,000
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
Cost range of universe ORIENT
3046 3900
81%
26%
Old plant New plant
Cost (INR m) Utilization (%)
3,96
6
3,86
6
3,88
0
2,85
0
DALM
IA
ICEM
MCE
M
ORI
ENT
Orient Cement
March 2016 87
Exhibit 7: EBITDA (INR/ton) on the lower end in FY16, led by dismal pricing in Maharashtra
Source: Company, MOSL
Exhibit 8: Capex to keep gearing high
Source: Company, MOSL
Exhibit 9: Trend in EV/Ton
Source: MOSL, Company
Exhibit 10: Trend in EV/EBIDA
Source: MOSL, Company
Exhibit 11: Scenario Analysis ORIENT Base case Bull case Bear case
Stock Info Bloomberg PRSC IN Equity Shares (m) 503.4 52-Week Range (INR) 134/56 1, 6, 12 Rel. Per (%) 20/-9/-14 M.Cap. (INR b) 41.1 M.Cap. (USD b) 0.6 12M Avg Val (INR M) 53 Free float (%) 25.1 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 57.3 62.8 72.2 EBITDA 3.3 5.5 7.8 PAT -0.2 1.6 3.5 EPS (INR) -0.4 3.2 6.9 Gr. (%) -119 -969 114 BV/Sh (INR) 19.8 23.0 29.2 RoE (%) -1.8 15.0 26.3 RoCE (%) 7.6 15.5 22.5 P/E (x) -221.7 25.5 11.9 P/BV (x) 4.1 3.6 2.8 EV/EBITDA(x) 18.0 10.4 7.0 EV/Ton(USD) 109 88 77 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 74.9 74.9 74.9
DII 6.5 6.7 8.1
FII 8.6 9.7 6.0
Others 10.0 8.7 11.1
FII Includes depository receipts Stock Performance (1-year)
Prioritizing profitability over growth Medium-term play on central market recovery
Growth headroom limited, but market mix strong: Given 84% capacity utilization and limited expansion plans, PRSC’s cement business offers limited scope for growth outperformance. However, it has an advantage in terms of market mix (North MP, East UP, and Bihar) – low supply visibility, high consolidation and better regional growth visibility. Benefits of various measures – higher pet coke mix, blending, and better power efficiency have begun percolating through improved profitability (FY16E EBITDA/ton to increase by ~INR120/ton despite 1% decline in pricing). TBK segment – return of cost competitiveness taking longer: Despite strong brand (19% share in organized market), the drag in PRSC’s TBK (tiles, bath and kitchen) segment profitability has been an overhang. Operational issues (disruption in energy supply and cost), which led to severe cost inflation in the past, are behind – PRSC has installed three coal gassifiers, drilled onshore micro gas wells in Andhra Pradesh, and put in place connectivity of natural gas in Karnataka. Yet margins are taking longer to improve (2-3% now v/s the normal 6-8%) due to (a) weak demand, (b) delay in premiumization plan (shift in product mix towards vitrified tiles). Profitability and balance sheet strength to get strategic priority over growth: Operational overhangs of the past are now behind. Strategy would ride on prudent capital allocation and cost competitiveness to normalize profitability. Conversion of cash on the back of limited capex should drive deleveraging. We expect net debt/EBITDA to reach 1.8x (net D/E of <1x) by FY18 v/s 5.7x (1.9x) now, before PRSC enters its next expansion cycle. Medium-term play on central market recovery: Our SOTP value for PRSC is INR95/share (EV of USD90/ton, and 8x FY18E EBITDA, 5x FY18E RMC EBITDA and 8x FY18E TBK EBITDA). PRSC remains a near-term play on Central India recovery, though long-term growth is likely to lag peers. We maintain Buy.
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Prism CementSensex - Rebased
Prism Cement
March 2016 91
Exhibit 1: Utilization headroom limited due to lower expansion plan
Source: MOSL, Company
Exhibit 2: Market mix skewed in central and east which offer healthy growth outlook
Source: MOSL, Company
Exhibit 3: Profitability to improves as cost levers percolate
Source: MOSL, Company
Exhibit 4: Non-cement business 50% capital employed (%)
Source: MOSL, Company
Exhibit 5: Leading market share in TBK (%)
FY15E Rev.
