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Merger of equals will create concrete behemoth, regulatory hurdles will have to be overcome

The merger of two of the largest cement conglomerates in the world will create a concrete behemoth with combined cement capacity of 427 mtpa, revenues of EUR31 bn and operating profit of EUR6.6 bn. Rising debt in an environment of under-utilized capacities had forced both cement majors to embark on a cost-cutting spreea possible motive for the merger, to monetize potential synergy benefits of EUR1 bn.

We note that the conclusion of the transaction is likely to be subject to regulatory hurdles, especially owing to anti-trust regulations as the two cement majors would meaningfully consolidate their market standing in several developed markets. The cement majors have proposed to divest capacities that contributed ~10% of operating profits, to overcome regulatory hurdles due to combined market shares.

India operations will benefit from more consolidation in East India

From an India perspective, Lafarge India has a dominant presence in East India (8.6 mtpa of cement capacities). ACC and Ambuja Cement (of the Holcim group) have a presence in East India with 5 mtpa and 6 mtpa of capacities respectively. The eastern region also enjoys superior pricingaverage prices of `330/bag against an all-India average of `310/bag due to paucity of supply in the region. In our view, the merger of the two parent companies, implying common ownership, could meaningfully increase consolidation in this region and have an incremental impact on pricing discipline in the region (to the extent not exploited).

We note that the merger is likely to have to obtain approval of the Competition Commission of India, owing to the dominant market share that the combined entity will have in relevant markets (specifically East India) as well as on an all-India basis.

CMP factors most optimistic earnings recovery; still leaves no upside

Consolidation in East India and consequent pricing discipline notwithstanding, the CMP of ACC and Ambuja factors an optimistic combination of (1) 10% growth in cement volumes and (2) 25% improvement in profitability over the next two years.

The Street appears to have hinged its optimism on a stable political regime that will yield improved volume and earnings trajectory, even as consensus earnings continue to be downgraded over time, and as cement-company valuations have reached historical peaks. We maintain our cautious stance on cement namesACC (REDUCE, target price: `1,070) and Ambuja Cement (SELL, target price: `150).

Cement India

Global merger, local implications. Lafarge and Holcim, the two largest cement manufacturers globally, have announced a merger to create to a concrete behemoth. From an India perspective, ACC and Ambuja (Holcim group) will take under common management Lafarge India with ~8 mtpa of capacity, a presence in North and East India and the potential to incrementally strengthen pricing discipline in East Indiaan important market for Ambuja, with Lafarge India its key competition.

CAUTIOUS

APRIL 09, 2014

UPDATE

BSE-30: 22,343

Murtuza Arsiwalla murtuza.arsiwalla@kotak.com Mumbai: +91-22-4336-0870 Avinash Ranjan avinash.ranjan@kotak.com Mumbai: +91-22-4336-0869

India Cement

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 1: Holcim and Lafarge will create a concrete behemoth with 427 mtpa of combined capacity Key operational and financial metrics for Holcim and Lafarge, CY2013

Holcim Lafarge Holcim+Lafarge

Operational parameters

Capacity (mn tons) 221 206 427

Production (mn tons) 137 139 276

Capacity utilization (%) 62 67 65

Financial parameters (EUR mn)

Revenues 15,198 16,022 31,220

EBITDA 3,102 3,520 6,622

Net income 782 1,297 2,079

Net debt 10,330 7,687 18,017

Net debt/EBITDA (X) 3.3 2.2 2.7

Source: Company, Kotak Institutional Equities

Exhibit 2: Holcim and Lafarge combined would have over 40% market share in the eastern region Capacity details of Holcim and Lafarge in India (mn tons)

ACC Ambuja Holcim Lafarge Industry

East 4.9 6.0 10.9 8.6 20 47 41

West 4.0 10.6 14.6 15 45 32

Central 4.5 1.5 6.0 6 51 12

North 5.9 9.9 15.8 2.6 18 73 25

South 10.9 10.9 11 136 8

Total 30 28 58 11 69 352 20

Holcim+ Lafarge

Market share

(%)

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Current market price assumes significant improvement in volume growth and EBITDA/ton Scenario analysis for valuations of ACC and Ambuja based on CY2015E earnings

ACC AmbujaCY2013 Bull CY2013 Bull

Volume 23.93 29 21 25 Growth (%) (2.8) 10 (2.0) 10 Profitability (Rs/ton) 572 893 751 1,174 Growth (%) (28) 25 (33) 25 EBITDA (Rs bn) 13,683 25,869 15,773 29,821 Multiple (X) 9 9 Enterprise value (Rs bn) 233 268 Net debt (Rs bn) (40) (38) Fair value 1,453 201

Notes:(a) Bull case is based on CY2015E.

