Documente Academic
Documente Profesional
Documente Cultură
November 2016
Operating
Leverage
Financial
Leverage
Demand
Growth
Cement
CONTENTS
SECTOR
What are you playing? 3
Coverage summary ..4
When the going remains tough 5
How to play the theme? 14
The operating leverage framework 15
The efficiency framework .18
Financial leverage (FL) framework .20
Pricing discipline here to stay ..23
Regional pricing dynamics ...25
Valuations: The low hanging fruit is gone 30
COMPANIES
UltraTech (SELL): Even hope doesnt last forever 37
Shree Cement (SELL): Can the champion keep at it? .47
Dalmia Bharat (BUY): Converting mass to muscle ..59
Orient Cement (BUY): Not a bad deal! .93
Page 2
Cement
POSITIVE
THEMATIC
Summary of recommendation
UTCEM
SELL
3,972
0.3
12.7
ACC
BUY
1,722
14.2
8.1
9.8
Upside EV/EBITDA
(%)
(FY19)
TP
BUY
273
11.6
DBL
BUY
2,353
16.2
9.1
SRCM
SELL
17,231
1.6
12.4
ORCMNT
BUY
216
26.4
6.2
500
400
300
200
100
1.5
1
0.5
Research Analysts
Nitin Bhasin
+91 22 3043 3241
nitin.bhasin@ambit.co
Achint Bhagat, CFA
+91 22 3043 3178
achint.bhagat@ambit.co
Parita Ashar, CFA
+91 22 3043 3223
parita.ashar@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
ACEM
ACC
SRCM
UTCEM
TRCL
ICEM
ORCMNT
-1
DBL
0
-0.5
JKLC
UTCEM
JKCE
SRCM
ACC
ACEM
TRCL
ICEM
DBL
ORCMNT
JKLC
Rating
ACEM
JKCE
Company
Cement
Coverage summary
Exhibit 1: Valuation summary
CMP
TP Upside Rating
MCap
MCap
(Rs
bn)
EV/Tonne (X)
(Rs)
3,959
3,972
0.3
19.6
16.0
24
20
16
13
245
273
11.6
BUY
486
7,279 29.7
16.9
12.6
9,860
9,558 33.7
20.2
15.1
11.7
ACC
1,508
1,722
14.2
BUY
283
4,243 17.7
14.0
10.2
8.1
9,003
8,186
7,946
7,946 22.7
18.0
13.1
10.4
DBL
2,025
2,350
16.1
BUY
180
2,694 15.3
13.1
10.7
8.9
9,661
9,615
9,615
9,615 17.4
14.7
11.7
9.8
16,963 17,231
1.6
SELL
591
8,855 43.2
20.4
16.4
20.6
16.4
12.5
26.4
BUY
35
525 25.8
12.5
7.4
15.2
9.0
7.6
Ambuja
Shree
Orient
171
216
FY16
FY17E
(Rs)
UltraTech
(%)
EV/EBITDA (X)
(US$
FY16 FY17E FY18E FY19E
mn)
FY18E
6.2
5,907
5,907
5,907
5,907 30.8
Utilisation
Realisation (Rs/tonne)
Cost/tonne
EBITDA (Rs/tonne)
FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
UltraTech
48.3
51.3
55.9
62.7
75
76
80
Ambuja
21.6
21.5
22.8
24.9
75
71
73
708
ACC
23.5
24.4
25.9
27.7
78
77
77
647
DBL
12.8
15.0
17.1
18.8
51
60
68
75 5,138 5,073 5,270 5,515 3,796 3,756 3,814 3,898 1,233 1,222 1,310 1,430
Shree
14.2
21.8
26.9
30.8
63
86
96
Orient
4.4
6.0
7.0
7.2
55
75
88
398
620
907 1,043
EBITDA margin
EPS
FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
UltraTech
Ambuja
ACC
55.5
67.9
85.2 19.2
22.1
23.4
24.7 21.8
27.8
37.5
50.4
20.2
24.7
32.0 16.1
21.2
22.8
25.3
8.6
12.2
17.1
23.0
5.2
6.1
19.3
26.4
33.3 13.0
15.4
18.8
21.0
5.9
8.1
12.8
17.9
39.2
51.0
76.0 102.8
10.1
23.2
48.6
82.4 123.1
94.6
DBL
64.4
74.8
18.4
22.4
26.9 24.5
24.5
25.6
26.8
1.9
4.0
6.8
Shree
55.7
28.0
34.8
44.5 23.7
30.3
30.0
32.3
4.5
13.4
18.4
Orient
15.1
21.1
3.8
6.4
7.6 12.2
18.0
24.0
26.7
0.6
0.8
2.5
26.8
28.4
1.8
11.6
3.0
4.0
12.4
16.3
Exhibit 4: Ratios
RoCE (%)
RoE (%)
FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
UltraTech
10
12
14
11
13
15
18
16
19
10
20
22
25
28
35
34
Ambuja
(5)
13
17
(21)
32
22
29
(35)
42
41
34
ACC
10
13
16
11
15
19
13
13
26
37
26
(13)
30
49
35
DBL
12
14
10
15
19
83
16
17
15
162
16
22
20 1,981
109
69
49
Shree
19
22
24
19
23
25
(14)
66
26
19
(2)
112
24
28
(14)
66
26
19
Orient
13
15
21
22
(2)
40
27
(40)
107
69
18
NA
33
206
32
Page 4
Cement
12%
10%
8%
6%
4%
2%
FY16
FY15
FY14
FY13
Median growth
YTDFY17
FY12
FY11
FY10
FY09
FY08
FY07
FY06
0%
Page 5
Cement
Exhibit 6: Cement demand CAGR over FY14-16 has been lowest in the last two
decades
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
Page 6
Cement
Exhibit 7: If implementation of rural schemes are as planned, volume growth could
increase by 150-160bps
Government schemes
FY12
MNREGA
FY13
310
FY14
FY15
FY16
FY17
303
330
325
337
385
-2.3%
9.0%
-1.6%
3.8%
14.2%
124
138
187
196
136
197
Central allocation
95
105
143
148
95
150
State allocation
29
33
44
48
41
47
11.2%
35.4%
4.7%
-30.6%
44.4%
89
98
100
101
190
-54.1%
10.4%
1.6%
1.4%
88.1%
YoY growth
IAY
YoY growth
PMGSY
193
YoY growth
Total (` bn)
628
YoY growth
530
615
620
574
772
-15.6%
16.1%
0.8%
-7.4%
34.4%
16
15
17
16
17
19
37
41
56
59
41
59
19
10
10
10
19
72
66
82
85
68
97
Cost/bag
275
294
296
302
285
302
13.1
11.2
13.9
14.1
11.9
16.1
-15.0%
25.0%
0.8%
-15.4%
35.3%
-0.9%
1.2%
0.0%
-0.8%
1.6%
-2.2%
3.0%
0.1%
-2.1%
4.0%
growth
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
60
55
50
45
40
35
30
Page 7
Cement
Exhibit 9: P&F cost dropped sharply in FY16 due to steep
decline in petcoke prices
(Rs)
1,200
30%
1,000
20%
6,000
800
10%
5,500
600
0%
5,000
400
-10%
200
-20%
-30%
7,000
Source: Company, Ambit Capital research. The chart above depicts costs for
37 companies
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
3,000
FY16
Jun-15
P&F cost/tonne
FY15
3,500
Mar-15
FY14
4,000
Dec-14
FY13
4,500
Sep-14
FY12
6,500
South
280
North
260
West
240
Central
220
East
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
Mar-15
May-15
Jan-15
Sep-14
Nov-14
Jul-14
May-14
Jan-14
Mar-14
Sep-13
Nov-13
Jul-13
May-13
Jan-13
Mar-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Mar-12
Sep-11
Nov-11
Jul-11
May-11
200
Page 8
Cement
100%
90%
20%
80%
10%
70%
FY20E
FY19E
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
0%
60%
50%
-10%
Page 9
Cement
Capacity
2020E
2019E
2018E
2017E
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2003
2002
5%
2001
100
2000
10%
1999
200
1998
15%
1997
300
1996
20%
1995
25%
400
1994
(mn tonnes)
500
State
Region
FY17
JK Lakshmi
Gujarat
West
1.35
JK Lakshmi
Chhattisgarh
East
Birla Corp
Rajasthan
North
UltraTech Cement
Rajasthan
Ambuja Cement
West Bengal
Ambuja Cement
Rajasthan
ACC
FY18
FY19
FY20
1.0
1.5
5.5
North
0.9
Chhattisgarh
East
2.5
Shree Cement
Chhattisgarh
East
Shree Cement
Karnataka
South
Emami Cement
Chhattisgarh
East
Emami Cement
West Bengal
East
Wonder Cement
Maharashtra
West
Mangalam Cement
Uttar Pradesh
Central
JSW Cement
Maharashtra
West
Bhavya Cement
Andhra Pradesh
Burnpur Cement
West Bengal
4.5
Total addition
Installed capacity at
the start of the year
% addition
2.8
4
3
4.0
2
3
0.75
1.2
1.15
2
9.5
5.0
18.2
8.5
420
430
434
453
2.3
1.2
4.2
1.9
Page 10
Cement
Top-5 players (barring Shree) have limited bandwidth for further expansions
The exhibits below show that six players accounted for 60% of the overall capex of the UltraTechs mega acquisition of
Indian cement sector over FY09-15. Of these, Shree is the only player planning Jaypees 22mn tonne capacity
reinvestments in greenfield/brownfield expansion. UltraTechs mega acquisition of limits its ability to re-invest
Jaypees 22mn tonne capacity limits its ability to re-invest; ACC and Ambuja have no
major expansion aspirations due to the global mandate of Lafarge-Holcim to curtail
expansion. Jaypee will exit the business.
Exhibit 14: Top-5 players accounted for 70% of sector capex
in FY02-08
Capex split (FY02-08)
UltraTech ,
Rs79.6bn;
25%
Others,
Rs18bn;
31%
UltraTech,
Rs154bn;
18.1%
Others,
Rs62bn;
41%
Ramco,
Rs20bn; 6%
JPA,
Rs137bn;
16.1%
JPA,
Rs65bn;
20%
Ambuja,
Rs25.6bn;
8%
ACC,
Rs30.5bn;
10%
Ambuja,
Rs68bn;
8.0%
Others,
44%
UltraTech,
17%
Holcim*,
18%
Others,
50%
Holcim*,
20%
UltraTech
, 15%
UltraTech
, 19%
Shree,
Rs69.5bn
8.1%
ACC,
Rs76bn;
8.9%
Jaypee,
8%
Ramco ,
5%
FY05
Shree ,
FY10
5%
Holcim*,
15%
Others,
52%
Dalmia ,
4%
Shree ,
6%
Jaypee ,
6%
FY16
Page 11
Cement
Exhibit 19: Top 3/5 groups have lost market share over a period of time
60%
57%
55%
50%
55%
51%
49%
47%
45%
44%
38%
40%
43%
35%
Top-5 groups
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
30%
Top-3 groups
FY03
ACC
UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech UltraTech
UltraTech ACC
Ambuja
Ambuja
FY04
ACC
FY05
ACC
FY06
ACC
FY07
ACC
FY08
FY09
ACC
ACC
FY10
FY11
FY12
FY13
ACC
ACC
ACC
ACC
Jaypee
Group
Jaypee
Group
Jaypee
Group
FY14
ACC
ACC
Ambuja
Ambuja
Ambuja
Ambuja
Jaypee
Group
Shree
Shree
Dalmia
Dalmia
Dalmia
Ambuja
Ambuja
Ambuja
Ambuja
Ambuja
Jaypee
Group
Jaypee
Group
Jaypee
Group
Jaypee
Group
Jaypee
Group
Ambuja
Ambuja
Ambuja
Jaypee
Group
ICEM
ICEM
ICEM
ICEM
ICEM
ICEM
ICEM
Dalmia
Dalmia
India
India
India
Ramco
Ramco
Ramco
ICEM
FY17E
ACC
Ambuja
FY16
ACC
Ambuja
Jaypee
Group
FY15
Exhibit 21: The last few M&A transactions suggest credible consolidation in India
Size
Valuation (US$)
(In MT)
In mn
% of industry
capacity*
FY06
15
100
10.7%
FY06
18
200
12.9%
Mysore
FY07
2.1
119
1.3%
My Home
FY08
3.2
128
1.7%
Vicat
Bharathi
FY10
NA
1.9%
JPA
Andhra Cement
FY11
1.5
57
0.5%
Dalmia
Calcom
FY12
1.7
85
0.6%
Dalmia
Adhunik
FY13
1.5
65
0.4%
CRH
Jajajyothi
FY14
3.2
70
0.9%
UltraTech
JPA (Gujarat)
FY14
4.8
127
1.4%
Shree
JPA (Panipat)
FY14
1.5
40
0.4%
Dalmia
JPA (MP)
Heidelberg
(GU in Maharashtra)
FY14
2.1
75
0.6%
FY14
0.6
50
0.2%
Acquirer
Target
Year
Holcim
Ambuja
Holcim
ACC
Heidelberg
CRH
Concluded
JSW
On-going
UltraTech
JPA
FY15
22
110
5%
Birla Corp
Reliance Cement
FY16
5.6
140
1.4%
Nirma
Lafarge
FY17
11
NA
2.5%
Orient
Jaypee
FY17
4.2
98
1%
Page 12
Cement
35%
30%
30%
25%
20%
20%
15%
10%
10%
5%
0%
RoCE
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
0%
Page 13
Cement
Efficiency
FL
Pricing
Overall
Ranking
DBL
10
SRCM
JKLC
ACEM
10
TRCL
JKCE
ACC
10
10
10
Company
ORCMNT
UTCEM
ICEM
Source: Ambit Capital research
Page 14
Cement
Exhibit 24: Fixed costs of the industry have increased sharply owing to poor absorption
(Rs/tonne)
800
20%
18%
600
16%
400
14%
200
12%
10%
FY01 FY02
FY03 FY04
Fixed cost/tonne
FY14 FY15
FY16
Exhibit 25: Unabsorbed overheads have increased significantly as capacity utilisation dropped
(%)
(Rs/tonne)
250
105
100
200
95
150
90
100
85
80
50
75
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
70
Page 15
Cement
FC as a % of sales (FY16)
20%
20%
20%
19%
20%
17%
16%
16%
16%
15%
15%
15%
14%
14%
JKLC
23%
ICEM
25%
13%
12%
10%
5%
UTCEM
Century
JKCE
TRCL
Bcorp
Shree
HEID
Prism
OCL
DBL
ACEM
ACC
Orient
Kesoram
0%
Exhibit 27: Companies such as ACC are inherently inefficient on fixed cost management
FY11
FY12
FY13
FY14
FY15
FY16
Change over
FY11-16 (bps)
ACC
21%
20%
17%
19%
20%
20%
(53)
ACEM
13%
14%
14%
18%
18%
20%
679
Bcorp
15%
16%
14%
15%
14%
16%
87
Century
14%
15%
14%
13%
13%
13%
(44)
DBL
16%
14%
16%
19%
22%
20%
441
HEID
17%
18%
22%
18%
15%
16%
(104)
JKCE
14%
13%
13%
15%
14%
15%
29
JKLC
12%
11%
11%
11%
12%
14%
153
Kesoram
10%
12%
13%
15%
20%
23%
1,250
MGC
10%
10%
10%
12%
11%
13%
343
OCL
12%
14%
15%
18%
18%
19%
750
NA
NA
14%
17%
17%
22%
784
PRSC
15%
15%
16%
17%
16%
17%
177
SGC
6%
6%
7%
8%
10%
11%
452
Shree
11%
9%
12%
14%
14%
16%
482
ICEM
16%
14%
14%
15%
15%
14%
(117)
TRCL
11%
11%
13%
13%
14%
15%
428
UTCEM
14%
10%
11%
11%
12%
12%
(117)
ORCMNT
Page 16
Cement
FC as a %
of sales
Change in FC over
FY11-16 (bps)
Fixed cost/Installed
Capacity
Fixed cost/
Volume
Scope of
savings
Ranking
ORCMNT
55%
22%
784
426
771
346
DBL
54%
20%
441
513
943
430
ACEM
73%
20%
679
614
845
231
TRCL
60%
15%
428
421
698
277
SRCM
73%
16%
482
472
643
171
ACC
77%
20%
(53)
785
1,019
234
ICEM
56%
14%
(117)
410
734
325
JKCE
72%
15%
29
528
729
201
JKLC
82%
14%
153
409
499
90
UTCEM
77%
12%
(117)
443
572
130
10
Company
Page 17
Cement
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
FY01
FY02 FY03
P&F cost
Exhibit 30: Variable costs as a % of sales have dropped due to savings in power and
fuel cost
Variable costs as a
% of sales
FY11
FY12
FY13
FY14
FY15
FY16
TRCL
65%
60%
61%
71%
66%
55%
DBL
65%
62%
62%
66%
61%
56%
OCL
67%
72%
62%
66%
66%
61%
Shree
64%
64%
61%
63%
65%
61%
ACEM
62%
62%
60%
64%
64%
65%
ACC
60%
62%
64%
66%
68%
66%
NA
NA
65%
68%
63%
67%
ICEM
72%
65%
67%
73%
70%
67%
UTCEM
67%
68%
67%
70%
70%
69%
HEID
72%
76%
81%
79%
69%
70%
JKCE
72%
67%
68%
73%
73%
71%
Sagar
79%
77%
87%
92%
79%
73%
Bcorp
65%
69%
71%
77%
76%
76%
Prism
74%
78%
77%
79%
77%
76%
JKLC
74%
69%
68%
74%
73%
76%
Century
73%
77%
77%
77%
79%
78%
Mangalam
77%
73%
71%
80%
79%
82%
Kesoram
85%
90%
82%
80%
77%
92%
Orient
Page 18
Cement
Rank
on
VC/tonne
VC/tonne
FY11-16
CAGR
Rank
on VC/tonne
CAGR
Overall
Rank
Shree
2,099
-7%
Orient
2,230
-1%
Dalmia Bharat
2,630
-1%
Ramco
2,808
2%
JK Lakshmi
2,814
2%
Ambuja
2,837
3%
UltraTech
3,227
3%
ACC
3,284
5%
ICEM
3,920
10
3%
JK Cement
3,694
5%
10
10
Company
Exhibit 32: Variable cost split for the ranking above (FY16)
Company
RM Cost
per tonne
P&F cost
per tonne
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
ACC
771
1,004
1,142
367
3,284
2,142
Shree
563
531
574
431
2,099
1,525
Dalmia Bharat
888
649
767
325
2,630
1,863
JK Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
JK Cement
983
1,078
1,087
547
3,694
2,607
Orient
473
902
722
133
2,230
1,508
India
779
1,088
906
1,146
3,920
3,014
Page 19
Cement
Net Debt/Equity
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
0.5
The chart below shows that interest/EBITDA of the sector has risen sharply 60% of
EBITDA in FY16 as against 10% in FY08. For the manufacturers (excluding top-5), the
interest/EBITDA increased to 110% in FY16 as against 16% in FY08.
Hence,
deleveraging could drive meaningful earnings improvement for the sector.
