india cement sector - credit suisse

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26 September 2012

Asia Pacific/India

Equity Research

Cement

India Cement Sector SECTOR REVIEW

Pricing resilience; upgrade ACC to NEUTRAL

Figure 1: Cement majors continue to remain in a sweet spot

0%

20%

40%

60%

80%

100%

120%

(400)

(200)

-

200

400

600

800

1,000

1,200

1,400

1,600

FY12 EBITDA/Tonne FY12 PBT/Tonne FY12 Capacity Utilisation (RHS) FY12 Industry Utilisation (RHS)

Regional PlayersFY12 Avg EBITDA/tonne – 1027Avg PBT/tonne – 471Avg utilization – 62%Capacity share – 18%

Cement MajorsFY12 Avg EBITDA/tonne – 858Avg PBT/tonne – 558Avg utilization – 78%Capacity share – 45%

High Utilization playersFY12 Avg EBITDA/tonne – 438Avg PBT/tonne – 218Avg utilization – 92%Capacity share – 7%

Source: Company data, CMA, Credit Suisse estimates

■ Cement prices continue to remain firm. Our recent channel checks suggest

that cement prices continue to surprise positively and have declined only 2% versus our expectation of a 4% decline in the September quarter. The cement industry’s pricing power has been aided by factors such as recovery in utilisation rates of cement majors (ACC, Ambuja and UltraTech), lower breakeven points of cement majors, and production discipline, which increasingly appears likely to be sustained. With higher-than-industry utilisations, lower leverage and higher profitability, cement majors remain well positioned in the industry, as smaller regional players face either leverage concerns or high utilisations with low profits.

■ The key negative catalysts we anticipated largely played out. We had three

key concerns about the sector: (1) adverse impact of rising costs, low industry utilisations and weak demand; (2) impact of adverse ruling on cartel, and (3) valuation risk arising from multiple and earnings de-rating. The industry, however, has navigated the challenging phase by maintaining production discipline (sacrificing volume to protect margins)—despite ruling on cartelisation by the CCI, and weak demand.

■ Outlook incrementally turning favourable. Cement industry’s cost pressures are

beginning to subside (coal, etc.), and capacity pressures are easing (utilisations near trough). Continued production discipline (lower cash flow volatility) and pricing power pose the risk of consensus estimates lagging. We revise up our estimates of cement majors to factor in higher cement prices.

■ Upgrade ACC; prefer ICEM as a beneficiary of mean reversion. Valuations of

cement majors (ex-ACC) are above historical averages and do not factor in any impact of CCI penalty (~4% impact on valuation). ACC’s underperformance vs Ambuja and UltraTech post the CCI order makes its valuation more reasonable (Figure 9). We upgrade ACC to NEUTRAL, and prefer ICEM as a mean reversion beneficiary given its significant valuation divergence to cement majors.

Research Analysts

Sandeep Mathew

91 22 6777 3715

[email protected]

Kush Shah

+91 22 6777 3862

[email protected]

26 September 2012

India Cement Sector 2

Focus charts Figure 2: Cement prices remain firm despite adverse CCI

order and weak demand

Figure 3: Cement majors’ utilisations have recovered;

industry utilisations to improve from FY14E

-10%

-5%

0%

5%

10%

15%

20%

240

250

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270

280

290

300

310

320

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

Cement Prices (Rs. per bag) YoY despatch growth (cement majors)

Date of CCI order

0%

10%

20%

30%

40%

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60%

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80%

90%

100%

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200

250

300

350

400

Avg Cement Prices (Rs. Per bag) Industry Utilisation(RHS) Cement major Utilisation(RHS)

Source: Company data, CMA, Credit Suisse estimates Note: Jul &

Aug YoY growth numbers are based on ACC & Ambuja only


Figure 4: Cement majors’ profitability set to improve… Figure 5: …as industry capacity pressures decline

0%

10%

20%

30%

40%

50%

60%

70%

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100%

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800

1,000

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1,400

FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14E

EBITDA/Tonne PBT/Tonne Capacity Utilisation (RHS)

0%

5%

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30%

35%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Capacity Additions (mn tonnes) % of Production (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, CMA, Credit Suisse estimates

Figure 6: Grinding excesses remain an unlikely threat… Figure 7: …and cost pressures begin to subside..

-4%

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(20)

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FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Excess Grinding Capacity (mn tonnes) % of total capacity (RHS)

4,600

4,800

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

80

90

100

110

120

130

140

Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

Coal Price (USD per tonne) Coal Price (INR per tonne) (RHS)

Source: Company data, CMA, Credit Suisse estimates Source: Company data, Bloomberg, Credit Suisse estimates

Figure 8: Consensus upgrades likely to continue Figure 9: ACC is cheapest among cement majors

80.00

90.00

100.00

110.00

120.00

130.00

140.00

150.00

160.00

Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

Ambuja - CY13E ACC - CY13E Ultratech - FY13E

8.2

9.4 9.3

15.5

17.5

16.3

7.9

9.5 9.8

8.5 8.1 8.7

13.7 14.7

13.8

5.0

5.8

6.6

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FY14E EV/EBITDA FY14E P/E FY13E EV per tonne ('000)

Source: Company data, Thomson Reuters, Credit Suisse estimates Source: Company data, Thomson Reuters, Credit Suisse estimates

26 September 2012


Pricing resilience; upgrade ACC to NEUTRAL Cement prices continue to remain firm

Our recent channel checks suggest that cement prices continue to surprise positively and

have declined by only 2% versus our expectation of a 4% decline in the September

quarter. The cement industry's pricing power has been aided by factors such as recovery

in utilisation rates of cement majors, lower breakeven points of cement majors versus

smaller cement players, and production discipline, which increasingly appears likely to be

sustained. With higher-than-industry utilisations, lower leverage and higher profitability,

cement majors remain well positioned in the industry, as smaller regional players face

either leverage concerns or high utilisations with low profits.

The key negative catalysts we anticipated largely

played out

We had three key concerns on the sector: (1) adverse impact of rising costs driven by

power and freight costs, low industry capacity utilisations and weak cement demand; (2)

impact of adverse ruling on cartelisation by the Competition Commission of India; and (3)

valuation risk arising from multiple and earnings de-rating. The industry, however, has

navigated the challenging phase by maintaining production discipline (sacrificing volume to

protect margins)—despite ruling on cartelisation by the CCI, and low demand.

Outlook incrementally turning favourable

Cement industry’s cost pressures are beginning to subside (coal, etc.), and capacity

pressures are easing (utilisations near trough). Continued production discipline (lower

cash flow volatility) and pricing power, raises risk of consensus estimates lagging. We

upgrade estimates of cement majors (ACC, Ambuja, UltraTech) to factor higher cement

prices.

Valuations high, but unlikely to de-rate; ACC a safer

haven

Valuations of cement majors (ex-ACC) trade above historical averages and do not factor in

any impact of the CCI penalty (~4% impact to valuation). ACC’s underperformance vs

Ambuja and UltraTech over the past three months make its valuation more reasonable

(Figure 9). We upgrade ACC to NEUTRAL. We prefer India Cements due to the potential

cost savings arising from its newly setup captive power plant, and it being a potential

beneficiary of mean reversion given its significant valuation divergence to cement majors

over the past 18 months.

Cement prices have

declined by only 2% versus

our expectation of a 4%

decline in the September

quarter

CCI penalty on industry

has not impacted pricing

power.

ACC more attractively

valued than UltraTech and

Ambuja

Cost pressures beginning

to subside, utilisations

near trough

26 September 2012


Valuation summary Figure 10: Key recommendations

Company Rating Share

price

Target

price

Target

multiple

+/- EV EBIDTA Core P/E (x) EV per tonne

(x)

(Rs) (Rs) (x) (%) FY12 FY13E FY14E FY12 FY13E FY14E FY13E

ACC Limited N 1,375 1,462 8.5x EV

EBIDTA

6% 13.7 9.4 8.2 19.4 16.2 15.5 7,895

UltraTech Cement Ltd U 1,835 1,559 8.1x EV

EBIDTA

-15% 12.4 10.4 9.4 20.5 17.6 17.5 9,491

Ambuja Cements Ltd N 195 194 8.7x EV

EBIDTA

0% 14.0 10.1 9.3 24.2 19.2 16.3 9,790

India Cements O 86 117 4074x EV

per tonne

36% 5.9 5.4 4.6 9.1 8.9 7.4 3,385

Source: Company data, Credit Suisse estimates

Figure 11: Global cement company valuation snapshot

Company Current Target Mcap Rating P/E (x) P/B (x) ROE EV / EBITDA

Price

(lc)

Price

(lc)

US$ bn FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

India

ACC Limited 1,375.3 1,468.0 4.8 N 16.2x 15.5x 3.3x 3.1x 14% 14% 9.4x 8.2x

Ultratech Cement Ltd 1,835.4 1,559.0 9.4 U 17.6x 17.5x 3.4x 3.0x 15% 12% 10.4x 9.4x

Ambuja Cements Ltd 194.8 194.0 5.6 N 19.2x 16.3x 3.4x 3.2x 14% 14% 10.1x 9.3x

India Cements 85.9 117.0 0.5 O 8.9x 7.4x 0.6x 0.6x 8% 8% 5.4x 4.6x

Mexico

Cemex 8.4 10.0 9.3 U N.M. N.M. 0.8x 0.8x -1% 1% 9.9x 8.5x

Thailand

Siam Cement 352.0 375.0 13.7 O 17.6x 11.5x 2.8x 2.5x 19% 23% 12.9x 9.8x

Europe

Lafarge 43.0 34.0 15.5 N 15.6x 12.6x 0.7x 0.7x 4% 5% 7.4x 6.6x

Holcim 63.0 51.0 22.1 N 18.4x 15.2x 1.1x 1.1x 6% 7% 7.6x 6.8x

CRH 15.4 12.0 14.4 N 17.7x 17.4x 1.0x 1.0x 6% 7% 8.4x 7.5x

Indonesia

Holcim Indonesia TBK PT 2,800.0 2,800.0 2.2 N 17.7x 15.1x 2.5x 2.3x 14% 15% 8.4x 7.7x