(INR b)
Margins (%)
Asset turn-
over (x)
Gr. CAGR (FY12-
15)
Market share
HRJ 22.1 3.5 1.8 9.6% 19%
Kajaria 21.7 16.3 2.6 19.5% 19%
Somany 15.4 7.5 3.6 18.3% 13%
Source: MOSL, Company
Exhibit 6: RoCE (%) breakup in different businesses: TBK profitability remain a drag
Source: MOSL, Company
2.0 2.0 2.0 5.6 5.6 7.0 7.0 7.0 7.0 7.0 7.0
122 114 146
61
93
68 73
80 78 83 89
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
Capacity (mt) Utilization (%)
MP 29%
East UP 49%
Bihar 20%
CHGRH 2%
1,500
2,500
3,500
4,500
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
Cost/t Cement EBITDA/ton
54% 58% 50% 51% 51% 52% 63%
35% 33% 36% 36% 37% 37%
30%
10% 8% 9% 8% 7% 6% 7% 5% 5% 5% 5%
FY10 FY11 FY12 FY13 FY14 FY15 FY16E
Cement TBK RMC Insurance
12%
19%
27%
10%
12%
24%
11%
6%
20%
2% 4%
18%
13%
3%
15%
Cement TBK RMC
FY11 FY12 FY13 FY14 FY15
Prism Cement
March 2016 92
Exhibit 7: Trend in EBITDA (INR b)
Source: MOSL, Company
Exhibit 8: Prudent capital management key to de-leveraging
Source: MOSL, Company
Exhibit 9: Trend in EV/Ton
Source: MOSL, Company
Exhibit 10: Trend in EV/EBITDA
Source: MOSL, Company Exhibit 11: Scenario Analysis PRISM Base case Bull case Bear case
Stock Info Bloomberg TRCL IN Equity Shares (m) 238.1 52-Week Range (INR) 427/270 1, 6, 12 Rel. Per (%) 3/29/45 M.Cap. (INR b) 96.4 M.Cap. (USD b) 1.4 12M Avg Val (INR M) 66 Free float (%) 57.7 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Net Sales 35.1 37.6 42.0 EBITDA 9.8 11.0 12.8 PAT 4.4 5.2 6.5 EPS (INR) 18.4 21.7 27.4 Gr. (%) 80.6 18.1 26.1 BV/Sh (INR) 127.2 145.4 168.2 RoE (%) 15.4 15.9 17.5 RoCE (%) 14.6 16.4 19.6 P/E (x) 22.0 18.6 14.8 P/BV (x) 3.2 2.8 2.4 EV/EBITDA (x) 12.0 10.1 8.1 EV/Ton (USD) 114 104 97 Shareholding pattern (%)
As On Dec-15 Sep-15 Dec-14
Promoter 42.3 42.3 42.3
DII 26.8 24.5 19.2
FII 11.6 13.7 18.0
Others 19.3 19.5 20.5
FII Includes depository receipts Stock Performance (1-year)
Best brand to play South recovery Peak dynamics in place; valuations rich but may enjoy scarcity premium
South recovery gradual; Ramco industry performer While Andhra Pradesh and Telengana are poised for revival, led by government spending, overall growth acceleration would be gradual (3-5% in FY17) due to dampening effect of other states like Tamil Nadu. With <50% utilization (clinker utilization of ~62%), we expect volume growth of 4% in FY17 and 6-7% in FY18.
Highest profitability in the cement pack at this moment At INR1,400-1,500/ton, TRCL’s profitability is the highest in the industry, led by (a) pricing discipline in the South, (b) strongest brand premium and trade mix, (c) 60% exposure to most profitable southern market (Tamil Nadu and Kerala), and (d) regaining of superior cost structure after limestone beneficiation in TN capacity.
What makes cost structure superior? Historically, TRCL is among the lowest cost producers in the South due to (a) fuel flexibility, (b) 90% captive power (to increase from 157MW to 175MW in a year), reducing grind dependency, and (c) strategic plant location. Further benefits would percolate with focus on raising pet coke mix from 25% to 60%. Impurity in limestone had hurt cost in FY14-15 (INR800-1,200/ton costlier import). Beneficiation resolved the issue and raised life significantly from 30 years.
Sub-normalcy in East dispatches and wind power a few drags: “Average” brand positioning in the East coupled with high freight and marketing expenses kept profitability sub-par. Vizak grinding unit would aid INR500-600/ton savings, in our view, led by (a) better reach in Orissa, (b) cheaper fly ash availability, and (c) savings in logistics (clinker instead of cement). Vizak investment at INR3.5b would generate 12% RoCE. Wind Power business (126MW) remains a drag on capital efficiency, with RoCE of 4-5% (10% of capital employed).
Visibility of deleveraging strongest among midcaps Deleveraging has already started, with INR4.4b reduction in net debt over 9MFY16 (~INR23b, 0.7x). With no immediate capex plan (barring 0.5mt of clinker de-bottlenecking), TRCL would generate INR6b-7b of annual FCFE over FY17-18, aiding further reduction ahead.
Peak dynamics in place; valuations rich, but preferred southern play With 10% market share, strong brand/dealer network, superior pricing and industry leading RoCE (15-17% in FY17/18), peak dynamics are already in place for Ramco. With valuation being rich at US$97/ton and 8.1x FY18E EBITDA, Ramco might enjoy scarcity premium for southern play. We value Ramco at INR480 (cement business at an EV of USD110/ton and 9.5x FY18E EBITDA). Buy
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The Ramco CementSensex - Rebased
The Ramco Cements
March 2016 96
Exhibit 1: Utilization to improve in line with industry demand; clinker utilizations at 60% now
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