Exhibit 34: The leverage of the sector has increased sharply in the last six years
120%
100%
80%
60%
40%
20%
0%
FY04
FY05
FY06
FY07
FY08
FY09
Interest/EBITDA
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Interest/EBITDA (ex-top 5)
Page 20
Cement
Exhibit 35: Regional players that have recently added capacities have the highest leverage
(X)
3.0
D/E
Int/EBITDA (RHS)
100%
2.5
80%
2.0
60%
1.5
40%
1.0
20%
0.5
ACC
ACEM
Shree
Bcorp
UTCEM
TRCL
Sagar
OCL
MGC
ICEM
HEID
Orient
JKLC
JKCE
Prism
Dalmia
Century
0%
Exhibit 36: The leverage of several companies has increased materially, leading to poor interest coverage
Company
Interest/EBITDA (%)
D/E (X)
FY11
FY12
FY13
FY14
FY15
FY16
FY11
FY12
FY13
FY14
FY15
FY16
ACC
7%
5%
9%
7%
6%
4%
0.1
0.1
0.0
0.0
ACEM
3%
3%
3%
4%
3%
6%
0.0
0.0
0.0
0.0
0.0
0.0
Bcorp
12%
15%
16%
33%
26%
29%
0.5
0.5
0.5
0.6
0.5
0.5
Century
18%
40%
55%
50%
74%
78%
1.6
2.1
2.7
3.2
3.1
2.6
Dalmia
64%
27%
37%
68%
72%
46%
0.7
0.6
1.1
1.4
2.7
2.2
HEID
4%
6%
16%
303%
43%
46%
1.0
1.2
1.7
1.5
1.2
JKCE
43%
28%
25%
43%
51%
56%
1.2
1.0
0.9
1.8
2.0
2.0
JKLC
33%
26%
19%
26%
27%
73%
1.0
1.0
1.1
1.3
1.5
1.7
Kesoram
100%
-419%
165%
200%
587%
-214%
3.1
5.2
8.8
10.5
61.1
13.3
MGC
3%
3%
4%
16%
42%
95%
0.0
0.4
0.7
0.7
0.9
OCL
20%
36%
18%
23%
21%
15%
1.0
0.8
0.8
0.7
1.1
0.8
Orient
NA
0%
6%
7%
5%
30%
NA
0.2
0.4
1.1
1.3
Prism
31%
61%
75%
152%
83%
73%
1.1
1.3
1.8
2.0
2.1
2.1
Sagar
43%
30%
72%
2250%
39%
34%
1.1
0.8
0.8
0.9
0.5
0.8
Shree
20%
14%
12%
9%
9%
6%
0.9
0.8
0.3
0.3
0.2
0.1
ICEM
35%
35%
39%
70%
63%
49%
0.8
0.9
0.9
1.1
1.1
1.0
TRCL
23%
17%
18%
34%
27%
17%
1.6
1.3
1.1
1.2
1.0
0.7
UTCEM
11%
6%
5%
9%
13%
11%
0.5
0.5
0.5
0.4
0.5
0.5
Page 21
Cement
Leverage
CE/tonne
Scope
Overall Rank
ORCMNT
DBL
10
JKLC
ICEM
JKCE
TRCL
ACC
10
SRCM
UTCEM
ACEM
10
10
Net Debt/EV
(FY16)
CE/tonne
(FY16)
Cumulative
FCF/DEBT (FY16)
ORCMNT
1.2
0.2
2,883
30%
DBL
1.6
0.3
5,147
25%
JKLC
1.5
0.3
3,759
24%
ICEM
1.0
0.4
4,068
22%
JKCE
1.7
0.3
4,594
24%
TRCL
0.7
0.1
4,415
33%
ACC
(0.2)
(0.0)
2,738
-146%
SRCM
0.1
0.0
3,668
404%
UTCEM
0.3
0.1
4,283
55%
ACEM
(0.5)
(0.1)
3,487
-52%
Company
Page 22
Cement
25%
Weak pricing;
earnings downgrades
20%
15%
10%
5%
0%
-5%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
-10%
Pricing growth
Source: Company, Ambit Capital research
Page 23
Cement
Pricing premium: Through this metric we ascertain markets where pricing is at a
premium compared to the all-India average. South India has the most premium
pricing thanks to strong discipline displayed by manufacturers in Tamil Nadu. East
has the second-highest price levels; however, the premium is now waning with rising
competition. Cement prices in Central India are lower than the all-India average.
Exhibit 40: Central India appears to be the best region for the cement market
Capacity utilisation
(FY16)
Fragmentation
(FY16)
Capacity additions
(FY16-19)
Demand
growth
Pricing premium
(vs India)
Overall Rank
Central
North
West
East
South
Region
Central
North
West
23%
25%
22%
JKCE
70%
10%
JKLC
80%
ACEM
SRCM
South
East
Rank
22%
20%
75%
2
20%
25%
ACC
18%
22%
22%
18%
20%
UTCEM
11%
21%
31%
18%
19%
ORCMNT
10%
55%
35%
10%
90%
ICEM
TRCL
DBL
10%
85%
15%
40%
50%
10
Page 24
Cement
370
350
330
310
290
270
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
250
South
Source: Company, Ambit Capital research
India
is
highly
dominated
ACC ,
9.7%
ICEM,
15.2%
Others,
32.9%
Chettina
d, 14.2%
ACC ,
10.0%
Dalmia,
8.2%
UTCEM,
17.2%
Others,
30.6%
Chettina
d, 11.8%
Ramco,
11.3%
ICEM,
11.7%
cement
Capacity share:FY18
UTCEM,
14.0%
UTCEM,
12.1%
Ramco,
Dalmia, 8.1%
5.5%
Capacity share:FY16
Capacity share:FY09
Others,
35.2%
by
ACC ,
9.3%
Dalmia,
9.7%
Chettina
d, 10.9%
Ramco,
11.3%
ICEM,
10.9%
Page 25
Cement
Exhibit 46: High fragmentation in AP is a key reason for pricing disruption
(mn tonnes)
100
100%
82
80
80%
60
60%
37
40
34
40%
20%
20
0%
AP
Overall capacity (LHS)
TN
Share of Top-3
Karnataka
Share of Top-5
Our view on pricing in South India: Whilst cement prices in South India have been
elevated we note that it has been supported by pricing discipline given high leverage
necessitated maintaining pricing in the absence of demand growth. We do not expect
scope for further price hikes in the region, and if demand remains weak, there is a
chance that prices may reduce.
280
230
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
180
Exit of two large players will benefit peers: While Jaypee will exit North India
after acquisition by UltraTech, another large player, Binani Cement (7% capacity
share in FY15), is facing working capital constraints and might reduce operations,
leading to improvement in the regions capacity utilisation. Capacity share of the top3 players is likely to increase to 52% in FY18 from 49% currently.
Page 26
Cement
Exhibit 48: Market share of
Capacity share:FY18
Capacity share:FY16
Shree,
23.7%
Shree,
21.9%
19.3%
Others,
19.2%
Others,
27.1%
Others,
30.2%
ACC,
12.5%
JKLC,
9.1%
ACC,
5.9%
ACC,
6.6%
UTCEM,
10.3%
Binani,
12.7%
ACEM,
17.0%
UTCEM,
15.8%
Binani,
7.0%
JKLC,
7.3%
Binani,
6.3%
ACEM,
11.3%
JKLC,
8.6%
ACEM,
10.2%
UTCEM,
18.2%
330
310
290
270
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
250
Central
Source: Ambit Capital research
Exit of Jaypee bodes well for the sector: Jaypee accounted for 25% of capacities
installed in Central India and, hence, had a significant impact on pricing in the
region. Since Jaypee is a volume-focused player, pricing in Central India remained
low. The acquisition will make UltraTech the leader in the region with a 30% capacity
share, which should lead to better pricing.
Page 27
Cement
Exhibit 52: Exit of Jaypee..
Capacity share:FY09
HEID,
4.8%
Capacity share:FY18
Capacity share:FY16
HEID,
11.6%
Jaypee,
28.1%
Others,
14.8%
ACC ,
14.2%
Jaypee,
23.5%
Others,
12.6%
ACC ,
11.6%
Century,
12.0%
UTCEM,
13.5%
UTCEM,
13.0%
Prism,
12.6%
Jaypee,
5.4%
Others,
24.2%
Century,
10.7%
HEID,
9.0%
Prism,
14.0%
Century,
13.7%
Prism,
10.8%
UTCEM,
30.7%
ACC ,
9.1%
Our view on pricing in Central India: Cement prices in Central India should
remain elevated in the next few years given the improving supply structure and pickup in demand. Central India has one of the highest capacity utilisation levels
amongst the Indian regions and overall utilisation here will reach ~90% by FY19,
thereby supporting pricing growth.
400
350
300
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Apr-14
Jun-14
250
East
Source: Ambit Capital research
Capacity share:FY09
Shree,
0.0%
Others,
19.8%
UTCEM,
23.5%
Shree,
9.5%
Capacity share:FY16
Others,
10.5%
UTCEM,
23.3%
OCL,
6.4%
ACEM,
14.6%
Lafarge,
18.4%
OCL,
12.7%
UTCEM,
20.0%
Shree,
14.0%
ACC,
12.1%
ACC,
17.3%
Others,
16.5%
ACEM,
12.9%
Lafarge,
19.0%
ACC,
14.2%
OCL,
11.7%
Nirma*,
14.0%
ACEM,
9.6%
Page 28
Cement
Our view on pricing in East India: Although demand growth in East India has
been higher than most other Indian regions, the rising prominence of volume focused
players such as Shree, JK Lakshmi and now Orient Cement will lead to weak pricing
in the market. Pricing growth in East will be the lowest amongst Indian regions.
340
320
300
280
260
240
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
220
West
Source: Company, Ambit Capital research
and...
Capacity share:FY09
Century,
7.1%
Others,
17.6%
Capacity share:FY16
Century,
4.2%
ACEM,
23.3%
ACC ,
8.8%
share
Capacity share:FY18
Others,
19.9%
Others,
25.3%
UTCEM,
38.9%
UTCEM,
48.2%
ACC ,
3.8%
UTCEM,
34.2%
Century,
7.8%
ACEM,
28.3%
ACC ,
7.8%
ACEM,
24.9%
Our view on pricing in West India: We expect the recent price hike to sustain but
do not expect any major growth thereon given that demand recovery will again lead
to rising dispatches from states like AP, thereby restricting price increases.
Page 29
in
Cement
Sector EV/EBITDA
14
12
10
8
6
4
EV/EBITDA
Oct-16
May-16
Dec-15
Jul-15
Feb-15
Sep-14
Apr-14
Nov-13
Jun-13
Jan-13
Aug-12
Mar-12
Oct-11
May-11
Dec-10
Jul-10
Feb-10
Sep-09
Apr-09
Nov-08
Jun-08
Jan-08
Aug-07
Mar-07
Oct-06
Avg EV/EBITDA
Source: Bloomberg, Ambit Capital research. Sector multiples includes UTCEM, ACEM, ACC, Ramco and Shree Cement
Exhibit 64: Post the 2Q results, EBITDA estimates have been downgraded
170
165
130
160
155
150
FY17
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
125
FY18
Source: Bloomberg, Ambit Capital research. Sector multiples includes UTCEM, ACEM, ACC, Ramco and Shree
Cement
Page 30
Cement
Walter Lippman
UltraTechs reputation of being the proxy play to the cyclical cement demand recovery
has meant that valuation has had little meaning in the last three years and
irrespective of earnings disappointments, its valuation continued to expand. Given
that demand recovery appears further delayed and cost savings will peter out due to
the increase the petcoke prices, we see little room for positive earnings surprise for
the next few quarters. Moreover, the stock trades at a 15x FY18E EBITDA at a 40%
premium to its 5-year average, which we find difficult to justify. We downgrade the
stock to SELL. We do not think that in a market growing at 5-6% the company can
grow materially ahead of the market and also enjoy pricing growth; we expect the
company to at best grow in line with the industry (or even behind) to support pricing.
On EV/tonne (ex-Jaypees plants), the stock trades at US$240/tonne, at a 70%
premium to replacement cost and five-year average, which appears too expensive to
generate investment returns.
Lastly, unlike the mid-cap players, we do not see significant scope of operating or
financial leverage playing out for the company and paying expensive valuations just
to play volume growth is not reason enough to buy the stock.
Exhibit 65: UTCEM is trading at a
cross-cycle average valuations
40% premium to
(X)
20
(USD)
230
16
200
12
170
140
110
4
80
EV/EBITDA
Average EV/EBITDA
EV/Tonne
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
50
Apr-10
Average EV/EBITDA
60,000
74,000
73,500
73,000
72,500
72,000
71,500
71,000
70,500
70,000
59,000
58,000
57,000
56,000
FY17
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
55,000
FY18 (RHS)
Page 31
Cement
Aug-16
Apr-16
Dec-15
Apr-15
Aug-15
Dec-14
Aug-14
Apr-14
Dec-13
Apr-13
Aug-13
Dec-12
Aug-12
Apr-12
Apr-11
Aug-16
50
Dec-15
Apr-16
Aug-15
80
Dec-14
Apr-15
4.0
Aug-14
110
Dec-13
Apr-14
8.0
Aug-13
140
Dec-12
Apr-13
12.0
Apr-12
170
Aug-12
16.0
Apr-11
200
Aug-11
Dec-11
20.0
Dec-11
(USD)
Aug-11
(X)
Exhibit 70: Ambuja is one of a few companies whose estimates have been upgraded
29,000
27,000
25,000
23,000
21,000
19,000
17,000
CY16
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
15,000
CY17
Page 32
Cement
15
150
13
130
11
110
70
50
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
90
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Exhibit 73: ACCs estimates were cut after the recent results
17,500
22,500
CY16
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
20,000
Jul-16
15,000
Jul-16
20,500
Jun-16
15,500
Jun-16
21,000
May-16
16,000
May-16
21,500
Apr-16
16,500
Apr-16
22,000
Apr-16
17,000
CY17
Page 33
Cement
(x)
(US$)
25
400
20
300
15
77%
premium
on
EV/tonne
6-yr EV/EBITDA
EV/tonne
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Apr-11
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
100
Apr-11
Sep-11
200
10
Shrees FY17 and FY18 EBITDA estimates have been upgraded by 14% and 23%
respectively due to strong pricing in North India and benefits accrued from low-cost
petcoke usage. With prices stabilising and petcoke costs having increased sharply, we
do not see scope for further earning upgrades.
Exhibit 76: Sharp earning upgrades by consensus led by strong pricing in North India
28,000
35,000
27,000
33,000
26,000
31,000
25,000
29,000
24,000
27,000
23,000
22,000
Apr-16
25,000
May-16
Jun-16
Jul-16
FY17
Aug-16
Sep-16
Oct-16
Nov-16
FY18 (RHS)
Page 34
Cement
12.5
12.0
12.0
11.0
9.5
10.0
9.0
7.5
8.0
6.0
4.0
2.0
SRCM
UTCEM
ACEM
DBL
ACC
ORCMNT
Page 35
Cement
Exhibit 78: Relative valuation of Indian cement companies
Capacity
Rating
(mn tonnes)
FY17
Advt
EV/EBITDA
6m
Mcap
FY18
(Rs
bn)
P/E
EV/tonne
(x)
(x)
US$ US$
mn mn FY17 FY18 FY17 FY18
CAGR (FY16-18)
Rs
ROE
Interest/EBITDA
(%)
(x)
FY18
FY17 FY18
FY15
FY16
69.6
69.6
22.3 14.2
47
25 15,689 15,689
11
29 42
11
18
13
11
Shree Cement **
26.6
29.5
SELL
593
8,901
3.4
20.4 16.4
44
32 21,420 19,314
26
43 74
20
23
Ambuja
31.7
32.7
BUY
487
7,317 10.3
16.9 12.6
39
28 10,181
9,860
27 29
ACC
34.1
34.1
BUY
284
4,265
7.8
14.0 10.2
30
20
8,186
7,946
32 39
11
15
Ramco Cements **
13.5
13.5
UR
147
2,209
1.9
14.1 12.0
29
22
9,787
9,787
13
13 10
15
17
27
17
Orient Cement
8.0
8.0
BUY
35
527
0.7
12.2
7.2
42
14
5,779
5,779
33
87 102
21
30
25.0
25.0
BUY
182
2,708
2.0
13.1 10.7
42
25
9,615
9,615
17
19 88
10
15
72
46
UltraTech
69.6
69.6
19.2 15.4
35
27 15,748 15,748
15
22 35
14
16
13
11
Shree Cement **
26.6
29.5
SELL
593
8,901
21.5 17.4
36
29 22,405 20,202
21
43 92
23
23
Large cap
Grasim^
3.4
NA
NA
NR
430
6,403 10.6
5.4
13
11
11
20 30
12
13
13
11
Ambuja*
31.7
32.7
BUY
487
7,317 10.3
21.5 16.3
6.5
34
26 13,797 13,374
14
31 34
10
12
ACC*
34.1
34.1
BUY
284
4,265
7.8
17.6 13.0
37
25
7,912
16 38
12
Ramco Cements **
13.5
13.5
SELL
148
2,209
1.9
14.0 12.4
24
20 12,445 12,445
12
11 15
18
19
27
17
Dalmia Bharat #@
25.0
25.0
NR
182
2,708
2.0
12.4 10.7
Century Tex#
12.8
12.8
NR
110
1,644 15.1
8.0
8.0
NR
52
771
JK Cement
10.8
10.8
NR
64
Jk Lakshmi Cement
11.0
11.0
NR
55
10.5
10.5
NR
6.7
6.7
7,912
Mid cap
Prism Cement #
46
9,545
16
19 70
13
72
46
NA 11,668 11,668
NA
NA NA
NA
74
78
37
16
8,957
8,957
12
43 NA
12
24
89
79
10
29
16
8,485
8,485
15
31 149
12
19
47
52
9.2
42
18
6,230
6,230
23
65 NA
18
26
71
8.3
19
14
5,417
5,417
16
55 64
11
13
26
29
8.1
7.3
16
14
7,733
7,733
11 29
20
20
21
25
16.1
NA
148
0.7
12.7
9.0
959
0.5
12.8
825
0.9
13.4
61
904
1.3
11.0
NR
54
808
0.4
30
9,545
Small Cap
Birla Corp #
OCL India
Orient Cement
8.0
8.0
BUY
35
527
0.7
14.4
8.7
40
15
5,942
5,942
30
73 95
19
30
India Cements
18.5
18.5
NR
48
720
9.7
8.2
7.2
19
13
4,333
4,333
12
13 63
10
62
48
Heidelberg India
6.0
6.0
NR
31
467
0.6
11.9
9.3
30
17
6,416
6,416
12
28 115
11
16
43
46
Mangalam Cement
3.5
3.5
NR
130
0.4
8.6
6.6
15
10
3,392
3,392
18
103 NA
10
14
42
97
Sagar Cement
3.5
3.5
NR
13
188
0.3
7.8
6.9
25
10
4,092
4,092
32
47 61
17
41
29
Page 36
UltraTech
SELL
UTCEM IN EQUITY
Cement
Catalyst
Performance (%)
160
140
120
100
SENSEX
UTCEM
FY15
FY16
FY17E
FY18E
FY19E
202,798
229,362
241,074
251,757
290,809
345,162
38,179
41,950
46,178
55,539
67,949
85,235
18.8
18.3
19.2
22.1
23.4
24.7
EPS (`)
78.2
73.4
79.3
101.3
136.6
183.7
RoCE
10.1
9.1
8.3
10.0
11.9
14.2
RoIC
14.5
11.3
9.7
11.5
13.9
16.4
EV / EBITDA (x)
28.6
26.6
23.6
19.6
16.0
12.8
Nitin Bhasin
+91 22 3043 3241
Key financials
Y/E Dec (` mn)
Research Analysts
nitinbhasin@ambit.co
Achint Bhagat, CFA
+91 22 3043 3178
achintbhagat@ambit.co
Parita Ashar, CFA
+91 22 3043 3223
parita.ashar@ambit.co
Nov-16
80
Sep-16
Whilst cement prices have improved in YTDFY17 and we expect pricing growth to
sustain, sharp increase in petcoke costs will wipe out ~`180 of EBITDA/tonne
from 4QFY17 onwards. UTCEMs aggressive expansions/acquisitions have
resulted in a sharp increase in the companys capital employed (CE/tonne:
`5,500 in FY18), which will keep RoCEs lower at 15% compared to other panIndia manufacturers till FY20; we assume 90% utilisation by FY20 for the group.