Indocement 20,500.0 20,500.0 7.8 N 17.4x 15.1x 4.0x 3.3x 23% 22% 10.0x 8.3x

Semen Gresik (Persero) 14,250.0 13,850.0 8.8 O 17.7x 14.5x 4.9x 4.1x 28% 27% 10.6x 8.7x

China

Anhui Conch Cement 20.0 13.5 13.7 U 17.0x 14.0x 2.1x 1.9x 15% 16% 8.0x 6.3x

China National Building 7.1 5.5 5.9 U 8.6x 6.5x 1.3x 1.1x 14% 16% 7.8x 5.8x

China Shanshui Cement 4.1 4.0 1.8 N 9.0x 8.7x 1.4x 1.2x 19% 18% 4.9x 4.9x


26 September 2012


Financial summary Figure 12: Changes in rating and target price

ACC Ambuja Ultratech India Cements

Rating Old Underperform NEUTRAL UNDERPERFORM OUTPERFORM

New NEUTRAL NEUTRAL UNDERPERFORM OUTPERFORM

Target price (Rs) Old 1,022 139 1,212 117

New 1,462 194 1,559 117

Change (%) 43% 40% 29% 0%


Figure 13: Ambuja—estimate revisions

CY12E CY13E CY14E

Old New Variance Old New Variance Old New Variance

Revenue 93,780 100,629 7% 103,283 112,778 9% 114,525 125,734 10%

EBITDA 20,503 26,546 29% 21,256 28,231 33% 22,665 31,688 40%

Net profit 12,503 15,517 24% 13,372 18,255 37% 14,366 20,682 44%

Volume (mn tonne) 22.3 22.2 0% 23.9 23.7 -1% 25.5 25.2 -1%

Average realisation (Rs/tonne) 4,219 4,535 7% 4,351 4,763 9% 4,508 4,986 11%


Figure 14: ACC—estimate revisions

CY12E CY13E CY14E

Old New Variance Old New Variance Old New Variance

Revenue 106,489 111,153 4% 116,778 124,612 7% 129,334 138,288 7%

EBITDA 19,127 24,851 30% 19,772 27,106 37% 20,725 30,404 47%

Net profit 10,797 12,500 16% 11,243 16,537 47% 11,619 18,395 58%

Volume (mn tonne) 24.6 24.4 -1% 26.1 25.7 -2% 28.0 27.2 -3%

Average realisation (Rs/tonne) 4,205 4,507 7% 4,352 4,753 9% 4,508 4,977 10%


Figure 15: UltraTech—estimate revisions

FY13E FY14E

Old New Variance Old New Variance

Revenue 202,688 212,298 5% 221,341 240,586 9%

EBITDA 42,799 49,411 15% 44,169 54,074 22%

Net profit 21,838 28,414 30% 20,847 28,376 36%

Volume (mn tonne) 43.4 42.0 -3% 45.5 45.8 1%

Average realisation (Rs/tonne) 3,950 4,311 9% 4,134 4,468 8%


26 September 2012


Cement prices continue to be firm Our monthly channel checks with cement dealers suggest that cement companies have

managed to hold onto prices better than our expectation, despite weak demand and low

industry utilisations.

Cement prices have on average only declined by 2% in September quarter versus our

expectation of a 4% decline. We estimate that every 1% improvement in average

realisations improves EBITDA by approximately 4.6% for the cement majors.

Figure 16: Cement prices have remained firm despite low

demand and adverse CCI order

Figure 17: Cement majors’ utilisations have recovered;

industry utilisations to improve from FY14E

-10%

-5%

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10%

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20%

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Cement Prices (Rs. per bag) YoY despatch growth (cement majors)

Date of CCI order

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Avg Cement Prices (Rs. Per bag) Industry Utilisation(RHS) Cement major Utilisation(RHS)

Source: Company data, CMA, Credit Suisse estimates Note: Jul &

Aug YoY growth numbers are based on ACC & Ambuja only


While cement prices have fallen by approximately 5% from June to September, with the

delayed monsoon, and unusual increase in cement prices in the month of July, average

cement prices for the quarter are only down approximately 2%.

Figure 18: Average cement prices (Rs/bag)

Month North South East West Central India

Jun-12 285 315 385 302 270 311

Jul-12 300 320 370 312 285 317

Aug-12 287 315 350 295 280 305

Sep-12 280 310 335 285 270 296

Variation (QoQ) Jun to Sep -2% -2% -13% -6% 0% -5%


Cement majors remain in a sweet spot

Enjoy higher utilisations, low leverage and better profitability

Cement majors (ACC, Ambuja, Ultratech) which account for 32% of total industry capacity,

have seen utilisations improve since FY11 (refer Figure 19) and are operating above

industry averages with net cash balance sheets, which continues to position them very

favourably in the industry.

A 1% improvement in

average realisations

improves EBITDA by

approximately 4.6% for the

cement majors

26 September 2012


Figure 19: Cement majors continue to remain in a sweet spot

0%

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120%

(400)

(200)

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1,200

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1,600




High Utilization playersFY12 Avg EBITDA/tonne – 438Avg PBT/tonne – 218Avg utilization – 92%Capacity share – 7%


Smaller regional cement companies (primarily South-based) despite earning higher

EBITDA per tonne at low utilisations do not appear in a position to force price wars due to

leverage as seen in their lower PBT per tonne (see Figure 20).

Even smaller regional players with high utilisation rates (Birla Corp, Heidelberg, etc.) are

less profitable than cement majors due to aggressive pricing resulting in lower EBITDA per

tonne. The focus of such companies, going forward, is likely to be to enhance margins as

there is limited scope to further improve utilisations.

Figure 20: Smaller regional cement companies unlikely to threaten pricing power—

weighed down by leverage and low profitability

(400)

(200)

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200

400

600

800

1,000

40% 50% 60% 70% 80% 90% 100%

Capacity Utilisation

PBT/

Tonn

e

Steady utilisations,High profit

Chettinad

Dalmia

OCL India

India Cements

BinaniHeidelberg

BIrla Corp

Jaypee

High utilisations, low profit

Century Tex

JK Cement

Madras Cement

Shree Cement

ACC

AmbujaUltratech

Source: Company data, Credit Suisse estimates Note: Size of bubble represents EV

Cement major’s utilisations

are above industry

utilisations.

Smaller regional players,

face leverage concerns, or

high utilisations with low

profits.

26 September 2012


Figure 21: Cement majors (ex-Jaypee) are comfortably placed with strong balance sheets

(1.0)

-

1.0

2.0

3.0

4.0

5.0

40% 50% 60% 70% 80% 90% 100%

Capacity Utilisation

Deb

t/Equ

ity

Chettinad

DalmiaOCL IndiaIndia Cements

Binani

Heidelberg

BIrla Corp

Jaypee

Century Tex

JK Cement

Madras Cement

Shree Cement

ACCAmbuja

Ultratech

Source: Company data, Credit Suisse estimates Note: Size of bubble represents EV

Further, the cost structures of the top 15 cement manufacturers (70% of current industry

capacity) suggest that there is not much of a significant cost advantage for the smaller

players vis-à-vis cement majors. Thus, improvement in utilisations will have to be primarily

driven by aggressive pricing, which in the current environment is unlikely.

Figure 22: Comparable cost structures seen for smaller and larger cement firms

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Realisation EBITDA Raw Material Power Freight Other Costs Total Costs

Cement Majors (Rs. per tonne) Smaller Companies (Rs. per tonne)


Cement majors’ breakeven points have been on the decline

Break-even levels for top three cement majors are low at 23% and have been declining.

While smaller cement companies have higher break-even levels (approximately 42%),

their current utilisations remain well above the break-even levels, which is one of the key

reasons for lack of distress despite low utilisations.

Lower break-even points have been aided by factors including declining leverage as large

cement companies have been generating strong cash flows over the past few years.

Further, the variable costs (power, freight) have structurally risen at a faster pace over the

past few years.

Break-even level for cement

majors average 23% versus

smaller players of 42%

26 September 2012


Figure 23: BEP for cement majors is at 23% Figure 24: Smaller manufacturers have higher BEP than

cement majors, but still a comfortable cushion

0%

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120%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Break Even Utilisation Capacity Utilisation

0%

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120%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Break Even Utilisation Capacity Utilisation

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 25: Variable cost per tonne has almost doubled in the past five years for cement

majors

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

FY07 FY08 FY09 FY10 FY11 FY12

Variable Cost (Rs. per tonne)


26 September 2012


The key negative catalysts we anticipated have largely played out We anticipated industry profitability to be impacted by rising freight and power costs,

upcoming capacity additions, and adverse CCI order. Majority of the cost pressures seem

to be behind us and industry appears to have dealt with the cost hikes.

Freight cost pressures appear largely done

Freight costs amount to approximately 28% of the total cost and 20% of sales of cement

majors. While rail freight was hiked by approximately 25% in March 2012, diesel prices

were hiked by approximately 14% last week.

The industry’s dependence on road transport is significant at 45%; however, smaller

regional cement companies have higher dependence on road transport, leaving them

more vulnerable to diesel price hikes.

In addition, captive diesel power plants and gensets account for 2% of total power

produced in FY12.

The increase in diesel prices is likely require a price hike of approximately 2% to offset the

cost increase.

Figure 26: EBITDA per tonne has improved sharply… Figure 27: …despite rising freight and power costs

400

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600

700

800

900

1,000

1,100

1,200

1,300

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Jun-12

Realisation (Rs. per tonne) EBITDA (Rs. per tonne) (RHS)

400

500

600

700

800

900

1,000

1,100

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Jun-12

Power cost (Rs. per tonne) Freight cost (Rs. per tonne)

Source: Company data, Credit Suisse estimates Note: Data for

cement majors

Source: Company data, Credit Suisse estimates Note: Data for

cement majors

Capacity additions have come on-stream, but pricing

power continues…

Approximately 16mn tonne of cement capacity, which started operations in FY12, and

approximately 23mn tonne of new cement capacity in 1HFY13 has been activated, totaling

almost 12% of FY12 industry capacity.

