Cement Monthly: October

October 29, 2013

Sector View
Neutral

Prices remain flat amid low demand

Cement prices remains flat in October; demand sagging
YoY (%) Aug-13 NA NA MoM (%) NA NA Sep-13 Sep-12 NA

Cement dispatches
Mn Tonnes NA

All India average cement price (|/50 kg bag)

320 300 280 |./bag 260 240 220 200 Jul-13 Jan-13 Jan-12 Apr-12 Apr-13 Oct-11 Oct-12 Oct-13 Jul-12 | 298

All-India cement prices remained at September levels after rising during that month. Average price settled at | 298/bag in October vs. | 299/bag in September. Prices went up by | 30-40/bag in certain markets from September pricing and came back to previous levels in the absence of overall good demand. Central sees marginal recovery in prices, other regions remain stagnant While most regions saw a marginal movement in prices, the central region saw an increase in cement prices by | 4/bag MoM in October after declining continuously for the last three months. Price in the central region inched up to | 262/bag in October from | 258/bag in the previous month and were at | 293/bag in June 2013. The northern region also saw a marginal increase in price on an average by | 2/bag MoM for October. Prices reached | 282/bag in that region. Eastern and western regions faced price declines during the month. Prices in the eastern region declined for the fourth month in a row to | 311/bag from | 333/bag in June 2013 and | 314/bag in the previous month. Prices in the Western region stood at | 303/bag, a decline of | 6/bag from the previous month. Prices in the southern region remained stagnant with all major cities experiencing a hike in price while the Hyderabad region faced a decline in price due to low demand on the back of regional issues. With all these, all India cement prices stood at | 298/bag, higher by only |1/bag MoM. On a YoY basis, prices are up by | 7/bag. According to dealers, prices are expected to remain under pressure in the coming months in the absence of any major improvement in demand. Pressure on margins to continue; remain neutral on sector The operating environment continues to remain challenging for the sector both in terms of poor demand and high cost structure. We believe the premium valuations of a few large cap cement companies like Ambuja and UltraTech are looking stretched given the present situation. However, the higher replacement costs and market leadership of these companies are keeping them at rich valuations. We remain positive on select midcap companies due to attractive valuations on an EV/tonne basis.

All India average cement price

Source: Cement dealers

Analysts name
Rashesh Shah rashes.shah@icicisecurities.com Darpan Thakkar darpan.thakkar@icicisecurities.com

Exhibit 1: Valuation matrix

Company ACC* Ambuja* UltraTech Shree Cem India Cem JK Cem JK Lakshmi Orient Cement Mangalam Heidelberg* CMP (|) 1150 195 1986 4437 48 190 68 38 100 38 EPS (|) TP(|) FY13 FY14E FY15E 1270 56.4 55.5 68.5 181 8.4 8.1 8.6 2040 96.8 76.3 101.9 4725 288.5 259.4 324.4 50 5.3 1.6 4.6 205 33.4 29.1 34.2 77 14.9 9.0 11.8 32 7.5 6.7 6.1 116 29.0 20.4 21.7 37 1.4 -1.8 0.1 P/E (x) FY13 FY14E FY15E 20.4 20.7 16.8 23.1 24.2 22.6 20.5 26.0 19.5 15.4 17.1 13.7 9.0 30.7 10.4 5.7 6.5 5.5 4.5 7.5 5.7 4.8 5.5 6.0 3.5 4.9 4.6 27.6 NA NA EV/EBITDA (x) FY13 FY14E FY15E 9.5 12.8 9.0 10.8 14.1 10.9 12.2 13.6 11.6 10.1 10.3 7.8 5.1 5.9 5.2 4.0 6.0 5.2 3.7 5.9 4.8 2.6 2.7 2.7 3.1 4.8 3.6 24.3 15.6 7.9 EV/Tonne ($) FY13 FY14E FY15E 104 106 106 159 151 139 171 144 142 164 162 134 44 46 47 47 64 50 48 58 39 26 25 23 32 28 30 60 49 42 RoNW (%) FY13 FY14E FY15E 14.4 12.5 14.6 14.8 12.2 11.9 17.4 12.0 13.9 26.1 20.9 21.1 4.0 1.2 3.3 13.8 10.9 11.6 13.9 7.7 9.4 21.3 15.9 12.7 15.7 10.0 9.9 3.6 -5.1 0.3 RoCE (%) FY13 FY14E FY15E 18.8 10.7 16.5 21.0 12.0 14.6 18.7 13.8 14.9 21.4 17.7 20.7 8.1 6.3 7.7 14.5 9.7 11.4 11.5 6.0 7.6 29.5 21.4 16.7 14.0 7.4 10.4 2.3 1.2 6.0