GREEN
AMBER
RED
Aug-16
Accounting:
Predictability:
Earnings Momentum:
Jun-16
Flags
May-16
`1,073/US$16.1
`924.1/US$13.9
`3,958
`3,972
0%
Mar-16
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Feb-16
Recommendation
Dec-15
Nov-15
CHANGE IN STANCE
Is scale enough?
UltraTechs scale leadership is yet to reflect in its financial performance as
despite significantly increasing its installed capacities (to 68mn tonnes in
FY16 as against 52mn tonnes in FY13), the company has managed to only
marginally improve its market share (to 16.7% in 1HFY17 as against 16.2%
in FY13). The company does not display variable cost efficiencies of the
industry leader and its fixed costs (as a% of sales) have remained constant
leaving little hope and scope of operating leverage playing out. A large
proportion of cost savings in the last one year was driven by reduction in
petcoke prices and increasing use of petcoke in the fuel mix. Now, we believe
these benefits will start to wane from 4QFY17, given the sharp increase in
petcoke prices in the last six months.
17.5%
8.0%
17.0%
6.0%
16.5%
4.0%
16.0%
2.0%
0.0%
15.5%
FY13
FY14
UTCEM
FY15
Industry
FY16
1HFY17
Page 38
(`/tonne)
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
4,300
4,200
4,100
4,000
3,900
3,800
3,700
3,600
FY13
FY14
FY15
Costs/tonne
15%
10%
5%
0%
-5%
-10%
-15%
-20%
FY13
FY14
FY15
P&F/tonne
P&F cost
per tonne
India
779
JK Cement
983
ACC
771
1,004
1,142
367
3,284
2,142
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
Jk Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
Dalmia Bharat
888
649
767
325
2,630
1,863
Orient
473
902
722
133
2,230
1,508
Shree
563
531
574
431
2,099
1,525
Company
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
1,088
906
1,146
3,920
3,014
1,078
1,087
547
3,694
2,607
Page 39
Financial assumptions
Volumes: We build in 6% volume growth in FY17, assuming that the company grows
in line with the industry. For FY18, we expect the company to grow 100bps higher
than the industry and build in 9% volume growth.
Assumptions for Jaypee assets: We assume a 60%/68% utilisation level for
Jaypees assets in FY18/FY19
We have assumed the best case both for volumes and realization and see little scope
for any upgrades.
Realisation: We build in a marginal realization growth in FY17 (+2%) but build in
strong growth in FY18 (+6%), since the companies are now more focused on holding
on to the price hikes, given no major new capacity additions.
Costs: Whilst sharp reduction in power and fuel costs in 1HFY17, will result in a 5%
YoY decline in overall costs in FY17 a sharp increase in FY18 will lead to a unitary
cost increase of 4%.
Unitary EBITDA and RoCE: Higher realization will lead to unitary EBITDA increasing
to `1,243 in FY18 as against `1,082 in FY17. Our estimates imply 14% unitary
EBITDA and 25% EBITDA CAGR over FY16-19. Pre-tax RoCE is likely to increase to
21% in FY19 as against 11% in FY17.
We assume `700/`1,000 unitary EBITDA for Jaypees assets in FY18/FY19.
Exhibit 5: Standalone financial assumptions for UltraTech (ex-Jaypee)
Key assumptions (Standalone)
Actuals
Assumptions
Growth (%)
FY15
FY16
FY17E
FY18E
FY14
FY15
FY16
FY17E
FY18E
44.9
48.3
51.3
55.9
2.7
8.8
7.6
6.3
9.0
75
75
76
80
(407)
25
15
56
446
Realisation*
5,047
4,936
4,873
5,167
(1)
(2)
(1)
Operating Costs*
4,199
4,035
3,845
3,984
(4)
(5)
910
956
1,082
1,243
(20)
(2)
13
15
229,362
241,074
252,858
292,365
13
16
EBITDA*
Financials (` mn unless specified)
Net revenues
EBITDA
41,950
46,178
55,539
69,505
(18)
10
10
20
25
18.3
19.2
22.0
23.8
(439)
(54)
87
281
181
13.3
13.8
16.3
18.8
(485)
(29)
46
252
247
28,863
30,587
39,155
54,339
(27)
28
39
12.6
12.7
15.5
18.6
(528)
(110)
10
280
310
20,147
21,764
27,800
38,581
(19)
(6)
28
39
8.8
9.0
11.0
13.2
(259)
(179)
24
197
220
73.4
79.3
101.3
140.6
(19)
(6)
28
39
RoCE (%)
9.1
8.3
10.0
12.2
(342)
(106)
(75)
165
219
ROIC (%)
11.2
9.5
11.4
14.1
(725)
(195)
(165)
184
271
0.9
0.9
0.9
0.9
(23)
(13)
(9)
CFO
40,829
43,323
39,550
52,339
(9)
26
(9)
32
Capex
25,679
20,359
6,913
7,052
(32)
16
(21)
(66)
FCF
15,151
22,965
32,637
45,288
235
48
52
42
39
Adjusted PBT
Adjuste PBT margin (%)
Adjuste PAT
Adjuste PAT margin (%)
EPS (`)
Ratios
CE Turnover (X)
Cash flows
Page 40
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
42,207
46,845
38,179
40,850
46,179
55,539
69,505
89,523
CAGR/Avg
FY12-15 FY15-18
2%
25%
Unitary EBITDA
1,036
1,152
925
910
956
1,082
1,243
1,429
-2%
14%
RoIC (Pre-tax)
28.1%
29.1%
18.8%
16.0%
13.6%
16.3%
20.1%
24.3%
21.1%
18.6%
RoCE (Pre-tax)
20.5%
19.5%
13.1%
12.8%
11.7%
14.1%
17.2%
21.0%
16%
16%
Assumptions
FY18
FY19
FY20
FY19
FY20
11.6
13.3
15.3
15%
15%
47,747
58,203
70,280
22%
21%
700
1,000
1,300
43%
30%
Volume
Sales
EBITDA/tonne
EBITDA
Growth
8,114
13,331
19,930
64%
50%
Pre-tax RoCE
(0)
299
398
Post-Tax RoCE
11
16
19
451
348
Ambit vs consensus
Exhibit 8: Our estimates are lower than consensus
Consensus
Ambit
Divergence
FY17
265,851
252,858
-5%
FY18
315,413
292,365
-7%
FY17
56,965
55,539
-3%
FY18
71,294
69,505
-3%
FY17
31,197
27,800
-11%
FY18
39,805
38,581
-3%
Revenue (` mn)
EBITDA (` mn)
PAT (` mn)
Comments
Our estimates are lower than consensus as we expect
weak volumes and no major market share gains
Exhibit 9: Our estimates of the next two quarters assumes best case for the company
Particulars
Actuals (`/tonne)
YoY Change
1QFY17
2QFY17
3QFY17E
4QFY17E
1QFY17
2QFY17
3QFY17E
4QFY17E
12.9
11.18
12.571
14.66802
6%
1%
7%
8%
Realisation
4,793
4,828
4,828
4,925
-2%
-3%
-1%
4%
Realisation ex freight
3,595
3,688
3,688
3,784
-1%
-2%
0%
7%
Raw materials
687
709
695
750
-3%
-9%
-6%
6%
RM consumed
758
665
695
750
-2%
-8%
2%
2%
89
106
108
110
6%
12%
17%
21%
269
320
309
260
4%
4%
4%
4%
716
787
810
875
-21%
-18%
-11%
17%
1,198
1,140
1,140
1,140
-6%
-6%
-4%
-5%
699
832
791
725
0%
-3%
-5%
-5%
1,103
1,033
1,046
1,133
16%
17%
9%
14%
Page 41
(X)
(USD)
20
230
16
200
12
170
140
110
80
Average EV/EBITDA
EV/Tonne
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Apr-10
Oct-16
Apr-16
Oct-15
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
EV/EBITDA
Oct-10
50
Average EV/EBITDA
Exhibit 12: EBITDA estimates have been cut marginally in YTD FY17
EBITDA (` mn)
60,000
74,000
73,500
73,000
72,500
72,000
71,500
71,000
70,500
70,000
59,000
58,000
57,000
56,000
FY17
Oct-16
Sep-16
Sep-16
Sep-16
Aug-16
Aug-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Apr-16
55,000
FY18 (RHS)
Page 42
The table below exhibits that to justify a 10-20% upside from current valuations,
requires investors to exit the stock one year out at 13-14.5x FY19 EBITDA, on EBITDA
estimates that builds in most of the positives, which is not a highly probabilistic
outcome.
Exhibit 13: Expensive implied multiples to justify any meaningful upside
Target Mutiple (X)
11.0
Target price
3,526
11.5
3,682
12.0
3,837
12.5
3,993
13.0
4,148
14.5
4,615
4.8%
9.5%
14.3%
19.0%
23.8%
38.1%
-8.1%
-4.1%
0.0%
4.1%
8.1%
20.3%
Catalysts
Volume growth tracking industry: Investors accept UltraTech to significantly
outpace the industry volume growth and hence ascribe a high multiple. As volume
growth continues to mirror the industry, the valuation premium to play the superlative
volume growth will wane
Rising fuel costs: Sharp rise in petcoke costs will start showing in costs from 4QFY17
onwards, thereby leading to a `150/tonne increase in power and fuel costs. Increase
in fuel costs will eat into majority of the benefits of improved pricing.
Potential Catalysts
These are events which we do not build in our estimates, however if they were to play
out the stock could de-rate materially
Continued demand adversity and further earnings cuts: We build in a 9%
volume growth for UltraTech in FY18 assuming industry demand growth of 8%.
Continued demand adversity could mean that the growth rate in FY18 is lower than
our expectations, thereby resulting in earnings downgrades. Given the expensive
valuations, another year of earning downgrades could lead to de-rating of UTCEMs
rich multiples
Re-investments over and above the Jaypee capacity: We build in no major reinvestments for the next 5 years, barring for the Jaypee capacity. If UltraTech were to
invest further for expansion, irrespective of the demand scenario, it will suppress
RoCE and lead to a de-rating.
Risks
Improved pricing discipline: Whilst prices have improved in recent quarters and
we build in a 6% improvement in FY18 as well, if pricing grows sharper than
expected, it will lead to significant upgrades to our EBITDA estimates.
Exhibit 14: Explanation for the accounting flags
Segment
Score
Comments
Accounting
GREEN
The companys cash conversion cycle is top notch (100% CFO/EBITDA) and we do not note any instance of
cash pilferage or window dressing. This is a common trait in all Indian cement companies
Predictability
AMBER
Predictability of UltraTech is better than Ambuja/ACC and has improved since the management has become
more transparent in recent years and improved the quality of non-financial disclosures
Earnings momentum
RED
Consensus EBITDA estimates for FY18 have been cut by 30% in the last one year given weak pricing
Page 43
Page 44
Balance sheet
Particulars
Share capital
FY15
FY16
FY17E
FY18E
FY19E
2,744
2,744
2,742
2,742
2,742
185,833
204,617
227,641
258,673
300,402
Total Networth
188,577
207,361
230,383
261,415
303,145
74,142
76,607
73,607
68,607
63,607
Loans
Deferred tax liability (net)
27,920
32,274
32,274
32,274
32,274
Sources of funds
290,639
316,241
336,263
362,295
399,025
Net block
209,475
225,327
217,999
210,524
202,900
Capital work-in-progress
20,737
14,156
14,156
14,156
14,156
Investments
52,088
51,081
68,099
68,099
68,099
2,139
22,352
28,141
60,087
103,120
Sundry debtors
12,032
14,149
10,346
11,951
14,185
Inventories
27,514
24,261
27,590
31,869
37,826
28,005
26,760
27,590
31,869
36,880
160
435
81
94
112
69,851
87,957
93,748
135,871
192,123
Current Liabilities
48,481
51,013
44,833
51,788
61,467
Provisions
13,030
11,267
12,905
14,566
16,785
61,511
62,280
57,738
66,354
78,252
8,340
25,677
36,010
69,517
113,871
290,639
316,241
336,263
362,295
399,025
FY15
FY16
FY17E
FY18E
FY19E
229,362
241,074
251,757
290,809
345,162
Income statement
Particulars
Revenue
yoy growth
13%
5%
4%
16%
19%
187,411
194,895
196,219
222,860
55,530
41,950
46,178
55,539
67,949
85,235
10%
10%
20%
22%
25%
11,331
12,890
14,241
14,526
14,817
EBIT
30,619
33,288
41,297
53,422
70,418
5,475
5,053
6,760
5,689
5,289
Total expenses
EBITDA
yoy growth
3,718
2,352
4,617
5,040
5,836
28,863
30,587
39,155
52,774
70,966
8,715
8,823
11,355
15,304
20,580
20,147
21,764
27,800
37,469
50,386
-6%
8%
28%
35%
34%
20,147
21,764
27,800
37,469
50,386
73.4
79.3
101.3
136.6
183.7
DPS (`)
11.0
11.9
15.2
20.5
27.6
Page 45
FY15
FY16
FY17E
FY18E
FY19E
28,863
30,587
39,155
52,774
70,966
Depreciation
11,331
12,890
14,241
14,526
14,817
Others
(3,444)
(2,047)
(4,617)
(5,040)
(5,836)
5,475
5,053
6,760
5,689
5,289
42,224
46,483
55,539
67,949
85,235
91
5,195
(6,182)
(3,222)
(3,539)
(1,486)
(8,355)
(11,355)
(15,304)
(20,580)
CFO
40,829
43,323
39,640
51,083
63,335
(25,679)
(20,359)
(6,913)
(7,052)
(7,193)
Net investments
2,268
(17,017)
Interest received
582
4,617
5,040
5,836
(18,797)
(17,323)
(19,313)
(2,012)
(1,357)
22,162
2,465
(3,000)
(5,000)
(5,000)
16
27
(2)
(5,495)
(5,388)
(6,760)
(5,689)
(5,289)
Dividends paid
(2,880)
(2,926)
(4,776)
(6,437)
(8,656)
(22,668)
(5,822)
(14,538)
(17,126)
(18,945)
(636)
20,178
5,789
31,946
43,033
15,151
22,965
32,727
44,032
56,142
Net capex
CFI
Proceeds from borrowings
Change in share capital
CFF
Net increase in cash
FCF
Opening cash balance
2,775
663
22,352
28,141
60,087
2,139
20,841
28,141
60,087
103,120
Year to March
FY15
FY16
FY17E
FY18E
FY19E
Revenue growth
13.1
5.1
4.4
15.5
18.7
EBITDA growth
9.9
10.1
20.3
22.3
25.4
PAT growth
(6.0)
8.0
27.7
34.8
34.5
(6.0)
8.0
27.7
34.8
34.5
EBITDA margin
18.3
19.2
22.1
23.4
24.7
EBIT margin
13.3
13.8
16.4
18.4
20.4
Net margin
8.8
9.0
11.0
12.9
14.6
RoCE
9.1
8.3
10.0
11.9
14.2
RoIC
11.3
9.7
11.5
13.9
16.4
RoE
11.2
11.0
12.7
15.2
17.8
Valuation metrics
FY15
FY16
FY17E
FY18E
FY19E
P/E (x)
53.6
49.7
38.9
28.8
21.5
P/B(x)
5.7
5.2
4.7
4.1
3.6
Debt/Equity(x)
0.4
0.4
0.3
0.3
0.2
Net debt/Equity(x)
0.2
0.2
0.0
(0.1)
(0.3)
EV/Sales(x)
4.9
4.5
4.3
3.7
3.2
Ratio Analysis
Valuation Parameter
EV/EBITDA(x)
EV/tonne(`)
26.6
23.6
19.6
16.0
12.8
17,815
16,606
15,651
15,651
15,651
Page 46
Shree Cement
SELL
SRCM IN EQUITY
Cement
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
`591/US$8.9
`223.9/US$3.4
`17,050
`17,231
1%
Flags
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
GREEN
Catalyst
Demand
weakness
leading
to
downgrades to volume growth
assumptions in FY18
Rising costs diluting unitary EBITDA
from 4QFY17 onwards
Performance (%)
160
140
120
100
SENSEX
SRCM
Research Analysts
FY15
64,536
13,439
4,618
132.6
9.2
128.6
42.9
FY16
55,678
13,203
4,572
131.2
8.0
129.9
43.2
FY17E
92,188
27,954
13,429
385.5
20.0
44.2
20.4
FY18E
115,839
34,770
18,434
529.1
23.2
32.2
16.4
FY19E
137,933
44,485
23,534
675.5
24.7
25.2
12.4
Nitin Bhasin
+91 22 3043 3241
nitin.bhasin@ambit.co
Achint Bhagat, CFA
+91 22 3043 3178
achint.bhagat@ambit.co
Nov-16
Sep-16
Aug-16
Jun-16
May-16
80
Mar-16
With rising scale/regional exposure, Shree will start finding it difficult to sustain
capacity addition more than the industrys volume growth (8% CAGR over next
decade); we are still building in 10% for Shree. Its low capacity cost advantage
could reduce with rising cost of procuring limestone and limited distress
inorganic opportunities. Whilst efficiency focus will help Shree gain market share
as institutional demand mix increases (infra demand), it will be at the cost of
EBITDA/tonne which is an imminent risk for the industry.
Feb-16
Dec-15
Recommendation
Nov-15
CHANGE IN STANCE
Shree Cement
50%
40
35.5
30
24
21.5
20
12
13.5
13.5
26.6
39.5
29.5
30%
20%
15.5
13.5
40%
10%
10
0%
0
FY10
FY11
FY12
FY13
Capacity
(LHS)FY14
FY15
FY16
FY17E
FY18EGrowth
FY19E FY20E
SRCM
capacity
40,000
120%
30,000
100%
20,000
80%
10,000
60%
40%
0
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
-10,000
20%
0%
CFO
FCF
Page 48
Shree Cement
10.0%
9.0%
30
8.0%
20
7.0%
6.0%
10
5.0%
4.0%
FY12
FY13
FY14
FY15
FY16
Volumes
FY17E
FY18E
FY19E
-20%
-25%
1,000
-30%
-35%
FY13
FY14
FY15
Costs/tonne (Shree)
FY16
Costs/tonne industry
Shree Utilisation
FY19E
2,000
FY18E
-15%
FY17E
-10%
3,000
FY16
-5%
4,000
100%
95%
90%
85%
80%
75%
70%
65%
60%
FY15
0%
FY14
5,000
FY13
(`/tonne)
FY12
Industry utilisation
We ascertain the efficiency of Indian cement companies based on the variable costs
incurred per tonne and changes in the same over the last five years. Unsurprisingly,
Shree trumps peers both in terms of VC/tonne and the change over the last few
years. Orient Cement and Dalmia Bharat fare reasonably well on the framework.
Amongst the pan-India players, Ambuja ranks the best followed by UltraTech. ACC
ranks poorly due to high costs and no major cost reductions in the last few years.