Rail freight hike of 25% and

diesel price hike of 14% is

behind us.

26 September 2012


Figure 28: Major capacity additions seen in FY12 and 1HFY13

Company State Capacity Commissioning Year

Shree Cement Rajasthan 1.4 FY12

KCP Ltd Andhra Pradesh 1.7 FY12

Chettinad Cement Tamil Nadu 2.5 FY12

Jaypee Jharkhand 2.1 FY12

Lafarge Jharkhand 1.2 FY12

JSW Cement Andhra Pradesh 4.5 FY13

ABG Cement Gujarat 5.8 FY13

Heidelberg Cement MP and UP 2.9 FY13

Jaypee Andhra Pradesh 5.0 FY13

Sagar Cements Karnataka 2.5 FY13

Wonder Cement Rajasthan 2.5 FY13


While ramp-ups of new capacities are likely to take time, we believe the full impact of

erstwhile capacity ramp-ups seen in FY10 and FY11 (totaling 110 mn tonne, 33% of

industry capacity) should have begun to take full effect.

However, these capacities have not impacted pricing power, and appear less likely to

impact as almost 25% of total cement capacity additions between FY07-12 (totaling 43 mn

tonne) have been pure grinding capacities, which are cheaper cost and easier to idle.

Going forward, the pace of new capacity additions in FY13E is expected to be around 14%

of FY12 production and gradually slow down.

Figure 29: Pace of capacity additions set to slow Figure 30: Pure grinding capacities have accounted for

25% of FY07-12 capacity additions

0%

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35%

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FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Capacity Additions (mn tonnes) % of Production (RHS)

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20

30

40

50

60

70

80

Greenfield Brownfield Grinding

Capacity additions during FY07 to FY12 (mn tonnes)


Pure grinding additions likely to continue running at low utilisations

While total rated cement capacity in India is 337mn tonne, clinker capacity is 225mn

tonne, which can support a total effective production of only 311 mn tonne of cement

(assuming current 25:67:8 OPC:PPC:Slag ratio and 100% clinker utilisation).

The differential between 311 mn tonne and 337mn tonne of pure grinding capacity will

remain a structural excess, in our view.

Clinker utilisations have bottomed, in our view, despite overall cement capacity utilisations

only troughing in FY13E (assuming demand grows at 9% in FY13).

Activation of FY10 and

FY11 capacity additions,

totalling 33 mn t, 33% of

industry has not impacted

pricing power.

Current grinding capacity

excesses of approximately

26 mn t (8% of cement

capacity) would increase to

35 mn t in FY13E and 38

mn t in FY14E.

Pace of capacity additions

to slow.

26 September 2012


Figure 31: Clinker utilisations have bottomed in FY12… Figure 32: …grinding capacity excesses unlikely threat

60%

65%

70%

75%

80%

85%

90%

95%

100%


Clinker Capacity Utilisation

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

(20)

(10)

-

10

20

30

40

50


Excess Grinding Capacity (mn tonnes) % of total capacity (RHS)


Why set up the excess grinding capacity? Tightly control the supply chain…

The new grinding capacities have been largely set up near fly-ash production centers

(power plants) and near demand centers to largely produce blended cement particularly

PPC (currently approximately 67% of overall cement demand in India).

The industry’s shift towards a hub-and-spoke model enables them to more efficiently

control the supply chain (move from ‘push’ to ‘pull’).

Further, the cost of idling cement capacity in comparison to idling clinker capacity is also

lower as the capex related to grinding units is only USD30/tonnein comparison to overall

cement capex of USD140-160/tonne.

Current grinding capacity excesses of approximately 26 mn tonne (8% of cement capacity)

would increase to 35 mn tonne in FY13E and 38 mn tonne in FY14E. We believe these

excess capacities are unlikely to be a significant threat to break production discipline,

considering the lower costs required for setting up and running the grinding plants.

Figure 33: Cost of setting up grinding capacity is low (US$/tonne)

0

20

40

60

80

100

120

140

160

Greenfield Capacity Brownfield Capacity Grinding Capacity

Cost of setting up capacity in 2012 (USD per tonne)


Cost of setting up grinding

capacity is only

US$30/tonne

The industry’s shift towards

a hub-and-spoke model

enables them to more

efficiently control the supply

chain

26 September 2012


Figure 34: Excess grinding capacities unlikely to impact pricing


Capacity 151.0 156.0 167.5 193.5 211.7 269.6 321.5 337.0 363.8 391.7

Clinker Capacity 122.8 125.0 136.1 142.4 150.9 184.5 210.0 225.0 242.0 260.3

OPC 56.6 51.7 44.6 38.1 39.3 48.1 54.7 58.6 63.0 67.8

PPC 82.9 93.3 117.0 134.5 143.5 175.5 199.7 214.0 230.2 247.6

Slag 20.7 20.0 22.4 22.9 25.2 30.8 35.1 37.6 40.5 43.5

Others 0.6 0.5 0.6 0.6 0.5 0.6 0.7 0.8 0.8 0.9

Effective Capacity 160.8 165.6 184.6 196.2 208.6 255.0 290.3 311.0 334.5 359.8

OPC 56.0 55.8 47.7 42.3 44.3 49.8 56.9 58.1 62.7 69.0

PPC 60.2 74.0 91.8 109.9 118.7 133.6 152.6 155.7 168.1 184.9

Slag 10.7 11.4 12.6 13.4 14.9 16.8 19.2 19.6 21.1 23.2

Others 0.6 0.6 0.6 0.7 0.6 0.7 0.7 0.8 0.8 0.9

Production 127.6 141.8 152.7 166.3 178.4 200.9 229.4 234.0 255.1 278.1

Cement Capacity Utilisation 84% 91% 91% 86% 84% 74% 71% 69% 69% 71%

Clinker Capacity Utilisation 85% 88% 94% 88% 96% 82% 78% 73% 74% 75%

Over/Under capacity (9.8) (9.6) (17.1) (2.7) 3.1 14.6 31.2 26.0 35.5 38.0

% of total cement capacity -6% -6% -10% -1% 1% 5% 10% 8% 10% 10%


CCI ruling has not impacted pricing power

The ruling on cartelisation by cement companies issued by the Competition Commission

of India in June 2012 was expected to impact the pricing power of cement companies

(through breakdown of production discipline, etc.). Cement companies were fined 0.5% of

profits for alleged cartelisation by the CCI.

While the order is unlikely to result in immediate cash outflows for the companies as they

are likely to challenge the order with the COMPAT and if unsuccessful, with the Supreme

Court, the legal process is expected to remain long-drawn.

While we anticipated CCI order to impact pricing power, cement companies, on the

contrary, have been able to successfully defend profitability through cement price

increases as early as July 2012.

Figure 35: Cement prices are up 20% in one year and seasonal decline has been lower

240

250

260

270

280

290

300

310

320


Cement Prices (Rs. per bag)

Date of CCI order


Cement prices have stayed

resilient, despite CCI order.

26 September 2012


Demand growth has disappointed… 2H recovery key

Demand growth of cement majors (ACC, Ambuja and Ultratech) continues to remain weak

as shown by the monthly dispatch data (refer to Figure 36). Growth for the four months

from Apr-12 onwards has averaged at 3% YoY for the cement majors versus 8% YoY in

the preceding three months.

Figure 36: YoY growth has slowed… Figure 37: …price increases continue to remain strong

8% 8% 8%

0%

4%

5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

ACC Amubja Ultratech

YoY volume growth (Jan-Mar) YoY volume growth (Apr-Jul)

8%

12%

3%

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

YoY volume growth for cement majors YoY cement price increase

Mar-12 Jul-12


Strong rural demand base unlikely to materially de-rate cement demand growth

As shown in our initiation report, rural concretisation trends provide a strong underlying

demand driver for the cement sector.

Despite lower forecasted GDP growth of 6.5% for FY13E, we expect cement demand to

grow at 8% in FY13, and 9% in FY14 as rural housing contributes approximately 40% of

total demand.

Further, any incremental demand push from government orders and infrastructure

(government orders largely use OPC, and same for ready-mix concrete, etc.) will also

favorably impact clinker utilisations due from higher OPC usage.

Figure 38: Cement demand largely driven by housing Figure 39: Rural housing concretisation trends provide a

strong support for demand

Commercial Real Estate

15%

Housing60%

Infrastructure / Others

25%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Housing stock Concrete roofedhouses

Cement-walledhouses

Cement flooredhouses

Total Rural Urban

Source: Company data, Credit Suisse estimates Source: Census 2011, Credit Suisse estimates; Note: Ten year 2001-

2011 CAGR used

Dispatch growth has

averaged at 3% from April to

Jul versus 8% from Jan-Mar

26 September 2012


Incrementally, outlook improving Cost pressures beginning to ease…

Lower imported coal prices can positively impact margins

International coal prices have fallen 23% (YoY) and adjusted for rupee depreciation have

still declined by 7% (YoY). The larger players (ACC, Ambuja and Ultratech) currently

source approximately 30% of their total coal requirements from FSAs with Coal India

(CIL). The remaining 70% is met through e-auction, petcoke and imported coal.

Given the industry’s increasing dependence on imported coal (due to supply delays by

CIL, etc.), we expect a positive impact to margins from falling international coal prices.

Figure 40: International coal prices have eased.. CS estimates of US$100/tonne in CY13E

4,600

4,800

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

80

90

100

110

120

130

140

Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

Coal Price (USD per tonne) Coal Price (INR per tonne) (RHS)

Source: Bloomberg, Thomson Reuters

…breakeven for new capacities set to increase...

Bulk of the cheaper cement capacity additions (capex cost of US$110/tonne) initiated

during 2008-11 is expected to be completed by FY13. The high breakeven for higher cost

capacities in future is likely to ensure that cement companies continue to focus on

enhancing margins.