Source: Company, ICICIdirect.com Research Note: For ACC, Ambuja,& Heidelberg FY13,FY14E and FY15E denotes CY12, CY13E and CY14E

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North region: Prices rise ~| 2-3/bag MoM in October 2013

In the north, cement prices on an average rose by only | 2-3/bag MoM in October 2013. While demand continues to be stagnant in the entire region, due to upcoming elections in the state of Rajasthan and Delhi, there does not seem to be any revival in demand in the near future. Average cement prices in the region stood at | 282/bag during the month. Jalandhar witnessed a price rise of | 2/bag. Prices in Jaipur and Delhi were up by | 5/bag. Prices in other northern markets were up in the range of | 0-3/bag. On a YoY basis, prices in the region declined by ~| 4/bag. According to our discussion with dealers, recently cleared infrastructure projects in the NCR region may create some demand in the coming future.
Exhibit 2: Cement prices in northern region
330 310 290 270 250 230 210 190 170 150 Oct-11 Oct-12 Aug-12 Aug-13 Aug-13 Dec-11 Dec-12 Jun-12 Jun-13 Apr-12 Feb-12 Feb-13 Apr-13 Oct-13 Oct-13

|/bag

Prices in Jaipur and Delhi were up by | 5/bag. Average prices rose by | 2/bag YoY

Delhi

Jaipur

Amritsar

Source: Cement dealers, ICICIdirect.com Research

East region: Average prices fall by | 3/bag due to low demand

Prices in the eastern region remained subdued during October. Average cement prices in the region stood at | 312/bag during the month, down | 2/bag MoM due to low demand in the region. West Bengal and Chhattisgarh saw a large drop in prices due to low demand because of the festive season and upcoming elections, respectively. In Kolkata, prices declined by | 20/bag and in Chhattisgarh they declined by | 10/bag. Prices in Bhubaneswar, Patna and Raipur, however, were up by | 5/bag, | 3/bag and | 5/bag, respectively. According to dealers in the region, demand is expected to rise after the Diwali festival.
Exhibit 3: Cement prices in eastern region
Prices in Kolkata fell by | 20/bag. Bhubaneswar, Patna and Raipur saw price increase of | 3-5/bag

450 400 350 |./bag 300 250 200 150 Oct-11 Aug-12 Dec-11 Oct-12 Dec-12 Jun-12 Jun-13 Apr-12 Feb-12 Feb-13 Apr-13

Kolkata

Patna

Bhubaneswar

Source: Cement dealers, CMIE, ICICIdirect.com Research

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Western region: Average prices fall by ~|6/bag MoM with Maharashtra facing steep decline
Cement prices in the western region declined during the month after an increase in the previous month. Prices decreased by | 6/bag on an average in the region with Gujarat experiencing increase in prices while Maharashtra facing huge declines. Price in Ahmedabad and Surat increased by | 9/bag and | 12/bag, respectively. Mumbai saw a marginal decline in price of | 3/bag while Pune, Nasik and Nagpur saw a decline in price of | 12/bag, | 21/bag and | 14/bag, respectively. Companies faced a low demand scenario during Q2FY14 in the region, which seem to have not ended. Going forward also, in the absence of any major event, demand is expected to remain subdued in the region.
Exhibit 4: Cement prices in western region
350
In the western region, prices declined by | 6/bag on an the Maharashtra region

300 |/bag 250 200 150 Oct-11 Oct-12 Aug-12 Aug-13 Dec-11 Dec-12 Apr-12 Jun-12 Apr-13 Jun-13 Feb-12 Feb-13 Oct-13

average. Prices increased in Gujarat while they declined in

Mumbai

Nagpur

Ahmedabad

Source: Cement dealers, CMIE, ICICIdirect.com Research

South region: Prices increase across cities except Hyderabad

Average cement prices in the southern region remained stagnant with increase in all major cities except Hyderabad region. After rising steeply, price declined in Hyderabad region to | 300/bag from | 320/bag in the previous month due to low demand while other regions in south are witnessing upward trend in prices over past three months. Prices rose by | 5/bag in Bangalore and Cochin while they rose by | 10/bag in Chennai. From an average price of | 311/bag in July 2013 prices have reached an average of | 335/bag in the last two months. On a YoY basis, prices are up by | 25/bag in South.
Exhibit 5: Cement prices in southern region
350
Prices in Hyderabad declined after a sharp increase in