Page 49
Shree Cement
Exhibit 6: Shree ranks the best on our efficiency framework
VC/tonne
(FY16)
Rank
on VC/tonne
VC/tonne
FY11-16 CAGR
Rank on VC/
tonne CAGR
Overall
Rank
Shree
2,099
-7%
Orient
2,230
-1%
Dalmia Bharat
2,630
-1%
Ramco
2,808
2%
Jk Lakshmi
2,814
2%
Ambuja
2,837
3%
UltraTech
3,227
3%
ACC
3,284
5%
ICEM
3,920
10
3%
JK Cement
3,694
5%
10
10
Company
P&F cost
per tonne
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
ACC
771
1,004
1,142
367
3,284
2,142
Shree
563
531
574
431
2,099
1,525
Dalmia Bharat
888
649
767
325
2,630
1,863
Jk Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
JK Cement
983
1,078
1,087
547
3,694
2,607
Orient
473
902
722
133
2,230
1,508
India
779
1,088
906
1,146
3,920
3,014
Company
Weights
(1)
(2)
Particulars
Integrated
Shree
9.0
Managalam
JK Lakshmi
ACC
Grinding Integrated
Wtd.
Capacity
addition
Grinding
(1) X (2)
9.5
0.3
11.9
1.5
0.3
4.0
1.3
0.3
(` mn)
70,304
5,933
1.5
9,450
6,300
4.4
30,427
6,931
9.5
0.8
0.3
9.7
69,277
7,131
10.7
3.4
0.3
11.7
87,051
7,437
JK Cement
3.5
2.0
0.3
4.1
35,825
8,695
UltraTech
16.0
10.4
0.3
19.1
166,632
8,715
6.0
3.0
0.3
6.9
63,710
9,233
ACEM
Ramco
Source: Company, Ambit Capital research. We assume 0.3 weight for grinding units, since the cost of a grinding
unit is ~30% of the cost of an integrated cement plant
Page 50
Shree Cement
Effective communication
Shree has a track record of printing what, in our opinion, is the best annual report in
the Indian cement sector. In its FY16 annual report (https://goo.gl/EeRiTt), Shree
Cement follows its tradition of detailing how it is building competitive advantages,
focusing on core strengths, and maintaining a strict discipline financially.
The annual report is a 231 page document, which starts with exhaustive
commentary from top management (Chairman, Managing Director, Joint
Managing Director, President (Marketing), and President (Works)). We do not
normally see such extensive communication from a companys leadership in
annual reports since in most Indian companies the Chairman/MD/CEO hogs
most of the attention.
The annual report has a theme, Less is more. The companys corporate
philosophy is explained in detail (pages 10 and 11) and more than 40 pages
(pages 20-62) emphasising Shree Cements strategy on specific areas of
conservation, efficiency, innovation, marketing, finance, human resources and
CSR.
We reproduce extracts from the annual report that stood out for us:
On core competency: Specialisation in an exclusive cuisine is always better than
having an ordinary menu of multiple cuisines. That's why at Shree, we deal in Cement
and Power businesses only. We want to remain focused on lesser areas to achieve
better results. [Page 13]
On corporate culture: People and Time are two of the most important resources. A
typical management theory is to have more meetings among people. More meetings,
however, prove to be a major productivity killer. At Shree, we make our meetings truly
count, and cut back on them wherever we can. [Page 15]
On competitive advantage:
Innovations: (a) in raw material use the first Indian company to start using
synthetic gypsum and bed-ash/fly-ash instead of gypsum in power plant (pg19) (b)
reduced margins of heat losses and made the Waste Heat Recovery (WHR)
systems, one of the most effective amongst Indian cement companies, (c) changed
aerofoils to averaging pilot tube which reduced air flow pressure drop by 90% and
installed twin lobe blower system to reduce power consumption further. [Pages 4
and 33]
Distribution: We were among the first companies to embark on the hub and
spoke model, setting up Cement Grinding Units nearer to fly-ash sources and
consuming markets. This approach not only made us competitive by reducing our
costs but also helped us garner higher market share through reduced lead time.
[page 16]
On Financial discipline: At Shree, financial discipline has been the pillar on which
growth has been planned. Irrespective of the external environment, Shree has never
drifted away from its principle of stretching only to the extent which its available
financial means could support. The Company has planned its growth in its own way
without giving in to the temptation of leveraged opportunities during times of abundant
liquidity and hence not getting impacted during times of stretched financial market
conditions. This has helped it survive the fluctuations in the external environment and
navigate its way through it. [Page 53]
Page 51
Shree Cement
Changes in assumptions
Volumes: We assume 13.3% volume CAGR over FY16-20, which is significantly
higher than our industry growth assumption of ~8%. We expect volumes to reach
39.5mn tonnes by FY20. The company is likely to maintain utilisation at 90-95% over
the next five years. We increase our volume assumptions for FY18 and FY19 as the
companys capacity expansion (and guidance) has been significantly higher than our
previous expectations.
Realisations: We assume 7% realisation in FY17 and 5% in FY18. We reduce our
realisation assumption marginally to account of weak pricing in East Indian states
such as Chhattisgarh.
Costs: We expect costs to remain flat in FY17 but increase by 5% in FY18 due to a
sharp increase in petcoke cost. The table below summarises our head- wise cost
movement assumptions.
Exhibit 9: Unitary cost assumptions
YoY increase
`/tonne
Particulars
FY17
FY18
FY19
FY17
FY18
FY19
340
357
375
5.0
5.0
5.0
Employee Costs
256
266
281
4.0
5.5
483
650
676
(8.0)
3.0
4.0
Freight Costs
801
818
867
2.0
6.0
Other expenses
Total costs
823
774
812
2.0
(6.0)
5.0
2,702
2,835
2,895
(0.4)
4.9
2.1
Unitary EBITDA: We expect EBITDA/tonne of `1,106 and `1,153 in FY17 and FY18
respectively as against `778 in FY19. The increase in unitary EBITDA is largely a
function of pricing improvement.
Exhibit 10: Changes in our assumptions for Shree Cement
Particulars
(` mn unless
mentioned)
Assumptions (New)
Assumptions (Old)
FY17E
FY18E
21.8
26.9
30.8
86.0
96.0
Cement
Realisation
3,771
Operating
costs
EBITDA
Cement sales
Capacity
utilisation (%)
Financials (`
mn unless
specified)
Net Revenues
FY18E
FY19E
FY17E
FY18E
21.8
25.3
26.8
0.0%
6.3%
94.8
86.0
92.6
92.2
3,976
4,224
3,852
4,094
4,343
-2.1%
-2.9%
2,702
2,835
2,895
2,693
2,775
2,819
0.3%
2.2%
1,106
1,153
1,326
1,231
1,363
1,554
-10.1%
-15.4%
0.4%
4.5%
44,077
-3.4%
-5.3%
EBITDA
EBITDA margin
(%)
27,954
34,770
30.3
30.0
Adjusted PBT
17,906
Adjusted PAT
Gross Block
turnover
FCF
RoCE
Target price
FY19E FY17E
Changes
44,485 28,940
31.5
33.1
26,334
34,107 20,187
31,061
13,429
18,434
23,534 15,140
21,742
0.9
0.9
13,933
12,372
19.4
22.7
17,225
32.3
36,715
0.9
1.0
1.0
-4 bps
-8 bps
17,037 16,295
16,913
21,924
-14.5%
-26.8%
21.5
12,878
25.8
Comments
11.7%
0.9
24.5
FY19E
Source:
Page 52
Shree Cement
Volume we build in 10% volume CAGR over FY18-28. This is 2% higher than
our industry growth assumption of 8%. Whilst the company will have the cash to
reinvest for expansion, we do not think it will be able to continuously redeploy
cash in the cement business because acquiring limestone reserves will be a
challenge and sustaining the pace of addition once scale is established will be
difficult. The only option for the company will be to acquire capacity, but that will
not have tax incentives (as against most greenfield expansions) and Shree will
have to pay a material premium to its current expansion costs.
Unitary EBITDA we assume 9% unitary EBITDA CAGR, which means
EBITDA/tonne will increase to more than double by FY28 from FY18 levels. We
do not think that a higher growth estimate is prudent especially as the
institutional mix increases, limiting the pricing power of the manufacturers.
Current
+1%
+2%
+3%
9.7%
10.7%
11.7%
12.7%
8.8%
9.8%
10.8%
11.8%
19.0%
20.8%
22.7%
24.7%
Capacity as on end-FY28
73.5
80.0
87.0
94.6
Volumes as on end-FY28
68.0
74.5
81.5
89.1
17,225
19,441
22,095
25,267
12.0
13.5
15.4
17.6
4%
18%
34%
53%
Current
+1%
+2%
+3%
9.7%
10.7%
11.7%
12.7%
19.0%
19.8%
20.6%
21.4%
73.5
80.0
87.0
94.6
Target price
Implied EV/EBITDA (FY19)
Upside
Source: Company, Ambit Capital research
68.0
74.5
81.5
89.1
17,225
17,897
18,618
19,391
4.4%
8.5%
12.8%
17.5%
Page 53
Shree Cement
Exhibit 13: Scenario analysis by changing only EBITDA/tonne assumptions
Particulars
Unitary EBITDA CAGR (FY18-28)
Overall EBITDA CAGR
Current
+1%
+2%
+3%
8.8%
9.8%
10.8%
11.8%
19.0%
Target price
20.0%
17,225
Upside
18,648
4.4%
13.0%
21.0%
20,178
22.3%
22.1%
21,823
32.3%
Ambit vs consensus
Exhibit 14: Our revenue and EBITDA estimates are higher than consensus
Consensus
Ambit
Divergence
FY17E
91,077
92,188
1%
FY18E
106,812
115,839
8%
FY19E
124,991
137,933
10%
FY17E
27,404
27,954
2%
FY18E
33,801
34,770
3%
FY19E
41,059
44,485
8%
FY17E
16,394
13,429
-18%
FY18E
20,427
18,434
-10%
FY19E
25,689
23,534
-8%
Comments
Revenue (` mn)
Our revenue estimates are higher than consensus since we expect
strong volume growth as Shree's new capacities are commissioned
EBITDA (` mn)
Our estimates are higher than consensus as we expect strong
realisation growth
PAT (` mn)
Divergence at PAT level is on account of difference in our and
consensus' depreciation assumptions
Page 54
Shree Cement
25
(US$)
400
20
300
15
6-yr EV/EBITDA
EV/tonne
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Apr-11
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
100
Apr-11
Sep-11
200
10
Shrees FY17 and FY18 EBITDA estimates have been upgraded by 14% and 23%
respectively due to strong pricing in North India and benefits accrued from low-cost
petcoke usage. With prices stabilising and petcoke costs having increased sharply, we
do not see scope for further earning upgrades.
Exhibit 17: Sharp earning upgrades by consensus led by strong pricing in North India
28,000
35,000
EBITDA (` mn)
27,000
33,000
26,000
31,000
25,000
29,000
24,000
27,000
23,000
22,000
Apr-16
25,000
May-16
Jun-16
Jul-16
FY17
Aug-16
Sep-16
Oct-16
Nov-16
FY18 (RHS)
Page 55
Shree Cement
Forensic accounting
Exhibit 18: Explanations for flags on the cover page
Segment
Score
Comments
Accounting
GREEN
In our forensic accounting of 374 companies, Shree Cement ranks 64th. It also is the fourth-best cement
company based on our accounting checks. The only concern on Shree is around volatile depreciation rates
which, however, can be explained by the WDV method that the company follows.
Predictability
AMBER
Shree Cement has always made timely announcements of capacity expansions and has in most cases not
surprised negatively. However, the companys annual reports, unlike many larger and smaller peers, provide
a very detailed view of the managements approach to its business.
Earnings Momentum
GREEN
FY17 and FY18 consensus estimates have seen marginal upgrades in recent months as pricing improved in
North India.
Page 56
Shree Cement
Balance sheet
Particulars
FY15
FY16
FY17E
FY18E
FY19E
Share capital
348
348
348
348
348
52,416
61,454
72,074
86,223
103,740
Total Networth
52,764
61,802
72,422
86,571
104,088
9,166
8,630
7,630
5,630
3,630
Loans
Deferred tax liability (net)
(1,952)
(2,634)
(2,634)
(2,634)
(2,634)
Sources of funds
59,979
67,799
77,418
89,567
105,084
Net block
30,043
30,502
40,668
54,151
65,084
5,111
2,645
2,645
2,645
#REF!
16,626
23,662
23,662
23,662
23,662
3,075
2,830
8,029
13,427
21,967
Sundry debtors
4,764
3,286
8,840
11,108
12,849
Inventories
9,189
8,152
12,628
15,234
17,761
9,230
14,179
13,185
16,568
19,728
256
357
#REF!
26,258
28,448
42,682
56,336
72,304
Current Liabilities
17,168
17,245
27,783
34,910
41,569
Capital work-in-progress
Investments
Provisions
Current liabilities and provisions
Net current assets
Application of funds
892
213
213
213
213
18,060
17,458
27,995
35,123
41,782
8,198
10,990
14,687
21,213
30,523
59,978
67,799
81,661
101,671
121,914
FY15
FY16
FY17E
FY18E
FY19E
64,536
55,678
92,188
115,839
137,933
Income statement
Particulars
Revenue
yoy growth
10%
-14%
66%
26%
19%
Total expenses
51,097
42,475
64,234
81,069
93,448
EBITDA
13,439
13,203
27,954
34,770
44,485
yoy growth
-3%
-2%
112%
24%
28%
Net depreciation
9,248
9,084
10,158
9,378
11,792
EBIT
4,191
4,119
17,796
25,392
32,693
1,206
751
844
688
481
Other income
1,379
1,201
954
1,630
1,895
Adj PBT
4,363
4,568
17,906
26,334
34,107
(255)
(4)
4,476
7,900
10,573
Adjusted PAT
4,618
4,572
13,429
18,434
23,534
-47%
-1%
194%
37%
28%
4,263
4,549
13,429
18,434
23,534
EPS (`)
132.6
131.2
385.5
529.1
675.5
132.6
131.2
385.5
529.1
675.5
14.7
19.6
69.4
105.8
148.6
yoy growth
DPS (`)
Source: Company, Ambit Capital research
Page 57
Shree Cement
Cash Flow statement
Particulars
FY15
FY16
FY17E
FY18E
FY19E
PBT
4,008
4,545
17,906
26,334
34,107
Depreciation
9,248
9,084
10,158
9,378
11,792
Others
(874)
(1,008)
(0)
1,206
751
844
688
481
13,588
13,373
28,908
36,400
46,380
(229)
(2,059)
1,501
(1,128)
(770)
(906)
(985)
(4,476)
(7,900)
(10,573)
12,453
10,330
25,933
27,372
35,037
Net capex
(14,886)
(7,348)
(12,000)
(15,000)
(18,000)
Net investments
(32,016)
(8,827)
Interest received
580
469
CFI
(9,969)
(12,623)
(12,000)
(15,000)
(18,000)
(2,832)
(526)
(1,000)
(2,000)
(2,000)
(1,246)
(892)
(844)
(688)
(481)
CFO
Dividends paid
(893)
(1,592)
(2,809)
(4,285)
(6,017)
(2,586)
2,485
(8,735)
(6,973)
(8,498)
(102)
193
5,198
5,399
8,539
411
310
2,830
8,029
13,427
309
502
8,029
13,427
21,967
(2,433)
2,982
13,933
12,372
17,037
FY15
FY16
FY17E
FY18E
FY19E
Revenue growth
9.6
(13.7)
65.6
25.7
19.1
EBITDA growth
(3.3)
(1.8)
111.7
24.4
27.9
PAT growth
(46.8)
(1.0)
193.7
37.3
27.7
(46.8)
(1.0)
193.7
37.3
27.7
20.8
23.7
30.3
30.0
32.3
EBIT margin
6.5
7.4
19.3
21.9
23.7
Net margin
7.2
8.2
14.6
15.9
17.1
RoCE
5.7
6.5
19.4
22.7
24.5
RoIC
10.9
11.2
34.4
40.7
44.8
RoE
9.2
8.0
20.0
23.2
24.7
CFF
FCF
Source: Company, Ambit Capital research
Ratio Analysis
Particulars
EBITDA margin
Valuation Parameter
Particulars
FY15
FY16
FY17E
FY18E
FY19E
P/E (x)
22.3
129.9
44.2
32.2
25.2
P/B(x)
11.3
9.6
8.2
6.9
5.7
Debt/Equity(x)
Net debt/Equity(x)
EV/Sales(x)
0.2
0.1
0.1
0.1
0.0
(0.2)
(0.3)
(0.3)
(0.4)
(0.4)
10
EV/EBITDA(x)
42.9
43.2
20.4
16.4
12.4
EV/Tonne (`)
17,908
23,741
21,420
19,314
15,545
Page 58
Dalmia Bharat
BUY
DBEL IN EQUITY
Cement
`180/US$2.7
`131/US$2.0
`2,025
`2,350
16%
Flags
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
GREEN
Catalyst
Performance (%)
SENSEX
DBEL
Research Analysts
Nitin Bhasin
+91 22 3043 3241
nitin.bhasin@ambit.co
Key financials
FY15
35,141
6,025
17.1
1.1
2.1
3.1
37.9
FY16
64,380
15,786
24.5
23.2
1.6
8.2
15.3
FY17E
74,779
18,354
24.5
48.6
1.3
11.6
13.1
FY18E
87,530
22,384
25.6
82.4
1.0
14.6
10.7
FY19E
100,309
26,918
26.8
123.1
0.7
17.2
8.9
Nov-16
Sep-16
Jun-16
Aug-16
May-16
Unutilised capacity, high fixed costs, high leverage all set to reverse
320
280
240
200
160
120
80
Mar-16
With the induction of Mr. Singhi in FY14, Dalmia achieved industry leading cost
efficiencies (variable cost ~12% below industry average) as blending mix
increased to 80% from 71% in FY14, power consumption reduced from
72kwh/t in FY14 to 68kwh/t in FY16; it ranks third-best on our efficiency
framework. Processes have been tightened by hiring of professional
management, which improved branding and logistics.
Feb-16
Year to March
Operating Income (`
)
EBITDA
(` mn)
EBITDA margin (%)
EPS (`)
Net debt/Equity(x)
RoIC (%)
EV / EBITDA (x)
BUY
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Dec-15
Recommendation
Nov-15
INITIATING COVERAGE
Dalmia Bharat
Company Background
FY16
FY17E
Net revenues
64,380
74,779
EBITDA
FY18E
87,530 1939
22,384
15,786
18,354
Depreciation
4,528
5,377
5,525
Interest expense
7,256
8,353
8,163
Adjusted PBT
5,644
6,587
Tax
2,991
1,976
3,291
1,908
3,997
6,771
24.5
24.5
3.0
5.3
15.3
1976
1984
10,969 2006
2009
25.6 2010
7.7
13.1
10.7
2012
Entered North East India by way of inorganic expansion acquired Calcom Cement and Adhunik Cement
87.2
41.6
24.6 2014
9,661
9,615
9,615 2015
FY16
FY17E
Total Networth
43,308
47,633
55,026
Loans
88,925
86,925
84,925
EV/Tonne (x)
Balance Sheet
Cash flow
FY16
FY17E
FY18E
PBT
5,644
6,587
10,969
Depreciation
4,528
5,377
5,525
137,907
140,232
145,625
3,371
(2,132)
(1,417)
Net block
76,117
72,978
71,136
(458)
(1,976)
(3,291)
Capital work-in-progress
29,884
29,884
29,884
CFO
18,907
14,247
17,676
Investments
25,752
25,752
25,752
Net capex
(3,852)
(2,238)
(3,683)
27,825
34,397
45,086
Net investments
(13,827)
21,671
22,779
26,235
CFI
(16,704)
(2,238)
(3,683)
4,129
(2,000)
(2,000)
11
(8,607)
(6,390)
(5,889)
(534)
(286)
(286)
CFF
(5,002)
(8,676)
(8,175)
(2,798)
3,332
5,818
FCF
15,055
12,008
13,993
Sources of funds
liabilities
and
6,154
11,618
18,852
137,906
140,232
145,624
7.2
9.3
11.8
RoE
5.5
9.9
14.9
1.6
1.3
1.0
P/B (x)
4.7
4.3
3.7
125%
1,200
100%
1,000
2.5
20
2.0
15
(5)
Utilisation - RHS
FCF
Capex
FY19E
FY19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
0.5
FY18E
25%
FY17E
200
1.0
5
FY16
50%
FY15
400
1.5
10
FY14
600
FY13
75%
FY12
800
FY11
Current
provisions
Page 60
Dalmia Bharat
Karnataka
, 9%
Others,
4%
Kerela,
27%
Tamil
Nadu,
60%
FY10
Karnataka
, 13%
Andhra
Pradesh,
10%
Others,
5%
Tamil
Nadu,
46%
Kerela,
26%
Page 61
Dalmia Bharat
Assam: The company acquired ~50% stake in Calcom cement in FY12 for
~`2.4bn and further increased its stake to 76% in FY13. At the time of
acquisition, the company had 1.3mt grinding unit in Lanka and 0.3mt clinker unit
in Umrangshu, which was expanded (in FY15) to 2.1mt of grinding and 1.3mt of
clinker at a capex of ~`5bn. The remaining 25% stake in Calcom Cement is held
by the Bawri family, the erstwhile promoters of Calcom Cement and currently a
court proceeding has been filed by the Bawri family against the Dalmia family.