Figure 41: Bulk of cheaper capex expansions done;

higher capex/tonne additions to start in FY14

Figure 42: Capex costs of historical additions have been

significantly lower than current costs

-

5.00

10.00

15.00

20.00

25.00

FY 13 FY 14 FY 15

Greenfield additions Brownfield additions Grinding additions

mn tonnes

0

20

40

60

80

100

120

140

160

Greenfield Capacity Brownfield Capacity Grinding Capacity

Cost per tonne (USD) in 2007 Cost per tonne (USD) in 2012

mn tonnes


Imported coal prices,

adjusted for rupee

depreciation have declined

by 7% (YoY)

26 September 2012


…new players likely to fall in norm

New capacities coming on-stream in the second half of FY13 of new players, ABG Cement

(5.8 mn tonne plant) and JSW Cement (4.5 mn tonne) account for one-third of FY13

capacity additions.

Based on the estimated cost of setting up the plants for these two players and leverage

profiles, we expect their break even EBITDA to be at around Rs.450/tonne running at

100% utilisation. Working backwards, we find that the ability of these plants to challenge

current pricing will be muted.

Figure 43: Higher leverage of new players unlikely to lead to price wars

ABG Cement JSW Cement

Capacity (mn tonne) 5.8 4.5

Capital cost (Rs.mn) 24,330 15,000

Debt (Rs.mn) 14,974 11,250

Depreciation (Rs.mn) 810 500

Interest (Rs.mn) 1,797 1,350

EBITDA required to breakeven (Rs.mn) 2,607 1,850

Implied breakeven EBITDA/ tonne @ 100%

utilization

450 411

Additional Dealer discount (@ Rs.5/bag) 100 100

Average operating cost / tonne 3,000 3,000

Minimum realization to breakeven at net profit 3,550 3,511

Average net industry realization (FY12) 3,835 3,835

% discount to current realizations 7.4% 8.4%

Source: Credit Suisse estimates

Profitability of cement majors set to improve

With industry capacity utilisations near-trough, and smaller players unlikely to materially

deteriorate pricing, we believe the profitability of larger cement majors are likely to

improve, going forward.

Figure 44: Profitability of cement majors to re-rate as utilisations pick up

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

200

400

600

800

1,000

1,200

1,400

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

EBITDA/Tonne PBT/Tonne Capacity Utilisation


New capacities unlikely to

challenge current pricing.

26 September 2012


Production discipline lowers cash flow volatility and

can help sustain high multiples

While cement majors continue to trade at high multiples in comparison to long-term

averages, we believe these multiples are likely to sustain on account of improving

fundamentals, and lower cash flow volatility.

Figure 45: Current EV/EBITDA multiples are higher than long-term averages


1 year 9.5x 9.4x 9.3x 5.0x

2 years 9.0x 9.1x 8.9x 6.2x

5 years 7.7x 8.1x 7.1x 5.7x

10 years 8.5x 8.7x 8.1x 7.6x

Source: Thomson Reuters, Credit Suisse estimates

Consolidation likely to continue and help sustain premium multiples

While the top five cement companies and top ten cement companies accounting for 44%

and 60% of total industry capacity respectively, the consolidated group holdings indicate

that concentration is higher.

The Birla Group (Ultratech, Kesoram, Century Textiles and Mangalam cements, the latter

three owned by the BK Birla Group) together own approximately 66.5mn tonnes of cement

capacity, while Holcim controls approximately 57.4mn tonnes (through ACC and Ambuja).

Figure 46: Capacity share of top 10 groups likely to

remain significant over the next two years

44%

60%

53%

70%

42%

57%

50%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Top 5 Companies Top 5 Groups Top 10 Companies Top 10 Groups

FY12 FY14E


We believe consolidation of cement capacities in the industry will continue given the strong

balance sheets of cement majors, continued interest from foreign players (CRH in talks to

buy out Jaypee cement assets in Gujarat for US$160 EV/tonne), and large capacity

additions by new non-core cement players (ABG, JSW, etc.).

Top ten cement companies

account for 60% of total

industry capacity.

26 September 2012


Valuations high, but unlikely to de-rate; ACC a safer haven Valuations of cement majors (exception of ACC) trade above historical averages and do

not appear to factor in the impact of CCI penalty (~4% impact to valuation). We continue to

value cement stocks on the basis of a through-cycle 10-year average EV/EBITDA multiple.

Figure 47: Current EV/EBITDA multiples are higher than long-term averages


1 year average multiple 9.5x 9.4x 9.3x 5.0x



10 year average multiple

(CS valuation)

8.5x 8.7x 8.1x 7.6x

Source: Thomson Reuters, Credit Suisse estimates

Further, the implied CY13E/ FY14E EBITDA/tonne being priced in for average historical

multiples to sustain appears high in the case of Ultratech, which is factoring in significant

improvement in EBITDA/tonne (from improvement in cement prices) versus FY13E levels.

We believe this is unlikely as a slow ramp-up of new capacities from 1QFY14E especially

in the Southern region for Ultratech is likely to keep its profitability prospects muted.

Figure 48: FY14E implied EBITDA per tonne at historical multiples

EBITDA/tonne required (Rs) ACC Ambuja Ultratech

1 year avg multiple 1,019 1,305 1,270




FY12A EBITDA/tonne 716 918 1,019

CS FY13E EBITDA/tonne 1,018 1,186 1,177


ACC is most attractive among cement majors at

current valuations

The recent underperformance of ACC relative to its larger peers (Ambuja and Ultratech)

makes it relatively more attractive, as it appears to be factoring in reasonable improvement

in EBITDA/tonne assumptions.

ACC more attractively

valued than Ultratech and

Ambuja

26 September 2012


Figure 49: ACC is more attractively valued relative to

peers

Figure 50: ACC has underperformed the larger cement

peers post the CCI ruling

8.2 9.4 9.3

15.5

17.5 16.3

7.9

9.5 9.8

8.5 8.1 8.7

13.7 14.7

13.8

5.0 5.8

6.6

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0


90

95

100

105

110

115

120

125

130

135

30-May-12 30-Jun-12 31-Jul-12 31-Aug-12

ACC Ambuja Ultratech

Source: Company data, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

ACC more immune to forthcoming cost pressures Less dependence on road

ACC has the lowest exposure to road transport and, thus, is more favorably placed among cement majors to tackle the diesel price hike.

We estimate that cement manufacturers have to raise prices by approximately 2% to off-set cost pressures should the current diesel price hike of 14% sustain.

Figure 51: ACC has the least dependence on road

transport…

Figure 52: … resulting in the least impact of diesel price

hike

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

ACC Ambuja Cement UltratechCement

India Cements IndustryAverage

Rail Road Sea

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


FY14 - Impact on EBITDA FY14 - Impact on Net profit


Higher renewable energy exposure

Given the recent order by the Rajasthan High Court ruling captive power generation companies are liable to pay penalties in case they do not comply with renewable energy requirements of the State, in our view ACC is better placed than peers to meet renewable energy requirements.

26 September 2012


Figure 53: % of generation through renewable sources in

FY12

Figure 54: ACC has higher renewable power capacity

2.2%

0.8%

0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


% of power generation through renewable sources - FY12

7.5%

4.2%

0.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%


% of power capacity through renewable sources - FY12


Consensus upgrades likely to continue

As seen in the past one year, earnings have been upgraded by 25% primarily driven by

improving realisations. With easing cost pressures, improving utilisation outlook, and

realisations continue to improve, we believe consensus upgrades are likely to continue.

Figure 55: Ambuja consensus upgrades Figure 56: ACC consensus upgrades

60.0

65.0

70.0

75.0

80.0

85.0

90.0

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

CY12E CY13E

7.0

8.0

9.0

10.0

11.0

12.0

13.0


CY12E CY13E

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

Figure 57: Ultratech consensus upgrades Figure 58: India Cements consensus upgrades

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0


FY13E FY14E

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0


FY13E FY14E

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

26 September 2012


ICEM appears to be a mean reversion beneficiary

Valuation discount to cement majors has widened considerably—mean reversion

points to significant upside

India Cements trades at 4.5x FY14E EV/EBITDA (a 29% discount to historical multiple)

and FY13E EV/tonne of Rs3,385, which is at a 60% discount to replacement cost. On

EV/EBITDA, the stock trades at a 50% discount to the cement majors, versus its historical

average discount of 12% (refer to the figure below). We believe improvement in

fundamentals driven by cost improvements is likely to narrow the discount to historical

averages.

Figure 59: ICEM’s discount to cement majors (EV/EBITDA) has widened considerably –

mean reversion can provide strong upside

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12

EV/EBITDA - Cement Majors EV/EBITDA - India Cements


26 September 2012


Key risks Threat of government intervention

Cement companies have seen increasing political pressure on account of rising cement

prices in 2012 (primarily in cement producing states which account for approximately 35%

of total cement demand). Some of the local governments have threatened to withdraw

subsidies in case cement companies do not cut prices.

Figure 60: States action to curb cement prices could be crucial

Date Region Allegations Result

Jul-12 North East Cement firms asked to cut prices after reports that

firms get high subsidies and earn high profits

Prices cut by 7-8% (25-

30/bag) in Assam

TN CM threatens to withdraw subsidies and

concessions to cement companies if prices go

unchecked

Prices have remained

stable over 4 months

May &

July 2012

AP, Rayalseema Opposition parties ask for CM intervention to

check rising cement prices

Prices have fallen by 20%

in Hyderabad over 2

months

Jan-12 Himachal Pradesh CM meets cement companies, and industries

minister threatens to withdraw subsidies

Cement prices decreased

by Rs.25/ bag from Rs.

330 /bag

Jan &

Feb 2012

Chattisgarh, Raipur Protests over rising cement prices by both

opposition and ruling party

Cement prices decrease

by Rs.50/ bag

Apr-12 Maharashtra,

Chandrapur

Former Congress MP demands cement prices be

brought down and intervention by CM


Penalties arising from adverse cartel ruling by CCI

Cement companies have been fined by the Competition Commission of India for alleged

cartelisation to the extent of 0.5% of profits. While we believe this remains an overhang,

cement companies are likely to challenge the order with the COMPAT and if unsuccessful

with the Supreme Court. The legal process is expected to remain long-drawn.