300 |/bag 250 200 150 100 Oct-11 Oct-12 Aug-12 Aug-13 Dec-11 Dec-12 Jun-12 Jun-13 Apr-12 Feb-12 Feb-13 Apr-13 Oct-13

the previous month. Prices in other southern cities increased by | 5-10/bag

Hyderabad

Chennai

Bangalore

Source: Cement dealers, CMIE,, ICICIdirect.com Research

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Central region: Average price rises by ~| 4/bag MoM with healthy demand

After continuously declining in the last three months, prices in Central region increased during the month. On an average, prices have increased by | 4/bag MoM in the region. Price in Bhopal reached as high as | 290/bag from | 275/bag last month and settled at | 280/bag. Allahabad, Kanpur & Lucknow saw an increase of | 8/bag, | 20/bag and | 5/bag, respectively. While Ghaziabad faced a decline of | 10/bag due to increased supply compared to the previous month, price in Indore decreased by | 7/bag due to election activities. According to dealers in the region, demand is robust in the region compared to other parts of India and is expected to rise after major events like election & Diwali get over.
Exhibit 6: Cement prices in central region
350
Prices increased in the region after hitting a bottom in the previous month. Average price has increased by | 4/bag MoM with good demand

300 |/bag 250 200 150 Oct-11 Oct-12 Aug-12 Aug-13 Dec-11 Dec-12 Apr-12 Jun-12 Apr-13 Jun-13 Feb-12 Feb-13 Oct-13

Lucknow

Indore

Ghaziabad

Source: Cement dealers, CMIE,, ICICIdirect.com Research

ICICI Securities Ltd. | Retail Equity Research

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Valuations
After taking into account the current financial performance and future outlook, we revise our expansion led volume CAGR of 6.8% (from earlier estimates of 7.6%) during FY13-15E for cement companies under our coverage. Higher volume growth is expected in Heidelberg Cement (~21.9%) and Mangalam Cement (~12.3%) due to capacity expansions. On the realisations front, we expect moderate growth of 4% in FY14E to be partly offset by the hike in fuel & power, raw material and transport charges. Overall, we expect cement companies to post a topline CAGR of ~0.2% during FY13-15E. On the other hand, margins are expected take a hit due to players inability to fully pass on the hike in costs given the slowdown in demand. However, we expect it to improve progressively from FY15E onwards with lower capacity additions and volume led operating leverage benefits.
Exhibit 7: Key financials
Cement Volume# | Crore ACC* Ambuja Cement* UltraTech Cement^ Shree Cement** India Cement JK Cement Orient Cem JK Lakshmi Mangalam Cement Heidelberg Cem* FY13 FY14E FY15E 24.1 21.4 41.5 12.4 10.1 5.8 4.1 5.3 1.9 2.9 24.1 21.7 42.2 13.4 10.3 6.1 4.0 5.2 1.9 3.5 27.6 24.4 48.3 14.5 10.6 5.9 4.1 5.9 2.4 4.3 FY13 11130.6 9671.1 20020.9 5563.6 4597.0 2904.0 1484.4 2054.9 698.7 1101.2 Sales FY14E 11015.5 9335.9 20434.2 5675.7 4635.1 2913.3 1452.2 1892.1 699.1 1401.2 FY15E 13617.4 11226.2 24015.4 6472.0 5100.0 3588.7 1512.5 2376.5 958.2 1801.2 FY13 1969.0 2420.0 4522.8 1558.4 843.3 552.1 301.4 428.7 123.3 74.4 EBITDA FY14E 1486.2 1756.4 4049.7 1517.0 740.7 508.8 275.1 321.7 111.6 113.1 FY15E 2120.8 2196.5 4701.1 1927.5 870.2 634.9 259.0 413.0 164.9 191.6 FY13 1059.3 1299.5 2655.6 1004.0 163.5 233.6 161.6 175.7 77.3 30.8 PAT FY14E 1043.4 1235.0 2093.4 902.7 47.7 203.2 143.5 106.5 54.5 -40.8 FY15E 1287.9 1322.4 2795.2 1128.8 140.8 239.1 131.1 139.2 58.1 2.4 FY13 56.4 8.4 96.8 288.5 5.3 33.4 7.5 14.9 29.0 1.4 EPS FY14E 55.5 8.1 76.3 259.4 1.6 29.1 6.7 9.0 20.4 -1.8 FY15E 68.5 8.6 101.9 324.4 4.6 34.2 6.1 11.8 21.7 0.1