Meghalaya: DBL acquired 100% stake in Adhunik Cement Ltd., which has a
1.5mt capacity in Meghalaya in September 2012, for an EV of `11bn (US$140/t).
As a part of the current restructuring of the business, Adhunik Cement will be
merged with its 100% parent Dalmia Bharat Ltd.
Jharkhand: DBL acquired 100% stake (in two stages) in Bokaro Jaypee Cement
(a JV between Jaypee and SAIL) which has a 2.1mt grinding unit in Bokaro for an
EV of `11.5bn (US$87/t) and a 30-year slag supply agreement with SAIL and 30year clinker supply agreement with Jaypee Associates. The company was later
renamed Dalmia Cement East and, as a part of the current restructuring of the
business, will be merged with OCL India (at a similar valuation).
South India (12mt running at sub 50%): Over FY11-16, cement demand has
declined (2-4% p.a.) in Kerala and Andhra Pradesh and flattish in Tamil Nadu,
and Karnataka market has seen a muted 4% demand CAGR. Against the overall
south India market demand remaining flattish, capacities have grown at a 4%
CAGR resulting in further drop in an already weak regional capacity utilisation
(from ~55% in FY10 to ~40% in FY16). In line with industry, DBLs capacity
utilisation in South India (12mt capacity) has also remained ~50%.
North East (3.6mt running at sub 50%): DBLs inorganic expansion (2.1mt in
Assam and 1.5mt in Meghalaya) are running at sub 50% utilisation given NE is a
small market (~7mt demand) and hence, limited potential to increase volumes.
Exhibit 1: DBLs capacity (excl. OCL) increased from 1.5mt to 18.2mt over the last decade
20.0
125%
100%
15.0
75%
10.0
50%
5.0
25%
0%
FY03
FY04
FY05
FY06
FY07
FY08
Capacity
FY09
FY10
FY11
Production
FY12
FY13
FY14
FY15
FY16
Utilisation - RHS
Page 62
Dalmia Bharat
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
7
6
5
4
3
2
1
0
FY09
FY10
FY11
FY12
Capacity
FY13
FY14
Production
FY15
FY16
Utilisation - RHS
State
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
1.5
3.5
3.5
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
1.5
1.5
1.5
1.5
1.3
1.3
2.1
2.1
TN
Kadapa
AP
Ariyalur
TN
Meghalaya
Meghalaya
Lanka
Assam
Belgaum
Karnataka
Bokaro
Jharkhand
1.3
2.5
2.5
2.1
2.1
2.6
Capacities of OCL (associate of DBL over FY09 to FY15, subsidiary from FY16 onwards)
Rajgangpur
Odisha
Kapilas
Odisha
Medinipur
WB
Total
4.0
1.5
3.5
3.5
6.5
4.0
4.0
4.0
4.0
4.0
4.0
4.0
0.4
0.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
9.0
9.0
15.6
17.1
20.0
24.0
25.0
Page 63
Dalmia Bharat
depressed
due
to
70,000
60,000
50,000
40,000
Stagnant volumes;
Investment in
brownfield
expansions drives
RoCE compression
30,000
Ramp up of brownfield
expansion drives 28%
volume CAGR; this
coupled with
Improved margins
drives sharp RoCE
improvement
60%
50%
40%
30%
20%
20,000
10%
10,000
-
0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research; Note: FY04 to FY10 numbers represent the cement segment of DCBL and FY11 to FY16 numbers represent consolidated
numbers for DBL
Page 64
Dalmia Bharat
Exhibit 5: Sources of funds (FY11-16) largely from internal
accruals and loans
Equity
raised
5%
Cash
1%
Others
1%
Interest paid
25%
Capex
21%
CFO
41%
Loans raised
53%
Current
investments
17%
Non current
investents /
Acquisitions
35%
Exhibit 7: SWOT analysis for Dalmia Bharat the fifth-largest cement company in India
Strengths
Weaknesses
Sharp rise in employee and overhead costs in FY15 and FY16 due to new
capacity additions, branding/advertising and investments in professional
management.
Threats
Page 65
Dalmia Bharat
KKR
100%
85%
Dalmia Cement Bharat Ltd (DCBL)
Dalmia Power
74%
100%
26%
100%
Adhunik Cement, Meghalaya
Cement capacity of 1.5mtpa, CPP of 25MW
76%
Calcom promoters
24%
Cement capacity of 2.1mtpa
75%
Public/others
25%
100%
Bokaro Plant (Acquired from
Cement capacity of 2.1mtpa
Page 66
Dalmia Bharat
12.1mt (48%) is based in South India and has been built by way of
greenfield/brownfield expansions by DBL;
~3.6mt (14%) is based in North East India, which are a result of inorganic
acquisitions (acquisition of Adhunik and Calcom); and
~9.3mt (27%) is based in East India (Odisha, Bihar and Jharkhand), of which
6.7mt is held by its subsidiary OCL India Ltd (20% stake acquired in FY09 which
was gradually hiked to 74% by FY16) and remaining 2.6mt in Jharkhand is held
by DBLs 100% subsidiary Dalmia Cement East Bokaro Ltd (DCEBL). DBL, OCL as
well as DCEBL will become one entity after the current restructuring is completed.
All of DBLs grinding capacities across South, East and North East largely produce
blended cement (80%) and DBL has one of the highest cement to clinker ratios in the
industry (1.8x).
November 09, 2016
East,
37%
South,
48%
North
East,
15%
Source: Company, Ambit capital research
Page 67
Dalmia Bharat
Limestone and clinker: All of DBLs limestone requirements are met via captive
mines, which are located close to its clinkerisation units. Whilst all of DBLs South
and North East plants have clinker units in close proximity, OCL has a central
clinkerisation unit at Rajgaganpur (Odisha), which transports clinker to OCLs
plants in Odisha and West Bengal.
Fly ash/slag: Fly ash for all its plants in South is acquired from nearby power
plants whereas slag for OCLs grinding units is acquired from nearby steel plants
(as there are many steel plants in East). The Bokaro grinding unit has a 30-year
slag supply agreement with SAIL.
Power and fuel mix: DBL has captive power at most of its plants (including
renewal energy but does not have waste heat recovery) and its CPPs were
adequate to meet >90% of DBLs power requirement in FY16. DBL procures
power from the grid only at Bokaro and Assam. In 1HFY17, economic fuels
(petcoke, etc) accounted for 80% of the total fuel requirement (100% in South
India whereas OCL has a linkage with Coal India).
Lead distance: As depicted in exhibit below, most of DBLs key demand markets
are within 50-400km and the average lead distance from its plants is ~300km.
State
FY16
grinding
capacity
Clinker
plant
Type of
Cement
Slag /
Flyash
Power
procurement
Key markets
Lead distance
to reach
markets
South
Dalmiapuram
TN
4.0
Dalmiapuram
PPC
Fly ash
45W CPP
Kadapa
AP
2.5
Kadapa
PPC
Fly ash
40W CPP
50-200
50-250
Ariyalur
TN
2.5
Ariyalur
PPC
Flyash
27MW CPP
from CPP
Belgaum
Karnataka
2.5
Belgaum
PPC
Slag
40MW CPP
Meghalaya
1.5
PPC
Flyash
20MW CPP
Assam
2.1
Meghalaya
Umrangshu Transported by
road to Lanka
PPC
Flyash
Grid
200-400
Jharkhand
2.6
Rajgangpur
PSC
Slag
Grid
100-300
Rajgangpur
Odisha
4.0
Rajgangpur
PSC
Slag
54MW
Kapilas
Odisha
1.4
Rajgangpur
PSC
Slag
5.5MW solar
WB
1.4
Rajgangpur
PSC
Slag
2.5MW solar
50-100
150-450
North East
Meghalaya
Lanka
East
Bokaro
OCL
Medinipur
100-400
50-200
50-200
Page 68
Dalmia Bharat
125%
25
100%
20
75%
15
50%
10
25%
5
-
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Capacity
Production
Utilisation - RHS
The South India capacities of ~12.1mtpa (48% of total) are currently running at
sub 50% utilisation;
The North East capacities of ~3.6mtpa (14% of total) are also running at sub 50%
utilisation; whereas
The East India operations of 9.3mtpa (incl. Bokaro) (27% of total) are running at
healthy utilisation (~70-75%).
North East
10%
0.5
4.1
10
5
South
45%
18.8
12.8
East
45%
0
FY16E
South
East
North East
FY19E
Source: Company, Ambit Capital research
Page 69
Dalmia Bharat
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
AP
48
56
65
74
76
80
81
81
81
82.15
82.15
Karnataka
15
22
24
26
29
31
33
36
36
36
39
TN
27
34
37
37
38
38
38
38
38
38
38
91
113
127
138
144
150
153
156
156
157.15
160.15
AP
22
23
21
21
20
18
16
17
Karnataka
12
13
14
14
15
16
15
16
TN
16
17
19
20
21
20
19
19
10
10
10
63.1
64.7
65.7
64.3
58.9
8
60.1
64.29
70.72
79.92
49.7%
46.9%
45.6%
42.9%
38.5%
38.5%
41.2%
45.0%
49.9%
Capacity
Kerala
Total
Volumes
~1.8mt would be from its new Belgaum plant commissioned in March 2016. It
would sell to Maharashtra, AP and Karnataka (we expect the plant to achieve
~75% utilisation by FY19E, not a big ask given the plant is already running at 4050% utilisation).
~2.2mt incremental volumes from the older capacities (~9.5mtpa spread across
Tamil Nadu and AP).
12%
10%
10%
5%
5%
7%
3%
0%
South
In our view, pick-up in overall cement demand in South India coupled with DBLs
presence across markets and ramp-up of new Belgaum plant would enable DBL to
report above industry volume growth in South India. We expect DBL to clock ~4mt
incremental volumes in South India over FY16-19E, of which:
15%
Andhra
Pradesh
We highlight that DBL has presence in all the four states in South India. In 1HFY17,
DBL had a ~7% market share in South India, with Tamil Nadu and Kerala being its
strongest markets (12% market share; refer adjacent callout). With the commissioning
of DBLs new plant in Belgaum in 4QFY16, we expect DBLs market share to rise in
Karnataka and AP/Telangana.
Karnataka
Dalmias presence across markets in South India to help gain market share
Kerala
Total
57.9
61.1
Average
63.6%
54.1%
utilisation
Source: Company, Ambit Capital research
Tamil Nadu
Kerala
Page 70
Dalmia Bharat
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
370
350
330
310
290
270
250
South
Source: Company, Ambit Capital research
India
is
highly
Capacity share:FY09
dominated
Others,
35.2%
Ramco,
Dalmia, 8.1%
5.5%
Others,
32.9%
ICEM,
15.2%
ACC ,
10.0%
Dalmia,
8.2%
UTCEM,
17.2%
Others,
30.6%
Chettina
d, 11.8%
Ramco,
11.3%
ICEM,
11.7%
cement
Capacity share:FY18
UTCEM,
14.0%
Chettina
d, 14.2%
Capacity share:FY16
UTCEM,
12.1%
ACC ,
9.7%
by
ACC ,
9.3%
Dalmia,
9.7%
Chettina
d, 10.9%
Ramco,
11.3%
ICEM,
10.9%
Page 71
Dalmia Bharat
Exhibit 20: High fragmentation in AP is a key reason for pricing disruption
(mn tonnes)
100
100%
82
80
80%
60
60%
37
40
34
40%
20%
20
0%
AP
TN
Karnataka
Share of Top-3
Share of Top-5
Our view on pricing in South India: Whilst cement prices in South India have
remained elevated, we note that the same has been supported by pricing discipline,
with high leverage necessitating maintaining pricing in absence of demand growth.
We do not see scope of further price hikes in the region; if demand continues
to remain weak, there is a chance that prices may reduce. Hence, we factor in
only a 0.6% realisation CAGR for South India over FY16-19E.
DBL: 1HFY17 market share in East
India
18%
21%
13%
North East
9%
Jharkhand
Orissa
14%
East
23%
Bihar
25%
20%
15%
10%
5%
0%
Post takeover of OCL Indias control by DBCL, OCL Indias capacity was also
increased from ~4mt in FY09 to 6.7mt in FY14 by way of: (a) enhancement of
capacity at Kapilas, Odisha (from 0.35mt to 1.35mt); and (b) greenfield expansion at
Medinipur, West Bengal (1.35mt). Capacity utilisation at OCL increased to ~84% in
FY16 from 50% in FY14 as the West Bengal capacity ramped up over FY15-16. In
FY16, DCBL acquired a further 24% stake in OCL, making it a subsidiary and is now
likely to be merged with DBL. Other than OCL, DBL has a 2.6mt grinding unit in
Bokaro, all of which are slag-based capacities.
West
Bengal
8
7
80%
6
5
60%
4
40%
3
2
20%
1
0
0%
FY12
FY13
FY14
Capacity
FY15
FY16
Production
FY17
FY18
FY19
Utilisation - RHS
Page 72
Dalmia Bharat
400
350
300
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
250
East
Source: Ambit Capital research
Others,
19.8%
UTCEM,
23.5%
Shree,
9.5%
Capacity share:FY16
Others,
10.5%
UTCEM,
23.3%
OCL,
6.4%
ACEM,
14.6%
Lafarge,
18.4%
OCL,
12.7%
UTCEM,
20.0%
Shree,
14.0%
ACC,
12.1%
ACC,
17.3%
Others,
16.5%
ACEM,
12.9%
ACC,
14.2%
Lafarge,
19.0%
OCL,
11.7%
Nirma*,
14.0%
ACEM,
9.6%
Our view on pricing in East India: Although demand growth in East India has
been higher than most other Indian regions, the rising prominence of volumefocused players such as Shree, JK Lakshmi and now Orient Cement will lead to weak
pricing. Pricing growth in East will be the lowest amongst Indian regions. However,
within the eastern markets, OCL is largely present in Odisha, West Bengal,
Jharkhand and Bihar, which are premium markets compared to Chhattisgarh
and, hence, we expect realisation CAGR of 3% for OCL over FY16-19E.
Page 73
Dalmia Bharat
A play on
leverage
operating
and
financial
DBLs volume growth (8x increase over FY06-16) is yet to match up to capacity
growth (16x over FY06-16), which has resulted in sharp increase in fixed
costs/tonne over the last 5 years. As utilisation in South India improves, we
expect improved fixed cost absorption to drive 200bps EBITDA margin
expansion over FY16-19E. We expect EBITDA CAGR of 20% (14% volume, 5%
EBITDA/t) and low capex to generate `42bn FCF over FY17-19E and reduce
net debt:equity to 0.7x by FY19.
(A)
As discussed earlier, DBLs volume growth (8x increase over FY06-16) is yet to match
up to capacity growth (16x over FY06-16), which has resulted in a sharp increase in
fixed costs over the last 5 years. Fixed costs per tonne increased sharply (2x) as the
company invested in professional management, and overheads increased with new
capacity addition (refer exhibit 23 below).
Exhibit 26: Fixed costs have increased sharply and should reduce with rising scale [`/tonne]
DBL
OCL India
FY11
FY12
FY13
FY14
FY15
FY16
FY11
FY12
FY13
FY14
FY15
FY16
Employee cost
229
267
326
339
396
396
213
245
281
340
330
296
Repairs
108
118
103
131
175
130
166
190
190
189
190
129
14
12
25
35
31
41
37
31
48
88
60
55
Rent
Insurance
10
40
52
52
59
61
Payment to Auditor
54
34
77
115
111
225
Advertisement
Loss on foreign exchange
fluctuation
Other misc expense
30
55
77
110
92
33
56
49
58
87
10
17
13
25
223
142
170
211
250
271
81
69
101
144
152
121
13
15
21
20
17
Director remuneration
Royalty
14
530
648
794
1,002
941
943
Total
581
625
739
870
1,084
1,002
On the back of our expectations of a sharp pick-up in capacity utilisation over FY1619E, we expect fixed costs as a % of sales to decline to 26% from 31% currently,
driving significant operating leverage and EBITDA margin expansion of ~200bps.
Page 74
Dalmia Bharat
Exhibit 27: DBL (ex-OCL) fixed cost as % of sales to decline
from decline from 21% in FY16 to 19% in FY19
(`/tonne)
32%
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
Fixed cost/tonne
Fixed cost/installed capacity
Fixed costs as % of sales (RHS)
FY19E
FY18E
FY17E
FY16
FY15
Fixed cost/tonne
Fixed cost/installed capacity
Fixed costs as % of sales (RHS)
FY14
1,600
1,400
1,200
1,000
800
600
400
200
FY11
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
FY13
1,400
1,200
1,000
800
600
400
200
-
FY12
(`/tonne)
As highlighted in the thematic section, DBL ranks second best in our analysis of 10
key cement companies in India on operating leverage parameters to understand
which companies would be the key beneficiaries when demand and pricing improve
in India. We ascertain the same based on: (a) fixed cost as a % of sales and the
increase over the years which will sieve companies whose fixed cost absorption
has deteriorated due to lack of sales growth as pricing in the target markets is weak;
and (b) scope of per tonne savings which will be realised as utilisation improves.