Figure 61: Fines still have not been accounted for

Company Penalty (Rs bn)

Jaiprakash Associates 13.24

Ultratech 11.75

Ambuja 11.64

ACC 11.48

Lafarge 4.80

Shree Cement 3.98

Century 2.74

Madras 2.59

India Cements 1.87

Binani 1.67

JK Cement 1.29

Source: CCI order

Threat of imports

In 2007, India witnessed imports from China at Rs. 160 per bag, as compared to average

price of Rs. 230 per bag locally. Imports were facilitated by the sharp price increases seen

during that period (prices increased by 27% over a period of a year).

26 September 2012


Currently, average realisations in China are at approximately Rmb305 (Rs 2,100) per t as

compared to Rs 4,200 in India. A key constraint, however, is obtaining BIS certification

(currently only two Chinese companies possess the same).

Pakistani imports likely to remain low

Despite granting of MFN status and removal of trade barriers, cement imports from

Pakistan have been fairly low due to procedural bottlenecks at the border and high

dependence on rail (almost 70%) wherein service availability is poor.

Figure 62: Cement imports have been on decline… Figure 63: …as imports from Pakistan/China have declined

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012

Value of Imports (USD mn)

-

10.00

20.00

30.00

40.00

50.00

60.00

FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

Pakistan Bangladesh China Others

Value of imports (Rs. mn)

Source: Ministry of Commerce, Credit Suisse estimates Source: Ministry of Commerce, Credit Suisse estimates

26 September 2012


Companies

26 September 2012


Asia Pacific / India

Cement

ACC Ltd.

(ACC.BO / ACC IN) UPGRADE RATING

A safe haven

■ Exposure to regions with resilient pricing driving EBITDA/tonne improvements. Cement prices continue to perform better than our expectation in September quarter (down 2% versus our expectation of 4%). The decline has been least in Central and Southern regions, where ACC has a 49% capacity exposure. We are factoring EBITDA/tonne to improve to Rs.1,018/tonne in CY12E (from Rs.709/tonne in CY11A) and stay flat in CY13E. While ACC’s recent underperformance could be attributable to weaker volume growth (YTD 2.3% YoY, vs Ambuja at 6.4% and Ultratech at 4.6%), its utilizations (81%) remain well above industry average (69%).

■ Higher immunity to upcoming cost pressures. ACC’s lower dependence on road freight (approximately 45% of total freight compared to 60% for Ambuja and Ultratech) makes it least exposed to the recent 14% hike in diesel prices. Further, its focus on renewable energy (currently generates 2.2% of captive power through renewable and can increase up to 7.5% of total) assumes significance due to the recent order by the Rajasthan High Court ruling captive power generation companies are liable to pay penalties in case they do not comply with renewable energy requirements of the State. We believe the order can set a precedent for other states to enforce such minimum renewable energy requirements. While minimum renewable energy power generation norms vary, it is between 4-10% for the major cement producing states in FY13. The benefit of lower international coal prices (approximately 25% of total consumption), is also likely to help ACC to sustain profitability in CY12/CY13E.

■ Valuations below historical multiples; Upgrade to NEUTRAL. ACC is currently trading at 8.2x CY13E EV/EBITDA, versus its historical average of 8.5x and is most attractively valued among cement majors. It also appears lower risk as current valuations do not price in significant CY13E EBITDA/tonne improvement compared to Ambuja and Ultratech. At Rs. 7,895 CY12E EV/t, it is trading at a 18% discount to Ambuja and Ultratech, and a 7% discount to replacement cost. We upgrade estimates of ACC to reflect improved realizations and anticipate CY12E EBITDA/tonne to sustain in CY13E as industry utilizations improve. We upgrade ACC to NEUTRAL, with a target price of Rs. 1,462 (based on 8.5x EV/EBITDA).

Share price performance

80

130

180

800

1000

1200

1400

Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the BSE

SENSEX IDX which closed at 18694.41 on 25/09/12

On 25/09/12 the spot exchange rate was Rs53.52/US$1

Performance Over 1M 3M 12M Absolute (%) 2.6 14.1 27.4 Relative (%) -2.5 3.9 11.0

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (Rs mn) 94,386.6 111,583.0 124,612.4 138,288.4 EBITDA (Rs mn) 16,990.9 24,850.6 27,106.2 30,404.0 EBIT (Rs mn) 12,237.9 19,584.7 21,762.7 24,520.5 Net profit (Rs mn) 13,252.6 15,853.8 16,537.0 18,394.8 EPS (CS adj.) (Rs) 70.51 84.35 87.99 97.87 Change from previous EPS (%) n.a. 46.8 47.1 58.3 Consensus EPS (Rs) n.a. 74.0 87.5 98.3 EPS growth (%) 18.3 19.6 4.3 11.2 P/E (x) 19.5 16.3 15.6 14.1 Dividend yield (%) 2.0 1.8 2.2 2.5 EV/EBITDA (x) 13.8 9.2 8.1 6.9 P/B (x) 3.6 3.3 2.9 2.6 ROE (%) 19.4 21.0 19.7 19.5 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, our estimates.

Rating (from Underperform) NEUTRAL* Price (25 Sep 12, Rs) 1,375.30 Target price (Rs) (from 1,022.00) 1,462.00¹ Upside/downside (%) 6.3 Mkt cap (Rs mn) 258,206 (US$ 4,825) Enterprise value (Rs mn) 227,678 Number of shares (mn) 187.75 Free float (%) 49.7 52-week price range 1,388.9 - 1,079.4 ADTO - 6M (US$ mn) 9.2

*Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Sandeep Mathew

91 22 6777 3715

[email protected]

26 September 2012


Focus Charts

Figure 64: Cement prices in South and Central India have

remained steady

Figure 65: Lower than expected fall in cement prices

should continue to positively impact EBITDA/t

260

270

280

290

300

310

320

330

Jun-12 Jul-12 Aug-12 Sep-12

South Central India

200

400

600

800

1,000

1,200

1,400

1,600

3,000

3,500

4,000

4,500

5,000

Jun-

09

Sep-

09

Dec-

09

Mar

-10

Jun-

10

Sep-

10

Dec-

10

Mar

-11

Jun-

11

Sep-

11

Dec-

11

Mar

-12

Jun-

12

Sep-

12

Dec-

12

Realisation per tonne EBITDA per tonne (RHS)

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 66: Volume growth expected to pick up, as base

effect kicks in

Figure 67: ACC has lowest dependence on road

28%

20%

9%

3%

5%9%9%

8% 7%

1%3% 3%

-6% -7%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-

0.5

1.0

1.5

2.0

2.5

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Despatch (mn tonnes) YoY Despatch Growth (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

ACC Ambuja Cement UltratechCement

India Cements IndustryAverage

Rail Road Sea


Figure 68: …resulting in least impact of diesel price hike Figure 69: ACC appears better placed to meet renewable

energy requirements

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


FY14 - Impact on EBITDA FY14 - Impact on Net profit

7.5%

4.2%

0.7%

2.2%

0.8% 0.5%

0.0%

2.0%

4.0%

6.0%

8.0%


% of power capacity through renewable sources - FY12

% of power generation through renewable sources - FY12


Figure 70: ACC’s stock has underperformed Ambuja and

Ultratech since the CCI ruling

Figure 71: ACC is the cheapest amongst cement majors

90

95

100

105

110

115

120

125

130

135

30-May-12 30-Jun-12 31-Jul-12 31-Aug-12


8.2

9.4 9.3

15.5

17.5

16.3

7.9

9.5 9.8

8.5 8.1 8.7

13.7 14.7

13.8

5.0

5.8

6.6

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0


Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Company data, Credit Suisse estimates

26 September 2012


Financial summary

Figure 72: ACC—income statement

Year-end Dec 31 (Rs mn) 2008 2009 2010 2011 2012E 2013E 2014E

Revenue 72,829 80,272 77,173 94,387 111,583 124,612 138,288

Expenses (55,497) (55,475) (61,634) (77,396) (86,732) (97,506) (107,884)

EBIDTA 17,332 24,797 15,540 16,991 24,851 27,106 30,404

Depreciation (2,942) (3,421) (3,927) (4,753) (5,266) (5,343) (5,883)

EBIT 14,390 21,376 11,613 12,238 19,585 21,763 24,520

Interest expense (400) (843) (568) (969) (1,049) (928) (924)

Other income 2,887 2,411 3,569 4,135 2,662 2,790 2,681

Profit before tax 16,877 22,944 14,615 15,404 21,197 23,624 26,278

Income tax (5,238) (6,877) (3,414) (2,152) (5,344) (7,087) (7,883)

Profit before minority 11,639 16,067 11,200 13,253 15,854 16,537 18,395

Extraordinaries 489 - - - (3,354) - -

PAT 12,128 16,067 11,200 13,253 12,500 16,537 18,395

EPS 62.0 85.5 59.6 70.5 84.4 88.0 97.9

Dividend per share 20.0 23.0 30.5 28.0 25.0 30.0 35.0


Figure 73: ACC—balance sheet


Assets

Cash 9,842 7,464 10,800 17,526 23,754 32,209 42,108

Receivables 3,102 2,037 1,783 2,604 3,079 3,438 3,815

Inventories 7,933 7,790 9,150 10,997 13,001 14,519 16,112

Other current assets 6,720 5,654 5,801 5,053 5,199 5,471 5,798

Current Liabilities 18,018 20,603 20,940 26,104 30,945 34,453 38,220

Provisions 9,639 10,919 16,525 10,540 10,636 10,746 10,858

Net current assets -61 -8,578 -9,931 -464 3,450 10,437 18,755

Fixed assets 34,697 41,583 50,824 62,075 56,867 56,523 65,640

Capital WIP 16,029 21,562 15,628 4,353 12,603 15,853 9,103

Investments 6,791 14,756 17,027 16,250 16,250 16,250 16,250

Total Assets 57,456 69,324 73,548 82,214 89,170 99,063 109,748

Liabilities

Share capital 1,879 1,879 1,880 1,880 1,880 1,880 1,880

Reserves 47,399 58,282 62,815 70,043 77,046 86,986 97,685

Shareholder funds 49,277 60,162 64,695 71,923 78,925 88,866 99,564

Debt 4,820 5,669 5,238 5,107 5,061 5,014 5,000

Others 3,358 3,493 3,615 5,184 5,184 5,184 5,184

Total liabilities 57,456 69,324 73,548 82,214 89,170 99,063 109,748


26 September 2012



Cement

Ambuja Cements Ltd.