Source: Company, ICICIdirect.com Research # Cement volumes in million tonnes, * FY13/FY14E/FY15E denotes CY12/CY13E/CY14E, **FY13E/FY14E/FY15E denotes JY13E/JY14E/JY15E, ^Excludes Jaypees Gujarat sales data

On the valuations front, we are neutral on large caps like ACC, Ambuja, UltraTech and Shree Cements due to expensive valuations. We remain positive on select midcap cement companies like JK Cement, JK Lakshmi Cement and Mangalam Cement on account of their strategic locations and attractive valuations on an EV/tonne basis.
Exhibit 8: Valuations & recommendations
P/E Market Cap ACC* Ambuja Cement* UltraTech Cement Shree Cement** India Cement JK Cement JK Lakshmi Orient Cem Mangalam Cement Heidelberg Cem* 21609 29835 54456 15439 1467 1325 797 783 268 850 CMP 1150 195 1986 4437 48 190 68 38 100 38 TP 1270 181 2040 4725 50 205 77 32 116 37 Rating HOLD HOLD HOLD HOLD HOLD BUY BUY SELL BUY HOLD FY13 20.4 23.1 20.5 15.4 9.0 5.7 4.5 4.8 3.5 27.6 FY14E 20.7 24.2 26.0 17.1 30.7 6.5 7.5 5.5 4.9 NA FY15E 16.8 22.6 19.5 13.7 10.4 5.5 5.7 6.0 4.6 NA FY13 9.5 10.8 12.2 10.1 5.1 4.0 3.7 2.6 3.1 24.3 EV/EBITDA FY14E 12.8 14.1 13.6 10.3 5.9 6.0 5.9 2.7 4.8 15.6 FY15E 9.0 10.9 11.6 7.8 5.2 5.2 4.8 2.7 3.6 7.9 EV/Tonne ($) FY13 104 159 171 164 44 47 48 26 32 60 FY14E 106 151 144 162 46 64 58 25 28 49 FY15E 106 139 142 134 47 50 39 23 30 42

Source: Company, ICICIdirect.com Research * FY13/FY14E/FY15E denotes CY12/CY13E/CY14E, ** FY13,/FY14E/FY15E denotes JY13/JY14E/JY15E

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Exhibit 9: EBITDA/tonne (FY13)

1400 1200 1000
|
Shree Cement, Ambuja and UltraTech remained best performers in terms of operating performance for FY13

1236

1128

1090

955

839

817

812

800 600 400 200 0

JK Cement India Cement

751

645 256

Orient Cem

ACC*

Mangalam Cement

Shree Cement**

Ambuja Cement*

UltraTech Cement

JK Lakshmi

FY13 EBITDA/tonne

Source: Company, ICICIdirect.com Research

Exhibit 10: Current replacement cost valuation matrix

180 160 140 120 100 80 60 40 20 0 159 171 164 Current replacement cost at ~$120/per tonne

$ per tonne

All midcap companies are trading at significant discounts to large caps

104

44

47 26

48

32

Ambuja*

Orient Cement

ACC*

JK Lakshmi

Shree Cem

India Cem

JK Cem

Valuation at FY13/CY12 capacities

Source: Company, ICICIdirect.com Research

Exhibit 11: EV/tonne vis--vis RoCE (FY14E)

25 ACC 20 15 RoCE (%)
All large caps are trading at rich valuations mainly due to bigger size and better performance

Shree Cem UltraTech ACC 100 125 150 Ambuja 175 200

JK Lak 0 25 50 75 MangalamIndia Cem JK Cem Heidelberg

10 5 0 -5 EV/Tonne (US$)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd. | Retail Equity Research

Mangalam

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Heidelberg

UltraTech

Heidelberg Cem*
60

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Sector view: Over weight compared to index Equal weight compared to index Under weight compared to index Index here refers to BSE 500

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We/I, Rashesh Shah CA, Darpan Thakkar MBA , research analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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