Exhibit 29: Ranking the top-10 cement companies on operating leverage framework
Company
Utilisation
FC as a % of Change in FC over
sales
FY11-16 (bps)
Fixed cost/Installed
Capacity (`/tonne)
Fixed cost/
Volume (`/tonne)
Scope of
savings
(`/tonne)
Ranking
ORCMNT
55%
22%
784
426
771
346
DBL
54%
20%
441
513
943
430
ACEM
73%
20%
679
614
845
231
TRCL
60%
15%
428
421
698
277
SRCM
73%
16%
482
472
643
171
ACC
77%
20%
(53)
785
1,019
234
ICEM
56%
14%
(117)
410
734
325
JKCE
72%
15%
29
528
729
201
JKLC
82%
14%
153
409
499
90
UTCEM
77%
12%
(117)
443
572
130
10
Page 75
Dalmia Bharat
(B)
to
rise
to
75%
in
FY19E
30
125%
25
100%
CAGR
of
18%
to
drive
30
20
18
16
14
12
10
8
6
4
2
0
25
20
15
50%
10
25%
0%
Capacity
Production
Utilisation - RHS
FY19E
FY18E
FY17E
FY16
FY15
FY11
FY19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
10
FY14
15
FY13
75%
FY12
20
RoIC
RoIC (%)
The 3x increase in cement capacity for DBL over FY11-16 has come at the cost of
sharp increase in net debt (up from `13bn in FY11 to `62bn by FY16) as internal cash
flow generation was inadequate to fund organic and inorganic expansions. However,
EBITDA CAGR of 20% over FY16-19E coupled with halt to expansion capex (capex is
restricted to merely maintenance capex) are likely to result in FCF generation of
~`42bn over FY16-19E and reduce net debt from ~`62bn in FY16 to ~`38bn at the
end of FY19E. Significant de-leveraging coupled with improved profitability will (a)
reduce net debt to equity to 0.7x by FY19E from 1.6x in FY16, and (b) improve
interest coverage ratio to 2.6x by FY19E.
25
3.0
20
2.5
2.0
15
1.5
10
1.0
0.5
Capex
Source: Company, Ambit Capital research
FCF
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
(5)
FY11
Page 76
Dalmia Bharat
DBL ranks second on our financial leverage framework
Even on our financial leverage framework, DBL ranks second amongst 18 cement
companies since the companys leverage increase has been to fund recent
expansions in Karnataka and West Bengal and inorganic acquisitions. On this
framework, we rank cement companies based on their capability to deleverage,
which is not to say that we like companies where leverage is high but companies
where leverage increase in on account of capacity addition (and not because of poor
capital allocation and management has the intent to improve the balance sheet). We
also ascertain which companies have the least capital employed/tonne, which implies
that higher utilisation and debt repayment will drive a sharp RoCE recovery.
As highlighted earlier, we expect Dalmias net debt to equity to reduce from 1.6x in
FY16 to 0.7x by FY19 and interest coverage to improve 2.6x by FY19 from 1.6x in
FY16, which make DBL rank no1 on parameters of leverage and scope to deleverage. However, DBL has the highest capital employed/tonne in the industry and,
hence, fares poorly on this key parameter. We highlight in the exhibit alongside that
DBLs capacity additions have been at a capex/tonne ~12% higher than industry
average. This coupled with the fact that DBL has increased capacity by 3x in last 5
years (resulting in sharp increase in debt) result in DBLs capital employed per tonne
being the highest among peers.
Exhibit 34: Orient Cement and Dalmia Bharat rank superior on the FL framework
Company
Orient Cement
3,432
ACC
3,667
Ambuja
4,051
India Cement
4,426
JK Cement
4,780
Shree Cement
4,999
JK Lakshmi
5,151
UltraTech
5,214
Dalmia Bharat
5,344
Leverage
CE/tonne
Scope
Overall Rank
ORCMNT
DBL
10
JKLC
Ramco Cement
6,278
ICEM
Average
4,762
JKCE
TRCL
ACC
10
SRCM
UTCEM
10
10
ACEM
Source: Company, Ambit Capital research
Net Debt/EV
CE/tonne
Cumulative
FCF/DEBT
ORCMNT
1.2
0.2
2,883
30%
DBL
1.6
0.3
5,147
25%
JKLC
1.5
0.3
3,759
24%
ICEM
1.0
0.4
4,068
22%
JKCE
1.7
0.3
4,594
24%
TRCL
0.7
0.1
4,415
33%
ACC
(0.2)
(0.0)
2,738
-146%
SRCM
0.1
0.0
3,668
404%
UTCEM
0.3
0.1
4,283
55%
ACEM
(0.5)
(0.1)
3,487
-52%
Company
Page 77
Dalmia Bharat
(C)
On our efficiency framework, DBL stands third amongst 18 cement companies behind
Shree and Orient given its below industry power & fuel and freight costs.
Exhibit 36: Dalmia ranks third-best on our efficiency framework
VC/tonne
(FY16)
Rank
on VC/tonne
VC/tonne
FY11-16 CAGR
Rank on VC/
tonne CAGR
Overall
Rank
Shree
2,099
-7%
Orient
2,230
-1%
Dalmia Bharat
2,630
-1%
Ramco
2,808
2%
Jk Lakshmi
2,814
2%
Ambuja
2,837
3%
UltraTech
3,227
3%
ACC
3,284
5%
ICEM
3,920
10
3%
JK Cement
3,694
5%
10
10
Company
P&F cost
per tonne
Freight cost
per tonne
Other VC
per tonne
Total VC
per tonne
VC
ex freight
UltraTech
769
827
1,157
474
3,227
2,070
Ambuja
676
953
871
337
2,837
1,966
ACC
771
1,004
1,142
367
3,284
2,142
Shree
563
531
574
431
2,099
1,525
Dalmia Bharat
888
649
767
325
2,630
1,863
Jk Lakshmi
976
770
927
140
2,814
1,887
Ramco
821
728
929
330
2,808
1,880
JK Cement
983
1,078
1,087
547
3,694
2,607
Orient
473
902
722
133
2,230
1,508
India
779
1,088
906
1,146
3,920
3,014
Company
Shielding rise in raw material costs by increasing the blending mix (from 1.4x in
FY11 to 1.8x in FY16)
Reducing power and fuel costs by increasing the ratio of economic fuels from 0%
in FY11 to 74% in FY16
Managing lead distance at ~300kms for DBL vs ~500kms average for the
industry
OCL
FY14
FY15
FY16
FY14
FY15
FY16
Alternative Fuels
15%
45%
73%
0%
9%
87%
Blended cement
71%
74%
80%
NA
100%
100%
Page 78
Dalmia Bharat
Exhibit 39: DBL(ex-OCL) variable costs have been stable to
declining over the last 5 years as increase in raw material
cost was offset by decline in power & fuel cost
(`/tonne)
3,500
3,000
2,500
2,000
1,500
1,000
500
FY19E
FY18E
FY17E
FY16
FY15
FY14
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
FY11
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
62.0%
60.0%
58.0%
56.0%
54.0%
52.0%
50.0%
48.0%
46.0%
44.0%
FY13
3,500
3,000
2,500
2,000
1,500
1,000
500
-
FY12
(`/tonne)
Power & fuel cost: Among the lowest given efficiencies and production of
slag-based cement
By implementing process modifications in its plants, DBL increased the use of
economic fuels (petcoke, carbon black, wood, charcoal, municipal waste and saw
dust among others) resulting in 73% of total fuel consumption in its kiln and captive
power plants being met by these fuels as against 45% in the previous year. The usage
of economic fuel in its Southern units reached ~100%. All kilns and captive power
plants switched to most economic fuels in FY2015-16. Power & fuel cost dropped by
28% in FY16 as the company increased usage of economical fuels and reduced
power consumed/tonne of cement manufactured to 67 units in FY16 as against 74
units in FY15. At OCL, the company increased the usage of petcoke to 87% in FY16
as against 9% in FY15 and reduced power used per tonne of cement produced to 62
units as against 68 units in FY15.
However, petcoke price has increased sharply in the last six months (from
US$40/tonne in Jan-16 to US$80/tonne currently) and we expect power & fuel
cost/tonne to rise by ~10% in FY18E vs FY17E. Management highlighted that it
would make efforts to reduce the impact of power & fuel cost by increasing the use of
alternative fuels from ~5% currently to 8-10%.
Exhibit 41: DBL (ex-OCL) power & fuel cost per tonne and
power and fuel costs as % of revenues
(`/tonne)
1,500
35%
30%
25%
20%
15%
10%
5%
0%
1,000
500
unit
and
80
78
76
74
72
70
68
66
64
62
FY11
FY12
FY13
FY14
FY15
FY16
P&F as % of revenues
Source: Company, Ambit Capital research
per
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY19E
FY18E
FY17E
P&F
FY16
FY15
FY14
FY13
FY12
FY11
Page 79
Dalmia Bharat
Exhibit 43: OCL power & fuel cost per tonne and power
and fuel costs as % of revenues
(`/tonne)
1,000
and
80%
80
60%
75
10%
40%
70
5%
20%
65
0%
0%
60
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
P&F
unit
85
15%
per
100%
20%
500
FY11
FY12
FY13
FY14
FY15
FY16
P&F as % of revenues
Source: Company, Ambit Capital research
(`/tonne)
(`/tonne)
1,000
20%
15%
15%
1,000
10%
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY11
0%
Freight as % of revenues
Source: Company, Ambit Capital research
5%
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
0%
FY11
500
FY13
5%
10%
FY12
500
20%
1,500
Freight as % of revenues
Source: Company, Ambit Capital research
Page 80
Dalmia Bharat
Process efficiencies
Our checks in the industry suggest that Mahendra Singhi was widely respected in
Shree Cement for his employee management and empowerment skills. It appears
that in Dalmia as well he is working towards creating a strong employee culture to
create a long-term sustainable competitive advantage. In the FY16 annual report, the
company explicitly states how it is creating a strong professional workforce. Below are
the key highlights:
Single digit attrition rate and almost nil attrition at senior management.
Page 81
Dalmia Bharat
14
80%
6,000
12
70%
60%
5,000
10
4,000
40%
3,000
Volume (mtpa)
1,000
FY19E
FY18E
FY11
FY19E
FY18E
FY17E
FY16
FY15
FY14
0%
FY13
0
FY12
10%
FY11
2,000
FY17E
20%
FY16
FY15
30%
FY14
50%
FY13
FY12
Realisation/t
Utilisation - RHS
EBITDA/tonne (Rs)
FY19E
10.0
FY18E
FY17E
15.0
FY16
500
FY15
20.0
FY14
1,000
FY13
25.0
FY12
1,500
FY11
30.0
FY19E
FY18E
FY17E
2,000
FY16
FY15
FY14
FY13
FY12
FY11
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Page 82
Dalmia Bharat
Volume (mtpa)
3,500
3,000
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
4,000
FY19E
4,500
FY18E
5,000
FY17E
FY16
5,500
FY15
6,000
FY14
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY13
Realisation/t
Utilisation - RHS
30.0
1,400
5,000
1,200
4,000
25.0
1,000
3,000
800
2,000
600
20.0
400
1,000
15.0
200
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY19E
FY18E
10.0
EBITDA/tonne (Rs)
FY17E
FY16
FY15
FY14
FY13
Page 83
Dalmia Bharat
FY15
FY16
FY17E
FY18E
FY19E
17.2
25.0
25.0
25.0
25.0
7.0
12.8
15.0
17.1
18.8
41%
51%
60%
68%
75%
5,006
5,030
4,978
5,125
5,327
Raw Material
751
954
954
979
1,016
Employee
397
396
422
401
393
1,014
690
670
731
771
Comments
Operational Parameters
Capacity (mtpa)
Cement Sales (mtpa)
Power
Freight
890
815
827
865
906
Other
1,093
952
884
839
813
Operating Cost
4,148
3,796
3,756
3,814
3,898
858
1,233
1,222
1,310
1,430
Revenue
35,141
64,380
74,779
87,530
100,309
EBITDA
6,025
15,786
18,354
22,384
26,918
17%
25%
25%
26%
27%
3,309
11,259
12,977
16,859
21,179
9%
17%
17%
19%
21%
(101)
5,644
6,587
10,969
15,954
PBT Margin
0%
9%
9%
13%
16%
Adjusted PAT
92
1,908
3,997
6,771
10,119
0%
3%
5%
8%
10%
1.1
23.2
48.6
82.4
123.1
5,448
18,907
14,247
17,676
20,712
(4,953)
(3,852)
(2,238)
(3,683)
(4,858)
496
15,055
12,008
13,993
15,854
RoCE (%)
3.0
7.2
9.3
11.8
14.0
RoIC (%)
3.1
8.2
11.6
14.6
17.2
CE Turnover (x)
0.3
0.6
0.7
0.8
0.9
EBITDA
P&L (` mn)
EBITDA Margin
EBIT
EBIT Margin
PBT
Page 84
Dalmia Bharat
Ambit vs Consensus
Our sales, EBITDA as well as PBT estimates for FY17 are lower than consensus. This
could be on account of our expectation of weak pricing in south India in FY17
whereas we expect pricing to recover in FY18.
Exhibit 56: Ambit vs Consensus
Particulars
Ambit
Consensus
Divergence
FY2017
74,779
75,878
-1%
FY2018
87,530
86,724
1%
FY2017
18,354
19,191
-4%
FY2018
22,384
22,212
1%
Revenue (` mn)
EBITDA (` mn)
PBT (` mn)
FY2017
6,587
7,755
-15%
FY2018
10,969
10,915
0%
Score
Comments
GREEN
The company is in the fourth decile of Ambit's forensic accounting framework, which is the zone of Safety.
Moreover in the last five years, the company delivered cumulative CFO/EBITDA of 95%. Key parameter on
which DBL has weak score is Miscellaneous expense as % of Total Revenues.
Predictability
AMBER
For the existing operations, EBITDA/tonne is a function of realisations, which is volatile and difficult to predict
given large overcapacity in the key market DBL operates in. DBL has added scale (16x in last 10 years) by
making several organic and inorganic acquisitions. Further capacity organic / inorganic acquisitions remain
the key uncertainty/risk.
Earnings Momentum
GREEN
FY17/FY18 EBITDA estimates have seen 8-10% upgrades in the past six months, mainly driven by improving
earnings visibility.
Accounting
Page 85
Dalmia Bharat
We expect EBITDA margins to rise to ~27% by FY19 vs 25% in FY16 on the back
higher fixed cost absorption that would drive operating leverage. We expect
EBITDA/tonne to rise to ~`1,540 for DBL by FY19 (from `1,467/t in FY16) due to
operating leverage; and EBITDA/t for OCL to increase to `1,202/t vs `934/t in
FY16 (due to cost efficiencies and realization growth). Thereafter, we factor in
EBITDA/t CAGR of 5% over FY19-28E.
Adding the two, we value DBL at `2,350/share one-year forward (16% upside) and
recommend investors to BUY. Our TP implies FY19E EV/EBITDA of 9.8x vs current
FY18 EV/EBITDA of 8.9x. We highlight that post the restructuring, DBL will be merged
into OCL and our post-merger TP remains the same.
Exhibit 58: DCF-based valuation
Particulars
` mn
95,989
124,135
EV (a) + (b)
220,124
EV (US$ mn)
4,892
Net debt
62,290
157,834
50,988
208,822
No. of shares
88.8
2,350
Page 86
Dalmia Bharat
Implied valuation
Our TP of `2,350/share values DBL consolidated at FY19 EV/EBITDA of 9.8x and
EV/tonne of `175/tonne. Our implied valuation for OCL stands at 8.5x FY19
EV/EBITDA, lower than for consolidated entity as capacity utilisation of OCL is higher
(92% in FY19E) and, hence, EBITDA fully captures its earnings potential. Our implied
valuation for DBL (ex-OCL) stands at 11x FY19E EV/EBITDA as we value FY19 EBITDA
at 8.5x and incrementally add value the under-utilised ~5.7mtpa capacity at
US$140/tonne. On a blended basis, our TP implies EV/tonne of US$175, which we
believe is justified as it costs US$130-140/tonne to set up greenfield capacity.
Exhibit 59: Implied valuations of DBL
Cap
Utilisation
Volume
EBITDA/t
Dalmia
68%
12.5
1,544
19,345
OCL
93%
6.3
1,206
7,594
EBITDA Multiple
EV
11.0 212,794
8.5
64,549
Debt
Equity
No of
shares
Value per
share
154,916
89
1,745
55,314
89
Equity Minority
57,877 154,916
(9,311)
73,861
18,546
Total
623
210,231
2,368
Cross-cycle valuation
DBLs stock price has significantly outperformed the Sensex last year (175%
outperformance) mainly due to improving visibility on (a) capacity ramp-up and (b)
sharp increase in EBITDA/tonne at both DBL and OCL. At CMP, the stock trades at
10.7x FY18 EV/EBITDA (on our as well as consensus estimates), a significant premium
to its historical average of 6.9x. We believe a premium to historical multiples is
justified as (a) capacity utilisation in FY18 will be a muted 68% and, hence, FY18
EBITDA does not full reflect earnings potential; and (b) DBL is gradually becoming a
multi-regional player vs a single region player historically and, hence, multiples
should re-rate closer to pan-India peers such as UltraTech as diversification reduces
earnings volatility. On one-year forward EV/tonne, the stock trades at `9,500/tonne,
a premium to its five-year average of `3,450/tonne.
Our target price of `2,350/share implies 9.8x FY19E EV/EBITDA. Whilst we agree that
further re-rating is unlikely, strong EBITDA growth for the next 2-3 years is likely as
capacity utilisation at DBLs South India plants improves (we expect a 20% EBITDA
CAGR over FY16-19E).
Exhibit 60: Dalmia is trading at a premium to its average
EV/EBITDA (x)
14
12000
12
10000
10
8000
6000
4000
2000
Sep-16
Apr-16
Nov-15
Jun-15
Jan-15
Mar-14
Aug-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
EV/Tonne
avg EV/EBITDA
Mar-16
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Apr-11
5 yr avg EV/Tonne
Page 87
Dalmia Bharat
Relative valuation
Post the ~3x increase in share price of DBL over the last one year, DBL now trades at
10.9x FY18 consensus EBITDA, at the higher end of the Indian mid-cap peers a
discount to Ramco which trades at 12.2x FY18 EV/EBITDA but a premium to JK
Lakshmi, JK Cement and Prism which trade at 9-9.5x. We highlight that DBLs
premium to mid-cap peers is justified given DBLs EBITDA is reflective of only ~65%
capacity utilisation whereas JK Lakshmi and JK Cement are at >70-80% utilisation.
Given DBL runs at lower capacity utilisation, investors must also look at DBLs
EV/tonne vs peers as it better reflects DBLs ability to expand earnings without
meaningful capacity additions. On an EV/tonne basis, DBL trades at `9,600/tonne, a
20% discount to Ramco and other large-cap companies such as Ultratech and Shree.
As DBLs capacity utilisation and RoCE improve, we expect valuation multiples to
move closer to that of its larger peers. Our TP of `2,350/share values the company at
an EV/tonne of `10,500/share.