(b) Growth rates for the bull case are CAGR for the two years from CY2013 to CY2015E.

Source: Company, Kotak Institutional Equities estimates

Cement India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 4: ACC and Ambuja have a history of earnings downgrades Data on consensus earnings for ACC, December year-ends, CY2013-14E

81.6

53.7

97.8

59.1

40

60

80

100

120

Janu

ary

Febr

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Mar

chA

pril

May

June July

Aug

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Sept

embe

rO

ctob

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ovem

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Dec

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Apr

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ayJu

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Aug

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Sept

embe

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ovem

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Dec

embe

r

(Rs/share) 2013 2014E

Source: Bloomberg, Kotak Institutional Equities

Exhibit 5: Ambuja reflects the earnings estimate trajectory of ACC Data on consensus earnings for ACC and Ambuja, December year-ends, CY2013-14E

7.8

11.2

8.9

13.4

6

8

10

12

14

16

Janu

ary

Febr

uary

Mar

chA

pril

May

June July

Aug

ust

Sept

embe

rO

ctob

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Dec

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Aug

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Sept

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Dec

embe

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(Rs/share) 2013 2014E

Source: Bloomberg, Kotak Institutional Equities

Exhibit 6: Comparative valuation of cement companies under our coverage

Market cap. CMP (Rs) Target EPS (Rs) P/E (X)Company (US$ mn) 7-Apr price (Rs) Rating 2013 2014E 2015E 2016E 2013 2014E 2015E 2016EACC 4,180 1,379 1,070 REDUCE 74 47 46 59 19 29 30 23Ambuja Cements 5,142 209 150 SELL 10.3 6.8 9.2 10.8 20 31 23 19Grasim Industries 4,211 2,847 2,800 ADD 272 207 227 278 10 14 13 10India Cements 328 66 60 ADD 7 3 5 8 10 25 13 8Jaiprakash Associates 1,904 56 44 ADD 2.0 3.3 9.0 10.3 28 17 6 5Shree Cement 3,155 5,615 3,950 SELL 288 220 285 358 19 25 20 16UltraTech Cement 9,837 2,226 1,600 REDUCE 101 69 83 111 22 32 27 20

EV/EBITDA (X) EV/ton of production (US$) EV/ton of capacity (US$)Company 2013 2014E 2015E 2016E 2013 2014E 2015E 2016E 2013 2014E 2015E 2016EACC 11.7 17.4 15.0 12.6 151 161 148 137 122 126 113 102Ambuja Cements 11.6 17.7 14.1 12.1 212 214 205 198 164 157 148 143Grasim Industries 7.6 6.8 5.4 4.1 NA NA NA NA NA NA NA NAIndia Cements 5.7 7.1 5.5 4.5 87 80 72 66 57 53 43 38Jaiprakash Associates 11.6 9.9 6.6 6.2 NA NA NA NA NA NA NA NAShree Cement 11.9 15.7 12.2 9.2 237 231 213 191 218 229 206 191UltraTech Cement 13.5 17.4 13.7 10.3 243 242 225 204 194 194 162 149

Source: Bloomberg, Kotak Institutional Equities estimates

Disclosures

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

"I, Murtuza Arsiwalla, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report." Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of December 31, 2013

Percentage of companies covered by Kotak Institutional Equities, within the specified category.

Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.

* The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2013 Kotak Institutional Equities Investment Research had investment ratings on 162 equity securities.

14.2%

27.2%

39.5%

19.1%

4.3% 4.9%

0.0%1.9%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver

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