(ABUJ.BO / ACEM IN) INCREASE TARGET PRICE

Defensively positioned, but lacks upside

■ Attractive cost structure, and high clinker utilizations: An attractive cost

structure versus industry peers (mainly on account of lower raw material

cost), and lack of exposure to low margin RMC business, has enabled the

company to maintain its strong EBITDA margins (22.5% in CY11, as

compared to 18% for ACC, 22.6% for Ultratech). Low dependence on

Southern markets (exposure limited to coastal Kerala/Karnataka through the

port route) is likely to help the company maintain its higher than industry

average utilizations of 77%. Further, clinker utilizations of Ambuja currently

hover around 85%, implying capacity excesses primarily lie on the lower cost

grinding front.

■ Supply concerns to ease in its core markets. Ambuja currently enjoys

most favorable positioning among cement majors as its capacities are

located along the Western, Northern and Eastern markets. We anticipate

limited supply pressures in the Eastern and Northern markets and should

excess capacities from other regions find its way, Ambuja will still continue to

enjoy a significant cost advantage. We believe capacity utilisations have

troughed in its core markets (refer to Figure 77) which is likely help improve

its overall EBITDA/tonne to Rs. 1,196 in CY12E and sustain going forward.

■ Valuations appear fair; significant upside unlikely. Ambuja currently

trades at high valuations (9.3x CY13E EV/EBITDA, at 7% premium to

historical average multiple and CY12E EV/tonne of Rs9,790, which is 15%

premium to replacement cost) and does not appear to factor in any adverse

impact of CCI penalty (approximately Rs11.6 bn). We estimate that for a

10% upside to stock from current levels, CY13E EBITDA/tonne has to

significantly re-rate to Rs1,410/tonne (cement price increase of

approximately 10.2%), which appears unlikely. We maintain NEUTRAL and

revise target price to Rs194 (based on 8.7x EV/EBITDA).


80

130

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100

150

200






Performance Over 1M 3M 12M Absolute (%) 2.4 14.5 32.8 Relative (%) -2.8 4.3 16.3


Year 12/11A 12/12E 12/13E 12/14E Revenue (Rs mn) 85,276.1 100,628.8 112,778.2 125,734.1 EBITDA (Rs mn) 19,191.0 26,546.3 28,230.5 31,687.9 EBIT (Rs mn) 14,739.5 21,696.8 23,254.4 26,117.4 Net profit (Rs mn) 12,287.9 15,517.5 18,254.7 20,681.9 EPS (CS adj.) (Rs) 8.01 10.11 11.90 13.48 Change from previous EPS (%) n.a. 24.1 36.5 44.0 Consensus EPS (Rs) n.a. 10.4 12.1 14.1 EPS growth (%) -3.0 26.3 17.6 13.3 P/E (x) 24.3 19.3 16.4 14.5 Dividend yield (%) 1.6 1.6 1.8 1.8 EV/EBITDA (x) 14.1 10.0 9.0 7.5 P/B (x) 3.7 3.3 2.9 2.6 ROE (%) 16.0 18.2 19.0 18.9 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Credit Suiisee estimates

Rating NEUTRAL* Price (25 Sep 12, Rs) 194.80 Target price (Rs) (from 139.00) 194.00¹ Upside/downside (%) -0.41 Mkt cap (Rs mn) 299,751 (US$ 5,601) Enterprise value (Rs mn) 264,546 Number of shares (mn) 1,538.76 Free float (%) 49.6 52-week price range 197.1 - 138.0 ADTO - 6M (US$ mn) 7.9



Research Analysts

Sandeep Mathew

91 22 6777 3715

[email protected]

26 September 2012


Focus charts

Figure 74: Ambuja has the lowest cost per tonne among

majors

Figure 75: …and high clinker utilizations

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Raw Material Power Freight Other Costs Total Cost

Ambuja ACC Ultratech

70%

75%

80%

85%

90%

95%

2007 2008 2009 2010 2011

Cement Utilisation Clinker Utilisations


Figure 76: ..with favourable regional capacity exposure… Figure 77: …and core markets continue to remain healthy

Central Region

5%

Eastern Region

17%

Northern Region

36%

Western Region

42%

40%

50%

60%

70%

80%

90%

100%

110%

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

North South East West Central

Source: Company data, Credit Suisse estimates Source: CMA, Company data, Credit Suisse estimates

Figure 78: EBITDA/tonne is expected to recover in CY12E

and remain flat in CY13E

Figure 79: Valuations remain unaccommodative

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EV/EBITDA (RHS) Mean EV/EBITDA 1+SD 1-SD


26 September 2012


Financial summary

Figure 80: Ambuja—income statement


Revenue 62,347 71,194 74,194 85,276 100,629 112,778 125,734

Expenses (44,567) (52,081) (55,666) (66,085) (74,083) (84,548) (94,046)

EBIDTA 17,779 19,113 18,528 19,191 26,546 28,231 31,688

Depreciation (2,598) (2,970) (3,872) (4,452) (4,849) (4,976) (5,570)

EBIT 15,182 16,143 14,656 14,740 21,697 23,254 26,117

Interest expense (321) (224) (487) (526) (614) (531) (531)

Other income 1,754 2,133 2,184 3,057 3,877 3,355 3,959

Profit before tax 16,615 18,052 16,353 17,271 24,960 26,078 29,546

Income tax (5,624) (5,849) (3,717) (4,983) (9,442) (7,823) (8,864)

Profit before minority 10,991 12,203 12,636 12,288 15,517 18,255 20,682

Extraordinaries 3,032 - - - (2,791) - -

PAT 14,023 12,203 12,636 12,288 12,726 18,255 20,682

EPS 7.2 8.0 8.3 8.0 10.1 11.9 13.5

Dividend per share 2.2 2.4 2.6 3.2 3.2 3.5 3.5


Figure 81: Ambuja—balance sheet


Assets

Cash 8,518 8,807 17,482 21,712 27,458 36,868 52,957

Receivables 2,246 1,522 1,282 2,409 2,842 3,185 3,551

Inventories 9,387 6,832 9,019 9,250 10,915 12,233 13,638

Other current assets 3,243 2,632 3,571 4,913 4,913 4,913 4,913

Less: current liabilities 14,738 17,411 23,942 26,940 29,482 31,855 33,995

Sundry Creditors 10,032 10,671 12,976 15,879 18,324 20,263 22,329

Provisions 4,706 6,740 10,966 11,061 11,157 11,591 11,666

Net current assets 8,657 2,383 7,412 11,343 16,646 25,344 41,063

Fixed assets 31,928 34,400 56,278 61,865 57,013 57,037 70,240

Capital WIP 19,472 27,144 9,307 5,773 14,773 18,773 5,000

Investments 3,367 7,297 6,264 8,643 8,643 8,643 8,643

Total Assets 63,423 71,224 79,260 87,623 97,075 109,797 124,946

Liabilities

Share capital 3,049 3,050 3,073 3,390 3,069 3,069 3,069

Reserves 53,680 61,659 70,228 77,304 87,077 99,049 113,448

Shareholder funds 56,729 64,709 73,301 80,694 90,146 102,117 116,516

Debt 2,887 1,657 650 494 494 494 494

Deferred tax liability (net) 3,808 4,858 5,309 6,436 6,436 7,186 7,936

Total liabilities 63,423 71,224 79,260 87,623 97,075 109,797 124,946


26 September 2012



Cement

Ultratech Cement Ltd.

(ULTC.BO / UTCEM IN) INCREASE TARGET PRICE

Risks not priced in

■ FY14E profitability to remain muted. Ultratech is likely to see the addition

of approximately 10.2m tonne of new cement capacity by 1QFY14E. While,

we anticipate FY14E volume growth of 9% to be higher than other cement

majors (ACC at 5% and Ambuja at 6.5%), we believe lower utilizations of

new capacities, higher costs associated with stabilizing new capacities, and

higher interest burden is likely to keep profitability muted (we anticipate

FY14E EPS to remain flat versus FY13E) over the next 18 months. Bulk of

the new capacity additions (4.4 mt in Malkhed, 4.8 mt in Chattisgarh and 1

mt grinding capacity in Pipavav) will target Maharashtra and the over-

supplied South market, which is likely to keep ramp-up of new capacities

slow.

■ High capex costs of current expansion likely to depress ROICs.

Ultratech is likely to incur approximately Rs. 60.5 bn (capex cost of

Rs.5,931/tonne) of capital expenditure towards setting up of new capacities

of 10.2 mn tonne. At FY14E projected EBITDA/tonne of Rs.1,180, these

capacities are likely to generate only 10% ROIC, versus current ROICs of

16%.

■ Premium valuations unlikely to sustain. Ultratech currently trades at 9.4x

FY14E EV/EBITDA versus its average historical multiple of 8.1x. Based on

current capacity of 52m tonne, it trades at FY13E EV/tonne (ex-CWIP) of Rs.

9,491, which is at 12% premium to replacement cost. Further, the stock does

not appear to price in any impact of CCI penalty of Rs. 11.8 bn. We estimate

that for a 10% upside to stock from current levels, FY14E EBITDA/tonne has

to significantly re-rate to Rs.1,515/tonne (cement price increase of

approximately 11.8%). We maintain UNDERPERFORM and revise our

target price to Rs. 1,559 (based on 8.1x FY14E EV/EBITDA).