Exhibit 62: Relative valuation of Indian cement companies
Capacity
Rating
(mn tonnes)
FY17
Advt
EV/EBITDA
6m
Mcap
FY18
(`
bn)
P/E
EV/tonne
(x)
(x)
US$ US$
mn mn FY17 FY18 FY17 FY18
`
FY17
FY18
CAGR (FY16-18)
Sales EBITDA EPS
ROE
Interest/EBITDA
(%)
(x)
FY17 FY18
FY15
FY16
69.6
47
25 15,689 15,689
11
29 42
11
18
13
11
Shree Cement **
26.6
29.5 SELL
593 8,901
44
32 21,420 19,314
26
43 74
20
23
Ambuja
31.7
32.7 BUY
39
28 10,181 9,860
27 29
ACC
34.1
34.1 BUY
284 4,265
30
20 8,186 7,946
32 39
11
15
Ramco Cements **
13.5
13.5
147 2,209
29
22 9,787 9,787
13
13 10
15
17
27
17
0.7 12.2
UR
Orient Cement
8.0
8.0 BUY
7.2
42
14 5,779 5,779
33
87 102
21
30
Dalmia Bharat
25.0
25.0 BUY
35
527
42
25 9,615 9,615
17
19 88
10
15
72
46
UltraTech
69.6
35
27 15,748 15,748
15
22 35
14
16
13
11
Shree Cement **
26.6
29.5 SELL
36
29 22,405 20,202
21
43 92
23
23
182 2,708
Large cap
Grasim^
NA
NA
NR
593 8,901
13
11
11
20 30
12
13
13
11
Ambuja*
31.7
32.7 BUY
6.5
34
26 13,797 13,374
14
31 34
10
12
ACC*
34.1
34.1 BUY
284 4,265
37
25 7,912 7,912
16 38
12
Ramco Cements **
13.5
13.5 SELL
148 2,209
24
20 12,445 12,445
12
11 15
18
19
27
17
Dalmia Bharat #@
25.0
25.0
NR
182 2,708
Century Tex#
12.8
12.8
NR
8.0
8.0
NR
52
771
0.7 12.7
JK Cement
10.8
10.8
NR
64
959
Jk Lakshmi Cement
11.0
11.0
NR
55
825
10.5
10.5
NR
61
6.7
6.7
NR
8.0 BUY
Mid cap
Prism Cement #
46
30 9,545 9,545
16
19 70
13
72
46
NA 148
NA 11,668 11,668
NA
NA NA
NA
74
78
9.0
37
16 8,957 8,957
12
43 NA
12
24
89
79
0.5 12.8
10
29
16 8,485 8,485
15
31 149
12
19
47
52
0.9 13.4
9.2
42
18 6,230 6,230
23
65 NA
18
26
71
904
1.3 11.0
8.3
19
14 5,417 5,417
16
55 64
11
13
26
29
54
808
0.4
8.1
7.3
16
14 7,733 7,733
11 29
20
20
21
25
Small Cap
Birla Corp #
OCL India
Orient Cement
8.0
35
527
0.7 14.4
8.7
40
15 5,942 5,942
30
73 95
19
30
India Cements
18.5
18.5
NR
48
720
9.7
8.2
7.2
19
13 4,333 4,333
12
13 63
10
62
48
Heidelberg India
6.0
6.0
NR
31
467
0.6 11.9
9.3
30
17 6,416 6,416
12
28 115
11
16
43
46
Mangalam Cement
3.5
3.5
NR
130
0.4
8.6
6.6
15
10 3,392 3,392
18
103 NA
10
14
42
97
Sagar Cement
3.5
3.5
NR
13
188
0.3
7.8
6.9
25
10 4,092 4,092
32
47 61
17
41
29
Page 88
Dalmia Bharat
Key catalysts:
25% volume CAGR in South /West over FY16-19E: We expect DBL to sell
incremental ~6mt of volumes over FY16-19E, majority of which ~4mt (68%) is
likely to be driven by South India; increasing capacity utilisation in the South to
~70% by FY19E vs sub 50% currently on the back of commissioning of new
capacity in Karnataka and demand recovery.
Cost/t ex-P&F to remain flat over FY16-18E: Volume CAGR of 14% over
FY16-19E to drive better absorption of fixed costs. We expect (a) cost/t ex-power
and fuel to remain stable over FY16-18E vs ~10% increase over FY14-16E; and
(b) Operating leverage to drive 200bps EBITDA margin expansion over FY16-19E.
Halt to capacity expansions over next 2-3 years: We expect EBITDA CAGR of
20% over FY16-19E and a halt to capex to result in `42bn FCF over FY17-19E
and reduce net debt:equity to 0.7x in FY19 from 1.6x in FY16
Page 89
Dalmia Bharat
Financial Summary
Income statement (consolidated)
Particulars
Revenue
yoy growth
Total expenses
EBITDA
yoy growth
FY15
FY16
FY17E
FY18E
FY19E
35,141
64,380
74,779
87,530
100,309
17%
83%
16%
17%
15%
29,116
48,593
56,425
65,147
73,391
6,025
15,786
18,354
22,384
26,918
30%
162%
16%
22%
20%
2,716
4,528
5,377
5,525
5,739
EBIT
3,309
11,259
12,977
16,859
21,179
4,344
7,256
8,353
8,163
7,997
Other income
933
1,642
1,963
2,274
2,772
(101)
5,644
6,587
10,969
15,954
469
2,991
1,976
3,291
4,786
92
1,908
3,997
6,771
10,119
-209%
1981%
109%
69%
49%
Reported PAT
30
1,908
3,997
6,771
10,119
EPS (`)
1.1
23.4
48.9
82.9
123.9
1.1
23.2
48.6
82.4
123.1
DPS (`)
2.4
2.6
2.6
2.6
2.6
FY15
FY16
FY17E
FY18E
FY19E
162
178
178
178
178
PBT
Provision for taxation
Adjusted PAT
yoy growth
38,289
43,130
47,455
54,848
65,730
Total Networth
38,452
43,308
47,633
55,026
65,908
Loans
84,797
88,925
86,925
84,925
83,425
4,006
5,674
5,674
5,674
5,674
127,254
137,907
140,232
145,625
155,007
Net block
58,233
76,117
72,978
71,136
70,256
Capital work-in-progress
38,785
29,884
29,884
29,884
29,884
Investments
16,905
25,752
25,752
25,752
25,752
5,281
2,483
5,815
11,633
20,476
Sundry debtors
5,101
4,946
6,081
7,118
8,157
Sources of funds
Inventories
7,293
7,083
8,108
9,490
10,876
12,320
13,209
14,189
16,608
19,032
152
104
203
237
272
30,147
27,825
34,397
45,086
58,812
Current Liabilities
15,833
19,162
20,270
23,726
27,189
Provisions
984
2,509
2,509
2,509
2,509
16,816
21,671
22,779
26,235
29,698
13,331
6,154
11,618
18,852
29,115
Miscellaneous expenditure
Application of funds
127,254
137,906
140,232
145,624
155,006
Page 90
Dalmia Bharat
Cash flow statement (consolidated)
Particulars
FY15
FY16
FY17E
FY18E
FY19E
PBT
(162)
5,644
6,587
10,969
15,954
Depreciation
2,716
4,528
5,377
5,525
5,739
Others
(785)
(1,434)
(1,963)
(2,274)
(2,772)
4,344
7,256
8,353
8,163
7,997
6,113
15,994
18,354
22,384
26,918
689
3,371
(2,132)
(1,417)
(1,420)
(1,354)
(458)
(1,976)
(3,291)
(4,786)
5,448
18,907
14,247
17,676
20,712
Net capex
(4,953)
(3,852)
(2,238)
(3,683)
(4,858)
Net investments
14,222
(13,827)
Interest received
170
402
CFO
CFI
9,656
(16,704)
(2,238)
(3,683)
(4,858)
34,985
4,129
(2,000)
(2,000)
(1,500)
11
(5,432)
(8,607)
(6,390)
(5,889)
(5,225)
(209)
(534)
(286)
(286)
(286)
CFF
29,345
(5,002)
(8,676)
(8,175)
(7,011)
44,449
(2,798)
3,332
5,818
8,843
496
15,055
12,008
13,993
15,854
FCF
Source: Company, Ambit Capital research
FY15
FY16
FY17E
FY18E
FY19E
16.5
83.2
16.2
17.1
14.6
29.6
162.0
16.3
22.0
20.3
PAT growth
(136.2)
6,156.1
109.5
69.4
49.5
(208.9)
1,969.4
109.5
69.4
49.5
EBITDA margin
17.1
24.5
24.5
25.6
26.8
EBIT margin
9.4
17.5
17.4
19.3
21.1
Net margin
0.3
3.0
5.3
7.7
10.1
RoCE
3.0
7.2
9.3
11.8
14.0
RoIC
3.1
8.2
11.6
14.6
17.2
RoE
0.3
5.5
9.9
14.9
18.9
P/E (x)
1,805.0
87.2
41.6
24.6
16.4
P/B(x)
5.4
4.7
4.3
3.7
3.1
Debt/Equity(x)
2.8
2.3
2.1
1.7
1.4
Net debt/Equity(x)
2.1
1.6
1.3
1.0
0.7
EV/Sales(x)
6.5
3.8
3.2
2.7
2.4
Valuation metrics
EV/EBITDA(x)
EV/tonne(`)
37.9
15.3
13.1
10.7
8.9
13,261
9,661
9,615
9,615
9,615
Page 91
Dalmia Bharat
Page 92
Orient Cement
BUY
COMPANY INSIGHT
ORCMNT IN EQUITY
Cement
Catalysts
Demand/pricing
recovery
in
Maharashtra in 2HFY17
Approvals from SAIL for the
acquisition
Unitary EBITDA improvement in
3QFY17
Performance (%)
SENSEX
ORCMNT
Research Analysts
Parita Ashar, CFA
+91 22 3043 3223
FY15
FY16
FY17E
FY18E
FY19E
15,470
3,067
19.8
9.5
11.8
15.6
9,593
15,092
21,079
1,834
3,795
12.2
3.0
3.4
25.8
5,907
18.0
4.0
6.9
12.5
5,907
26,787
6,427
24.0
12.4
13.0
7.4
5,907
27,590
7,381
26.8
15.6
14.3
6.4
5,907
Nitin Bhasin
+91 22 3043 3241
nitin.bhasin@ambit.co
Achint Bhagat, CFA
+91 22 3043 3178
achint.bhagat@ambit.co
Oct-16
Sep-16
Jul-16
Jun-16
135
125
115
105
95
85
75
parita.ashar@ambit.co
Key financials
Year to March
Net Revenues (` mn)
EBITDA (` mn)
PAT (` mn)
EPS (`)
RoE (%)
EV/EBITDA
EV/tonne
GREEN
AMBER
RED
Apr-16
Accounting:
Predictability:
Earnings Momentum:
Mar-16
`34/US$0.5
`36.8/US$0.6
`173
`216
25
Flags
Jan-16
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Dec-15
Recommendation
Oct-15
Orient Cement
The company is trying to become too big too soon, which will have an
adverse impact on its balance sheet (excess leverage).
With SAIL maintaining its 26% share in the business, isnt there too much
uncertainty around future expansions?
In this note, we assess the above mentioned investor concerns and believe
that: (a) even the worst-case outcome, the deal will be 2% value dilutive; and
(b) it is in SAILs own interest to come on board with Orient Cement.
We highlight that in the best-case scenario, there is a 51% upside possibility
to our ex-deal TP of `216/share (considering a dilution of 15% to raise `7bn
at `200/share).
A well-negotiated deal
Orient Cement has entered into an agreement to acquire Jaypees cement assets,
including: (a) 74% stake in Bhilai-Jaypee Cement Limited (BJCL) this includes a
2.2mn tonne grinding unit in Bhilai (Chhattisgarh) and a 1.1mn tonne clinker unit in
Satna (MP); and (b) acquisition of 2mt grinding unit at Nigrie (MP). We believe that
the acquisition price of ~US100/tonne (lowest in the last decade as depicted in
Exhibit 1 below) seems to be already discounting the uncertainty that comes with a JV
partner being on board.
Exhibit 1: Orient-Jaypee valuation is one of the lowest in the last decade
250
Valuation (USD/tonne)
200
200
140
150
128
127
125
119
115
100
98
85
65
50
DBL-Adhunik
DBL-Calcom
Orient-JPA
UTCEM-JPA
HEID-Mysore
Lafarge-Nirma
UTCEM-JPA (Guj)
CRH-MHI
Bcorp-Reliance
Holcim-ACC
Page 94
Orient Cement
Exhibit 2: Basic details of the plant
Plant Type
Clinker
Grinding
Grinding
Location
Satna, MP
Bhilai, Chattisgarh
Nigrie, MP
2.2
EV
EV/tonne
US$100/t
Orient Cement's
Stake
2.0
`5,000mn
US$40/tonne
100%
CPP
No
No
Railway Siding
Yes
Yes
Type of Cement -
PSC
PPC
JP Power Plant
Power Source
Grid
(~`6-7/unit)
-
Clinker for Bhillai will be procured from Devapur instead of Satna: Orient
Cements management realised that taking clinker from Satna to Bhillai was not
attractive as; (a) clinker production cost at Satna is ~`2,000/tonne whereas at
Devapur it is ~`1,500/tonne; and (b) distance from Devapur to Bhillai is 470km,
lesser than that of Satna to Bhillai (550km). Hence, Orient Cement will be taking
clinker from Devapur to Bhilai, which will reduce the landed cost of clinker by
~`500/t of clinker (~15-17%). This would also improve the utilisation of the
Gulbarga unit (in the near term) as the company will now supply cement from
Gulbarga to the markets of Central or Eastern Maharashtra, which were
previously served by Devapur (similar distance). Eventually, the company ay have
to increase the clinker capacity at Devapur to ensure optimum utilization of all
grinding units (Jalgoan, Devapur and Bhillai).
Clinker for Nigrie will be procured from Satna: The clinker capacity at Satna
would be utilised to provide clinker to the Nigrie grinding unit, which is at a
distance of merely ~200km. The Nigrie grinding unit will give Orient Cement
access to Bihar and Jharkhand, which are better markets then MP (Satna cluster).
Outward logistics: We believe that Orient Cement will have to travel ~500kms to
reach the target markets:
Bhillai grinding unit: Key markets that the Bhillai unit would be servicing are
Chattisgarh, Odisha, Eastern Maharashtra and Southern MP. As depicted in
Exhibit 3 below, most of the key markets are ~300-500kms away from Bhillai.
Nigrie grinding unit: Key markets that the Nigrie unit would be servicing are
Bihar, Jharkhand, Uttar Pradesh and Madhya Pradesh. As depicted in Exhibit 3
below, even for the Nigrie unit, most of the key markets are ~300-500kms away
from Nigrie.
For our scenario analysis, we assume an average lead distance of ~500km from
each plant and hence, outward freight of ~800/tonne (~`1.6/km).
Page 95
Orient Cement
Exhibit 3: Key markets are 300-500 kms away from the acquired assets
Page 96
Orient Cement
Exhibit 4: Key markets for the acquired plants
Distance from plant
(km)
Market
A premium market but entry of Shree Cement has diluted the pricing premium. However,
growth remains strong and it is largely a slag cement-based market.
Jharkhand
400-500
Ranchi
Jamshedpur,
Dhanbad
Bokaro,
Ranchi,
Top-3 brands account for ~70% of the overall sales, hence prices remain steady here.
Jharkhand also has a high proportion of slag cement use.
600-700
Madhya Pradesh
Jabalpur
200-300
Satna
200-300
Bhopal
500-600
Gwalior
500-600
Whilst pricing was affected in the last few years, Jaypee's exit has improved pricing
discipline. A highly consolidated market.
Uttar Pradesh
Allahabad
100-200
Varanasi
200-300
Lucknow, Kanpur
300-400
Jhansi
400-500
Agra
600-700
Much like MP, prices in UP improved post exit of Jaypee. Pick-up in rural income will benefit
the state disproportionately as the state is highly rural-dependent.
Market
Comments
Orissa
400-500
Rourkela
Brahmapur,
Cuttack
Bhubaneshwar,
Pricing remains stable despite entry of new players, however no major demand
improvement. Largely a slag cement market.
500-600
Chhattisgarh
Korba, Bilaspur
Raipur, Bhilai, Durg
0-100
Pricing has been affected since multiple players have entered the market. Largely a PPC
cement market.
200-300
Page 97
Orient Cement
90%
50
85%
40
30
80%
20
75%
10
70%
0
FY10
FY11
FY12
Capacity
FY13
FY14
Volumes
FY15
Utilisation - RHS
Although demand growth in East India has been higher than most other regions, the
rising prominence of volume-focused players, such as Shree, JK Lakshmi and now
Orient Cement will lead to weak pricing in the market. Pricing growth in East will be
the lowest amongst Indian regions. As a result, the premium pricing of the market
has started to wane and has dropped sharply in states, such as Chhattisgarh.
Exhibit 6: Entry of new players
Capacity share:FY09
Shree,
0.0%
Shree,
9.5%
UTCEM,
23.5%
Others,
19.8%
Exhibit 8: fragmentation
Capacity share:FY16
Capacity share:FY18
UTCEM,
23.3%
Others,
10.5%
Others,
16.5%
Shree,
14.0%
ACC,
12.1%
ACC,
17.3%
ACEM,
14.6%
OCL,
6.4%
Lafarge,
18.4%
UTCEM,
20.0%
ACEM,
12.9%
OCL,
12.7%
Lafarge,
19.0%
ACC,
14.2%
OCL,
11.7%
Nirma*,
14.0%
ACEM,
9.6%
Exhibit 9: East India (ex-Chhattisgarh) volatile prices, barely crossing past highs
390
370
350
330
310
290
270
Oct-16
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
250
Page 98
Orient Cement
Exhibit 10: Per capita cement consumption in Central and East India is significantly
lower than other markets
Agri GDP
Construction GSDP
GSDP
Region
FY15
CAGR
FY10-15
FY15
North
19%
5.2%
West
16%
7.7%
Central
24%
East
22%
South
18%
Per
Capita
GSDP
PCCC
(Kgs)
CAGR
FY10-15
FY15
CAGR
FY10-15
FY15*
FY15*
17%
3.0%
19%
7.0%
57,633
296
24%
10.4%
25%
7.6%
74,429
293
8.2%
12%
4.6%
13%
6.8%
23,931
162
3.9%
23%
9.5%
19%
7.0%
28,458
135
1.8%
24%
5.6%
24%
6.7%
47,775
243
Source: RBI Docs, Ambit capital research * we use population as per the census document of 2011. PCCC- per
capita cement consumption
Exhibit 11: States such as Bihar and Jharkhand are amongst the fastest growing
cement markets
FY10-15 GSDP CAGR
12%
10%
8%
6%
4%
2%
Odi.
Pun.
AP
CHTG
UP
Ker
WB
Kar,
Har.
Delhi
Mah.
TN
Guj.
Raj.
MP
Jhar
Bihar
0%
Page 99
Orient Cement
Contract renewals by SAIL: BJCL is dependent on SAIL for: (a) limestone for the
Satna clinker (since SAIL owns the mines); (b) slag for blending at the Bhillai
grinding unit (from SAILs Bhillai Steel plant); and (c) power for Bhillai grinding
unit (from Bhillai Steel plant). In our view, given these cement plants are nonoperational at the moment, it would be SAILs interest to renew the contracts as a
new JV partner would revive these assets and improve SAILs return on these
investments.
Transfer price of clinker: Whilst convincing SAIL to renew the raw material
supply contracts is a relatively easier task, the key variable remains the price at
which these are transferred. Orient would have to negotiate the following prices
with SAIL:
(a) Price of clinker sold by BJCL to Nigrie grinding unit (as SAIL has a 26% stake
in BJCL but no stake in Nigrie unit. For our scenario analysis, we assume
clinker transfer price of `2,000/tonne from Satna to Nigrie.
(b) Price of slag and power supplied to Bhillai grinding unit by Bhillai Steel plant.
We note that SAIL currently sells slag to BJCL at ~`700/tonne, which in our
view is higher than the market and could be renegotiated by Orient. For our
scenario analysis, we conservatively assume slag sale price to continue at
`700/tonne and power price of `7/unit.
(c) Price of clinker sold by Orients Devapur plant to Bhillai grinding unit. For our
scenario analysis, we assume clinker transfer price of `1,500/tonne from
Devapur to Bhillai units.
SAILs approval required for all future acquisition: We are cognizant of the
fact that despite large limestone reserves with SAIL, the expansion prospects of
these assets would require SAILs consent (by way of either equity infusion or
equity dilution). We believe it is difficult to judge whether and how SAIL would
come on board and hence, we do a scenario analysis assuming: (a) no capacity
expansion; and (b) 2.5x capacity expansion of the Satna clinker unit and a set-up
of a new grinding unit linked to Satna over FY18-22E.