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Performance Over 1M 3M 12M Absolute (%) 6.7 25.3 61.7 Relative (%) 1.6 15.1 45.3


Year 3/12A 3/13E 3/14E 3/15E Revenue (Rs mn) 183,131.3 212,298.0 240,585.8 269,635.3 EBITDA (Rs mn) 41,474.3 49,411.0 54,074.4 63,653.6 EBIT (Rs mn) 32,448.7 39,625.0 42,317.5 49,646.6 Net profit (Rs mn) 24,462.0 28,413.8 28,376.1 34,463.9 EPS (CS adj.) (Rs) 89.25 103.67 103.54 125.75 Change from previous EPS (%) n.a. 30.1 36.1 - Consensus EPS (Rs) n.a. 96 108 149 EPS growth (%) 74.2 16.2 -0.1 21.5 P/E (x) 20.6 17.7 17.7 14.6 Dividend yield (%) 0.33 0.38 0.38 0.41 EV/EBITDA (x) 12.4 10.4 9.6 7.6 P/B (x) 3.9 3.3 2.8 2.4 ROE (%) 20.8 20.1 16.9 17.5 Net debt/equity (%) 10.3 6.1 8.0 net cash


Rating UNDERPERFORM* Price (25 Sep 12, Rs) 1,835.35 Target price (Rs) (from 1,212.00) 1,559.00¹ Upside/downside (%) -15.1 Mkt cap (Rs mn) 503,061 (US$ 9,400) Enterprise value (Rs mn) 512,563 Number of shares (mn) 274.10 Free float (%) 34.6 52-week price range 1,837.4 - 1,083.4 ADTO - 6M (US$ mn) 4.5



Research Analysts

Sandeep Mathew

91 22 6777 3715

[email protected]

26 September 2012


Focus charts

Figure 82: Utilizations to decline in FY14E as Ultratech’s

new capacities are activated…

Figure 83: South would become a key target market post

commissioning of new capacities in 1QFY14E

65%

70%

75%

80%

85%

90%

95%

FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Ambuja ACC Ultratech

Central Region

10%

Eastern Region

19%

Northern Region

19%

Southern Region

29%

Western Region

23%


Figure 84: FY14E profitability to remain muted due to

higher start-up costs

Figure 85: High capex costs of new capacities likely to

depress ROICs

40

50

60

70

80

90

100

110

FY09 FY10 FY11 FY12 FY13E FY14E

Earnings per share

10%

12%

14%

16%

18%

20%

FY11 FY12 FY13E FY14E

Return on invested capital


Figure 86: We do not anticipate improvement in EBITDA

per tonne in FY14E

Figure 87: Valuations are expensive

200

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1-Jan-07 1-Jan-08 1-Jan-09 1-Jan-10 1-Jan-11 1-Jan-12

EV/EBITDA (RHS) Mean EV/EBITDA 1+SD 1-SD


26 September 2012


Financial summary

Figure 88: Ultratech— income statement

Year-end Mar 31 (Rs mn) FY11 FY12 FY13E FY14E FY15E

Revenue 132,099 183,131 212,298 240,586 269,635

Expenses (106,675) (141,657) (162,887) (186,511) (205,982)

EBITDA 25,424 41,474 49,411 54,074 63,654

Depreciation (7,657) (9,026) (9,786) (11,757) (14,007)

EBIT 17,767 32,449 39,625 42,318 49,647

Interest expense (2,771) (2,239) (2,177) (4,793) (4,096)

Other income 2,867 3,719 3,010 3,013 3,683

Profit before tax 17,862 33,929 40,458 40,537 49,234

Income tax (3,820) (9,467) (12,045) (12,161) (14,770)

PAT 14,042 24,462 28,414 28,376 34,464

EPS 51.2 89.3 103.7 103.5 125.7

Dividend per share 6.0 6.0 7.0 7.0 7.5


Figure 89: Ultratech—balance sheet

Year-end Mar 31 (Rs mn) FY11 FY12 FY13E FY14E FY15E

Assets

Cash 1,448 1,882 17,319 6,666 34,419

Receivables 6,023 7,660 8,725 9,887 11,081

Inventories 19,565 20,359 23,266 26,366 29,549

Other current assets 10,551 13,665 11,705 11,705 12,939

Sundry Creditors 28,804 33,740 34,419 35,740 36,227

Provisions 5,735 8,207 7,904 7,904 8,064

Net current assets 3,048 1,619 18,692 10,980 43,696

Fixed assets 114,003 116,342 126,335 164,578 190,571

Capital WIP 11,053 31,637 51,526 41,526 11,526

Investments 37,303 37,888 28,823 23,823 23,823

Total Assets 165,407 187,485 225,376 240,907 269,616

Liabilities

Share capital 2,788 2,791 2,791 2,791 2,791

Reserves 103,872 125,807 151,976 178,108 210,167

Shareholder funds 106,660 128,598 154,767 180,899 212,958

Debt 41,446 41,509 53,231 42,631 39,281

Deferred tax asset 17,301 17,378 17,378 17,378 17,378

Total liabilities 165,407 187,485 225,376 240,907 269,616


26 September 2012



Cement

India Cements

(ICMN.BO / ICEM IN)

Cost savings key to valuation re-rating

■ Low volume growth with profitability focus likely to continue. Capacities in the South remain under pressure due to new additions, and we expect existing cement players in the South (including India Cements) to continue to lose market share, and sacrifice volume growth to maintain profitability. Higher leverage among the smaller Southern players is unlikely to lead to price war in a weak demand environment, in our view. South continues to enjoy the highest realizations and consequently better EBITDA/tonne despite low utilizations and checks continue to indicate that prices are most

resilient in the Southern region.

■ Leverage concerns to ease, declining power costs to positively impact ICEM. We believe ICEM’s debt-equity remains under control at 0.67x, and

FY13E interest coverage remains comfortable at 3.2x. Decline in power costs remains a key catalyst for the stock, in our view. ICEM’s power cost (currently 24% of sales) is likely to benefit from the new CPPs (48 MW) commissioned, and incremental ramp-up of power plant in FY13 will reduce its dependence on expensive grid power in Andhra Pradesh and Tamilnadu (potential cost saving of Rs.0.8/ unit or approximately Rs.330 mn in power costs). Further, ICEM also has the highest proportion of imported coal usage

(70%), which is likely to further benefit power costs.

■ Valuation discount to cement majors has widened – Mean reversion points to significant upside. India Cements currently trades at 4.5x FY14E

EV/EBITDA (29% discount to historical multiple) and FY13E EV/tonne of Rs. 3,385, which is at 60% discount to replacement cost. On EV/EBITDA, the stock trades at a 50% discount to the cement majors, versus its historical average discount of 12% (refer Figure 94). We believe improvement in fundamentals driven by cost improvements, is likely to narrow the discount to cement majors. As the South market continues to remain in a downcycle, we value India Cements at its historical EV/tonne multiple of 4,074x based on FY12 capacity of 15MT, to arrive at a target price of Rs. 117 (we do not

value the IPL franchise).


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Performance Over 1M 3M 12M Absolute (%) -4.6 4.1 23.9 Relative (%) -9.7 -6.1 7.4


Year 3/12A 3/13E 3/14E 3/15E Revenue (Rs mn) 42,034.0 45,937.2 50,092.4 56,110.6 EBITDA (Rs mn) 9,033.6 9,959.3 10,122.3 12,448.7 EBIT (Rs mn) 6,520.4 7,233.2 7,308.5 9,579.1 Net profit (Rs mn) 2,929.5 2,989.8 3,585.5 5,489.9 EPS (CS adj.) (Rs) 9.54 9.73 11.67 17.87 Change from previous EPS (%) n.a. -7.6 -4.9 - Consensus EPS (Rs) n.a. 10.4 12.6 17.9 EPS growth (%) 345.4 2.1 19.9 53.1 P/E (x) 9.0 8.8 7.4 4.8 Dividend yield (%) 1.2 1.2 1.2 1.7 EV/EBITDA (x) 5.9 4.7 4.2 3.0 P/B (x) 0.65 0.60 0.57 0.52 ROE (%) 7.2 7.1 8.0 11.3 Net debt/equity (%) 66.3 45.7 34.9 21.3


Rating OUTPERFORM* [V] Price (25 Sep 12, Rs) 85.90 Target price (Rs) 117.00¹ Upside/downside (%) 36.2 Mkt cap (Rs mn) 26,386.6 (US$ 493.1) Enterprise value (Rs mn) 46,380 Number of shares (mn) 307.18 Free float (%) 74.7 52-week price range 117.5 - 65.9 ADTO - 6M (US$ mn) 2.6



[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Sandeep Mathew

91 22 6777 3715

[email protected]

26 September 2012


Focus Charts

Figure 90: Southern players are focused on protecting profitability in a weak demand/ excess capacity environment

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Figure 91: Higher leverage among key Southern players

unlikely to force price wars

Figure 92: Cost savings anticipated through new captive

power plants

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OCL India

India Cements

Madras Cements

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Cost of generation / purchase price per unit (Rs/kwh)


Figure 93: Lower imported coal costs to favour India

Cements the most

Figure 94: Discount to cement majors (EV/EBITDA) has

widened considerably—mean reversion can provide

strong upside

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Imported Coal Domestic Coal

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EV/EBITDA - Cement Majors EV/EBITDA - India Cements


26 September 2012


Financial summary

Figure 95: India Cements—Income statement

Year-end Mar 31 (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Revenue 30,611 34,275 37,713 35,011 42,034 45,937 50,092 56,111

Expenses (19,677) (24,318) (29,447) (30,670) (33,000) (35,978) (39,970) (43,662)

EBIDTA 10,934 9,957 8,265 4,340 9,034 9,959 10,122 12,449

Depreciation &

amortisation

(1,279) (2,033) (2,331) (2,440) (2,513) (2,726) (2,814) (2,870)

EBIT 9,655 7,924 5,934 1,900 6,520 7,233 7,308 9,579

Interest expense (1,099) (1,121) (1,426) (1,417) (2,867) (3,185) (2,433) (1,883)

Other income 270 474 370 393 193 223 247 147

Profit before tax and

extraordinaries

8,826 7,276 4,877 875 3,846 4,271 5,122 7,843

Profit before tax 8,826 7,277 4,877 875 3,810 4,271 5,122 7,843

Income tax (2,071) (2,161) (1,770) (218) (880) (1,281) (1,537) (2,353)

PAT 6,755 5,116 3,108 658 2,929 2,990 3,585 5,490

Extraordinary items (380) (794) 436 23 - (200) - -

PAT after extraordinary 6,375 4,322 3,543 681 2,929 2,790 3,585 5,490

EPS 24.0 18.1 10.1 2.1 9.5 9.7 11.7 17.9

Dividend per share 2.0 2.0 2.0 1.5 1.0 1.0 1.0 1.5


Figure 96: India Cements—Balance sheet

Year-end Mar 31 (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Assets

Cash 4,256 852 538 331 29 788 1,593 1,160

Receivables 3,111 3,540 4,853 2,544 2,098 2,167 2,363 2,647

Inventories 3,506 3,909 4,682 5,177 5,258 5,117 5,580 6,250

Other current assets 10,621 13,134 18,692 20,986 23,817 21,728 21,728 21,728

Sundry Creditors &

Provisions

9,835 11,533 12,741 11,184 11,571 13,009 14,434 15,934

Net current assets 11,659 9,902 16,023 17,855 19,631 16,791 16,831 15,852

Fixed assets 34,645 38,083 39,186 38,345 41,329 41,021 39,063 36,599

Capital WIP 5,749 9,040 7,029 10,398 1,451 1,451 3,000 5,000

Investments 1,293 1,590 3,140 1,603 8,520 8,520 8,520 8,520

Total Assets 53,583 58,750 65,378 68,201 70,931 67,783 67,414 65,970

Liabilities

Share capital 2,819 2,824 3,072 3,072 3,072 3,072 3,072 3,072

Reserves 30,392 33,490 38,286 37,826 37,604 40,670 43,300 47,656

Shareholder funds 33,211 36,314 41,358 40,898 40,676 43,741 46,372 50,728

Debt 18,115 19,880 21,327 24,561 27,010 20,796 17,796 11,997

Deferred tax liability 2,257 2,556 2,693 2,743 3,245 3,245 3,245 3,245

Total liabilities 53,583 58,750 65,378 68,201 70,931 67,783 67,414 65,970


26 September 2012


Companies Mentioned (Price as of 25 Sep 12) ACC Ltd. (ACC.BO, Rs1,375.30, NEUTRAL, TP Rs1,462.00) Ambuja Cements Ltd. (ABUJ.BO, Rs194.80, NEUTRAL, TP Rs194.00) Anhui Conch Cement Co. Ltd. (0914.HK, HK$24.65, UNDERPERFORM [V], TP HK$16.50) Binani Industries Ltd (BINZ.BO, Rs111.75) Birla Corp. (BRLC.BO, Rs213.45) Cemex (CX, $8.37, OUTPERFORM [V], TP $10.00) Century Textile and Industries Ltd (CNTY.BO, RS359.75) Chettinad Cement Corp Ltd (CHET.BO, Rs794.7) China National Building Material Co (3323.HK, HK$8.69, UNDERPERFORM [V], TP HK$6.70) China Shanshui Cement Group Ltd. (0691.HK, HK$5.04, NEUTRAL [V], TP HK$4.90) CRH (CRH.I, Eu15.20, UNDERPERFORM, TP Eu12.00) Dalmia Bharat Enterprises Ltd (DALA.BO, Rs143.25) Holcim (HOLN.VX, SFr62.95, NEUTRAL, TP SFr51.00) Holcim Indonesia (SMCB.JK, Rp2,800.00, NEUTRAL, TP Rp2,800.00) India Cements (ICMN.BO, Rs85.90, OUTPERFORM [V], TP Rs117.00) Indocement (INTP.JK, Rp20,500.00, NEUTRAL, TP Rp20,500.00) J K Cement (JKCE.BO, Rs234.05) Jaiprakash Associates Ltd. (JAIA.BO, Rs82.60, OUTPERFORM [V], TP Rs90.00) Lafarge (LAFP.PA, Eu43.00, NEUTRAL, TP Eu34.00) Madras Cement (MSCM.BO, Rs183.60) OCL India (OSCM.BO, Rs133.9) Semen Gresik (Persero) (SMGR.JK, Rp14,250.00, OUTPERFORM, TP Rp13,850.00) Shree Cement (SHCM.BO, Rs3623.85) Siam Cement (SCC.BK, Bt352.00, OUTPERFORM, TP Bt375.00) Ultratech Cement Ltd. (ULTC.BO, Rs1,835.35, UNDERPERFORM, TP Rs1,559.00)

Disclosure Appendix Important Global Disclosures

I, Sandeep Mathew, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names.

3-Year Price, Target Price and Rating Change History Chart for ACC.BO

ACC.BO Closing

Price

Target

Price

Initiation/

Date (Rs) (Rs) Rating Assumption

29-Oct-09 736 715

23-Jul-10 821 730

22-Oct-10 986.15 815

4-Feb-11 968.25 811

19-Apr-11 X

27-Apr-11 1107 824

2-May-12 1,211.3 1022 X

715 730

815 811 824

1022

19-Apr-11 2-May-12361

561

761

961

1161

1361

Closing Price Target Price Initiation/Assumption Rating

Rs

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

26 September 2012


3-Year Price, Target Price and Rating Change History Chart for ABUJ.BO

ABUJ.BO Closing

Price

Target

Price

Initiation/


29-Oct-09 736 715

23-Jul-10 821 730

22-Oct-10 986.15 815

4-Feb-11 968.25 811

19-Apr-11 X

27-Apr-11 1107 824

2-May-12 1,211.3 1022 X

715 730

815 811 824

1022

19-Apr-11 2-May-12361

561

761

961

1161

1361


Rs


3-Year Price, Target Price and Rating Change History Chart for ICMN.BO

ICMN.BO Closing

Price

Target

Price

Initiation/


29-Oct-09 112.2 120

3-Aug-10 102.5 108

15-Nov-10 117.25 116

11-Feb-11 90 115

19-Apr-11 X

2-May-12 87.5 117 O X

120

108

116 115 117

19-Apr-11 2-May-12

O

63

73

83

93

103

113

123

133

143


Rs


3-Year Price, Target Price and Rating Change History Chart for ULTC.BO

ULTC.BO Closing

Price

Target

Price

Initiation/


3-Aug-10 860 730

27-Jan-11 1,008.85 839

19-Apr-11 X

27-Apr-11 1059 840

2-May-12 1,414.45 1212 X

730

839 840

1212

19-Apr-11 2-May-12730

930

1130

1330

1530

1730


Rs


The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities.

26 September 2012


Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.

Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 44% (52% banking clients) Neutral/Hold* 42% (49% banking clients) Underperform/Sell* 11% (39% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names. Price Target: (12 months) for (ACC.BO) Method: Our target price of Rs1,462 for ACC is based on its 10-year average historical EV/EBITDA multiple of 8.5x, and average CY13E and CY14E EBITDA of Rs. 28,755mn. Risks: Risks to our target price of Rs1,462 for ACC include: 1) input prices could surprise negatively, particularly the price of coal in domestic e-auctions 2) cement prices could surprise negatively on oversupply, and 3) overall India macro risks. Upside risks include cement volume growth in FY13E driven by a cyclical recovery, sustained price increases favourably impacting margins. Price Target: (12 months) for (ABUJ.BO) Method: Our target price of Rs194 for Ambuja is based on its 10-year average historical EV/EBITDA multiple of 8.7x, and average of CY13E and CY14E EBITDA of Rs.29,960mn Risks: Risks to our Rs194 target price for Ambuja Cements include the following: 1) Input prices could surprise negatively. 2) Cement prices could surprise negatively on oversupply. 3) Overall India macro risks. 4) Low-cost imports in Ambuja's main markets in the west and north. Upside risks include cement volume growth in FY13E driven by a cyclical recovery, sustained price increases favourably impacting margins. Price Target: (12 months) for (ICMN.BO)

26 September 2012


Method: Our target price of Rs 117 for India Cements is based on its 10-year average historical EV/Tonne of Rs.4075 and FY14E capacity of 15m tonnes. We believe EV/Tonne is a more representative method to value the company vis-a-vis EV/EBITDA that we have used for larger cement majors due to its high exposure to the on-going downcycle in the South Indian market, making its EBITDA more volatile than peers. Risks: The risks to our target price of Rs 117 on India Cements include the following: 1) Concentration of India Cements' business in the Southern region could be a risk. 2) Input costs, particularly coal, could surprise negatively. 3) Cement prices could surprise negatively. 4) Overall India macro risks Price Target: (12 months) for (ULTC.BO) Method: Our target price of Rs1,559 for Ultratech Cement is based on its 5-year average historical EV/EBITDA multiple of 8.1x and FY14E EBITDA of Rs.54,074mn. Risks: Potential risks to our Rs1,559 target price for Ultratech Cement include: 1) input prices could surprise negatively; 2) cement prices could surprise negatively on oversupply; 3) overall Indian macro risks and 4) further delays in commissioning/ramping up new capacities, all of which could adversely affect earnings. Upside risks include cement volume growth in FY13E driven by a cyclical recovery, sustained price increases favourably impacting margins.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (ICMN.BO, ULTC.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ICMN.BO, ULTC.BO) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ICMN.BO, ULTC.BO) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ACC.BO, ABUJ.BO, ICMN.BO, ULTC.BO) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: CRH.I, HOLN.VX, LAFP.PA.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that.

For Thai listed companies mentioned in this report, the independent 2010 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Siam Cement(Excellent). Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Sandeep Mathew, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. • Kush Shah, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

26 September 2012


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