Page 100
Orient Cement
Exhibit 12: Supply structure in East and Central India
1.0
Banjari
Bihar
Shree Cement
2.0
Aurangabad
Bihar
Ultratech (G)
1.6
Pataliputra
Bihar
4.6
Singhbhum
JHK
2.1
Bokaro
JHK
ACC Ltd.
0.9
Chaibasa
JHK
Devapur Bhilai Unit Assuming clinker transfer from the Devapur plant, building
in all the related overheads and assuming that the price per bag is similar to the
current market price, we expect unitary EBITDA of `225/tonne.
JHK
Orissa
4.0
Rajgangpur
Orissa
0.1
Kapilas
Orissa
11
ACC - Bargarg
Cement Works
2.1
Bargarh
Orissa
12
Shiva Cement
0.6
13
2.3
Kutra(Sunder
Orissa
Garh)
Durgapur
WB
1.2
Durgapur
1.0
Mejia
WB
Kolaghat
WB
16
1.0
WB
17
0.5
Purulia
WB
18
1.0
Sankrail
WB
19
1.3
Farakka
WB
20
OCL india
Sonar BanglaB.K.Birla (G)
1.4
Medinipur
WB
1.5
Sagardighi
WB
22
Century Cement
2.1
Raipur
CHG
23
UltraTech Cement
2.5
Raipur
CHG
24
UltraTech Cement
1.9
Hirmi
CHG
25
CCI Ltd.
0.4
Akaltara
CHG
26
CCI Ltd.
0.4
Mandhar
CHG
27
1.6
Bilaspur
CHG
28
0.6
Sonadih
CHG
29
2.2
Bhilai
CHG
30
ACC Ltd.
1.6
Jamul
CHG
31
Ambuja Cement
3.2
Bhatapara
CHG
32
Grasim
4.8
Raipur
CHG
33
Shree Cement
2.0
Raipur
CHG
34
JK Lakshmi
2.7
Durg
CHG
UP
35
Birla Cement
0.6
Raebareli
36
Heidelberg Cement
0.5
Jhansi
UP
37
Jaypee Cement
0.5
Dalla
UP
UP
38
2.5
Chunar
39
0.6
Sadva Khurd UP
40
1.0
Tanda
UP
41
1.1
Sikandrabad
UP
1.3
Dadri
UP
1.3
Koil
UP
44
2.3
Tikaria
UP
1.5
42
Sindri
Jharsuguda
10
21
0.9
1.0
15
The Bhillai grinding unit is a Chhattisgarh-based slag cement unit which would be
running on clinker from Orients Devapur plant. As depicted in exhibit above,
Chhattisgarh and Odisha have significant integrated cement plants that are based on
locally produced clinker and hence, Orient will be at a disadvantage. Higher clinker
cost in the case of Orient will be partially offset by higher blending ratio (~35% in
case of the other plants in Chhattisgarh as most are based on fly ash vs ~65% for
Orient as Bhillai is slag based). We highlight that whilst pricing in Orissa is healthy
(balance between capacity and demand), pricing in Chhattisgarh is severely
depressed (`220/50kg bag in Chhattisgarh vs `330/50kg bag in Bihar/Jharkhand
and Odisha) given high surplus 7mt demand vs 23t capacity.
14
State
CapaPlace
city
43
45
46
Birla Vikas
Dadri
UP
Satna
47
Satna Cement
MP
Satna
48
Maihar Cement
MP
3.8
Maihar
49
MP
UltraTech Cement
3.0
Jawad Road
MP
50
Heidelberg Cement
1.0
Damoh
MP
MP
1.6
51
CCI Ltd.
0.4
Neemuch
52
Jaypee Cement
3.0
Rewa
MP
53
Jaypee Cement
4.9
Bela
MP
54
Jaypee Cement
1.5
Sidhi
MP
55
Prism Cement
5.6
Satna
MP
56
ACC Ltd
2.2
Kymore
MP
57
Emami Cement
2.5
Risda
CHG
58
Jaypee
2.1
Nigrie
MP
Page 101
Orient Cement
Exhibit 13: Expect unitary EBITDA of `225/tonne
Cost head
Cost
Multiple
Clinker cost
1500
0.33
Transportation
1000
0.33
700
0.7
1000
0.05
Power
210
Freight
800
Others
600
Employee
200
Slag
Gypsum
Total costs
Spot
Realisation
EBITDA
Cost/tonne Comments
Satna-Nigrie unit Assuming clinker transfer from the Satna plant at `2,000/tonne
(current manufacturing cost), building in all the related overheads and assuming that
the price per bag is similar to the current market price, we expect unitary EBITDA of
`675/tonne
Exhibit 14: Expect unitary EBITDA of `675/tonne
Cost head
Clinker cost
Cost
2000
0.7
Transportation
320
0.7
Fly Ash
300
0.3
Power
210
Freight
800
Others
600
Employee
200
Total costs
3370
Spot Realisation
EBITDA
Profitability in East India: Our analysis of East India markets (page 6-7) and
Orients position relative to peers in the region suggests that although Orient is
worse off compared to its peers, the East India market per se is better placed
relative to rest of the country. Although pricing is depressed currently, there is
demand potential and profitability of Orients acquired assets would depend on
competitive intensity in the region two years from now.
Page 102
Orient Cement
In all the scenarios, we assume dilution of 15%, assuming that the company will raise
equity of `7bn at `200/share. Moreover, we do not make any changes to our
estimates of Orients existing business.
Scenario I: No capacity expansion at Satna, Nigrie and Bhillai and pricing
remain weak in the region (2% realisation CAGR (net of cost increase) and 11%
EBITDA/tonne CAGR). This is the worst case, which will be value dilutive to our TP
by `4/share (2%) and implies IRR of 12.6% for the acquisition. Under this
scenario, FY18/FY19 EPS will be diluted by ~34%/19%. Net debt to equity even
in the worst case normalises to 0.6x by FY19E and hence, we do not expect the
acquisition to be a stress for Orient Cements balance sheet.
Scenario II: No capacity expansion at Satna, Nigrie and Bhillai but pricing
improves in the region (3.5% realisation growth (net of cost increase) and 16%
EBITDA/tonne CAGR). Based on this, the value added per share to our TP is `33
(15%) and the IRR is 16%. Under this scenario, FY18/FY19 EPS will be diluted by
~34%/16%.
Scenario III: Orient manages to expand clinker capacity at Satna and sets up
new grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable.
However, pricing remains weak in the region (2% realisation CAGR (net of cost
increase) and 12% EBITDA/tonne CAGR). Based on this, the value added per
share to our TP is `19 (9%) and the IRR is 14%. Under this scenario, FY18/FY19
EPS will be diluted by ~34%/19%.
Scenario IV: Orient manages to expand clinker capacity at Satna and sets up
new grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable.
Pricing also improves in the region (3.5% realisation growth (net of cost increase)
and 17% EBITDA/tonne CAGR). Based on this, the value added per share to our
TP is `111 (50%) and the IRR is 18%. Under this scenario, FY18/FY19 EPS will be
diluted by ~34%/16%.
Exhibit 15: Key assumptions and estimates for the acquisition under each scenario
Scenario 1
Scenario 2
Scenario 3
Scenario 4
225
225
225
225
675
675
675
675
FY18 Blended
467
467
467
467
Growth assumptions
Realisation CAGR (FY18-28E)
2.00%
3.50%
2.00%
3.50%
NIL
NIL
13%
13%
766
1,014
878
1,137
3.5
3.5
5.4
5.4
11%
16%
12%
17%
10%
14%
26%
30%
9,360
21,261
16,717
46,694
2,434
5,528
4,346
12,140
6,927
15,733
12,371
34,553
7,000
7,000
7,000
7,000
(73)
8,733
5,371
27,553
240
240
240
240
(4)
33
19
111
12.6%
16.0%
14.0%
18.0%
Project IRR
Source: Ambit Capital research
Our assessment of key investor concerns suggests that: (a) it is in SAILs own
interest to come on board with Orient; and (b) even in the worst case
scenario, if pricing in Chhattisgarh remains under pressure, the deal is only
2% value dilutive. Net debt to equity even in the worst case normalises to
0.6x by FY19E and hence, we do not expect the acquisition to be a stress for
Orient Cements balance sheet. We highlight that in the best case scenario,
there is a 50% upside (`111/share) to our ex-deal TP of `216/share.
November 09, 2016
Page 103
Orient Cement
Exhibit 16: Scenario 1 - 2% realisation growth (net of cost increase), 11% EBITDA/t CAGR over FY18-28E and no capacity
expansion
Particulars
Jaypee's assets
Existing operations
Consolidated
FY18
FY19
FY20
FY21
FY22
FY18
FY19
FY20
FY21
FY22
FY18
FY19
FY20
FY21
FY22
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
Utilisation (%)
41%
64%
83%
83%
83%
88%
88%
89%
80%
85%
109%
121%
133%
154%
161%
Volumes (mt)
1.7
2.7
3.5
3.5
3.5
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
12.3
12.9
P&L drivers
Capacity (mtpa)
EBITDA/tonne (`)
561
606
658
717
776
907
1,043
1,158
1,285
1,388
847
929
1,002
1,131
1,229
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
971
1,638
2,293
2,497
2,704
6,427
7,381
8,360
11,394
13,133
7,398
9,019
10,653
13,891
15,837
586
604
623
642
662
1,523
1,546
1,569
2,077
2,591
2,110
2,151
2,192
2,719
3,254
385
1,034
1,670
1,855
2,042
4,904
5,835
6,791
9,317
10,542
5,288
6,869
8,461
11,172
12,584
1,011
1,039
1,040
1,021
1,018
1,176
1,124
1,023
922
895
2,187
2,163
2,063
1,942
1,913
(627)
(6)
630
834
1,024
3,728
4,711
5,768
8,395
9,647
3,101
4,705
6,398
9,230
10,671
1,193
1,507
1,788
2,603
2,990
1,193
1,507
1,788
2,603
2,990
(163)
(1)
110
145
178
(464)
(4)
520
689
846
2,535
3,203
3,980
5,793
6,656
1,908
3,198
4,610
6,627
7,680
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(13.3)
(0.1)
14.9
19.7
24.2
12.4
15.6
19.4
28.3
32.5
8.0
13.3
19.2
27.6
32.0
Equity
20,037 23,077
27,264
33,397
40,521
Net Debt
Ratios
19,239 14,821
9,395
1,891
(8,068)
0.3
0.1
(0.2)
EPS (`)
Balance Sheet
1.0
0.6
2.7
1.7
0.9
0.1
(0.5)
Pre-tax RoCE
12.5% 16.6%
21.2%
29.3%
35.0%
Post-tax RoCE
9.6% 12.8%
16.3%
21.8%
25.8%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.6
6.4
4.8
4.2
5,472
5,472
5,472
5,472
5,472
82
82
82
82
82
Page 104
Orient Cement
Scenario II: No capacity expansion at Satna, Nigrie and Bhillai but pricing improves
in the region (3.5% realisation growth (net of cost increase) and 16% EBITDA/tonne
CAGR). Based on this, the value added per share to our TP is `33 (15%) and the IRR is
16%. Under this scenario, FY18/ FY19 EPS will be diluted by ~34%/16%.
Exhibit 17: Scenario 2 3.5% realisation growth (net of cost increase), 16% EBITDA/t CAGR over FY18-28E and no capacity
expansion
Particulars
Jaypee's assets
FY18
FY19
FY20
Existing operations
FY21
FY22
FY18
FY19
FY20
FY21
Consolidated
FY22
FY18
FY19
FY20
FY21
FY22
P&L drivers
Capacity (mtpa)
Utilisation (%)
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
41%
64%
83%
83%
83%
88%
88%
89%
80%
85%
72%
80%
87%
81%
85%
Volumes (mt)
1.7
2.7
3.5
3.5
3.5
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
12.3
12.9
EBITDA/tonne (`)
467
590
724
867
1,014
907
1,043
1,158
1,285
1,388
829
925
1,023
1,173
1,294
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
807
1,596
2,523
3,020
3,534
6,427
7,381
8,360
11,394
13,133
7,234
8,978
10,883
14,413
16,668
586
604
623
642
662
1,523
1,546
1,569
2,077
2,591
2,109
2,150
2,192
2,719
3,254
221
992
1,900
2,377
2,872
4,904
5,835
6,791
9,317
10,542
5,125
6,827
8,690
11,695
13,414
1,017
1,053
1,052
1,017
983
1,176
1,124
1,023
922
895
2,193
2,177
2,075
1,939
1,878
(796)
(61)
847
1,360
1,889
3,728
4,711
5,768
8,395
9,647
2,932
4,650
6,615
9,756
11,536
280
449
623
1,193
1,507
1,788
2,603
2,990
1,193
1,507
2,068
3,051
3,614
(207)
(16)
148
237
329
(207)
(16)
148
237
329
(589)
(45)
420
674
937
2,535
3,203
3,980
5,793
6,656
1,946
3,158
4,400
6,467
7,593
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(16.8)
(1.3)
12.0
19.3
26.8
12.4
15.6
19.4
28.3
32.5
8.1
13.2
18.3
27.0
31.7
Equity
20,037 23,195
27,595
34,062
41,655
Net Debt
Ratios
19,239 14,667
8,971
1,034
(9,539)
0.3
0.0
(0.2)
EPS (`)
Balance Sheet
1.0
0.6
2.7
1.6
0.8
0.1
(0.6)
Pre-tax RoCE
12.5% 16.9%
22.3%
30.9%
37.4%
Post-tax RoCE
9.6% 13.2%
17.0%
22.9%
27.3%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.4
6.1
4.6
4.0
5,472
5,472
5,472
4,392
4,392
82
82
82
66
66
Page 105
Orient Cement
Scenario III: Orient manages to expand clinker capacity at Satna and sets up new
grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable. However,
pricing remains weak in the region (2% realization CAGR (net of cost increase) and
12% EBITDA/tonne CAGR). Based on this, the value added per share to our TP is `19
(9%) and the IRR is 14%. Under this scenario, FY18/FY19 EPS will be diluted by
~34%/19%.
Exhibit 18: Scenario 3 - 2% realisation growth (net of cost increase), 12% EBITDA/t CAGR over FY18-28E and 13% volume
CAGR over FY20-28E
Particulars
Jaypee's assets
FY18
FY19
FY20
Existing operations
FY21
FY22
FY18
FY19
FY20
FY21
Consolidated
FY22
FY18
FY19
FY20
FY21
FY22
P&L drivers
Capacity (mtpa)
Utilisation (%)
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
41%
64%
83%
104%
129%
88%
88%
89%
80%
85%
72%
80%
87%
87%
97%
Volumes (mt)
1.7
2.7
3.5
4.4
5.4
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
13.2
14.8
EBITDA/tonne (`)
467
533
607
797
878
907
1,043
1,158
1,285
1,388
829
909
985
1,129
1,208
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
807
1,442
2,114
3,489
4,748
6,427
7,381
8,360
11,394
13,133
7,234
8,823
10,474
14,883
17,881
586
604
1,245
1,283
1,323
1,523
1,546
1,569
2,077
2,591
2,109
2,150
2,814
3,360
3,914
221
837
869
2,206
3,425
4,904
5,835
6,791
9,317
10,542
5,125
6,673
7,660
11,523
13,967
1,017
1,059
1,819
2,591
2,646
1,176
1,124
1,023
922
895
2,193
2,183
2,842
3,513
3,542
(796)
(221)
(950)
(385)
778
3,728
4,711
5,768
8,395
9,647
2,932
4,490
4,818
8,010
10,425
(313)
(127)
257
1,193
1,507
1,788
2,603
2,990
1,193
1,507
1,475
2,476
3,247
(207)
(58)
(165)
(67)
136
(207)
(58)
(165)
(67)
136
(589)
(164)
(471)
(191)
386
2,535
3,203
3,980
5,793
6,656
1,946
3,040
3,509
5,602
7,042
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(16.8)
(4.7)
(13.5)
(5.5)
11.0
12.4
15.6
19.4
28.3
32.5
8.1
12.7
14.6
23.4
29.4
Equity
20,037 23,077
26,586
32,188
39,230
Net Debt
Ratios
19,239 14,821
9,690
2,444
(7,697)
0.4
0.1
(0.2)
EPS (`)
Balance Sheet
1.0
0.6
2.7
1.7
0.9
0.2
(0.4)
Pre-tax RoCE
12.5% 16.6%
19.8%
31.2%
40.4%
Post-tax RoCE
9.6% 12.8%
16.0%
24.5%
31.0%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.6
6.4
4.5
3.7
5,472
5,472
5,472
4,392
4,392
82
82
82
66
66
Page 106
Orient Cement
Scenario IV: Orient manages to expand clinker capacity at Satna and sets up new
grinding unit north of Satna (UP, Bihar) and Bhillai capacity remains stable. Pricing
also improves in the region (3.5% realisation growth (net of cost increase) and 17%
EBITDA/tonne CAGR). Based on this, the value added per share to our TP is `111
(50%) and the IRR is 18%. Under this scenario, FY18/FY19 EPS will be diluted by
~34%/16%.
Exhibit 19: Scenario 4 3.5% realisation growth (net of cost increase), 17% EBITDA/t CAGR over FY18-28E and 13% volume
CAGR over FY20-28E
Particulars
Jaypee's assets
FY18
FY19
FY20
Existing operations
FY21
FY22
FY18
FY19
FY20
FY21
Consolidated
FY22
FY18
FY19
FY20
FY21
FY22
P&L drivers
Capacity (mtpa)
Utilisation (%)
4.2
4.2
4.2
4.2
4.2
11
11
12.2
12.2
12.2
15.2
15.2
41%
64%
83%
104%
129%
88%
88%
89%
80%
85%
72%
80%
87%
87%
97%
Volumes (mt)
1.7
2.7
3.5
4.4
5.4
7.0
7.0
7.2
8.8
9.4
8.7
9.7
10.6
13.2
14.8
EBITDA/tonne (`)
467
590
724
986
1,137
907
1,043
1,158
1,285
1,388
829
925
1,023
1,192
1,302
EBITDA (` mn)
Less: Depreciation
(` mn)
EBIT (` mn)
Less:Interest (`
mn)
PBT (` mn)
807
1,596
2,523
4,318
6,148
6,427
7,381
8,360
11,394
13,133
7,234
8,978
10,883
15,711
19,281
586
604
1,245
1,283
1,323
1,523
1,546
1,569
2,077
2,591
2,109
2,150
2,814
3,360
3,914
221
992
1,278
3,035
4,825
4,904
5,835
6,791
9,317
10,542
5,125
6,827
8,069
12,352
15,367
1,017
1,053
1,794
2,527
2,523
1,176
1,124
1,023
922
895
2,193
2,177
2,817
3,448
3,419
(796)
(61)
(516)
508
2,301
3,728
4,711
5,768
8,395
9,647
2,932
4,650
5,252
8,903
11,948
168
759
1,193
1,507
1,788
2,603
2,990
1,193
1,507
1,788
2,770
3,750
(207)
(16)
(134)
88
401
(207)
(16)
(134)
88
401
(589)
(45)
(382)
252
1,141
2,535
3,203
3,980
5,793
6,656
1,946
3,158
3,598
6,045
7,797
No of Shares (mn)
35
35
35
35
35
205
205
205
205
205
240
240
240
240
240
(16.8)
(1.3)
(10.9)
7.2
32.6
12.4
15.6
19.4
28.3
32.5
8.1
13.2
15.0
25.2
32.5
Equity
20,037 23,195
26,793
32,838
40,635
Net Debt
Ratios
19,239 14,667
9,433
1,616
(9,505)
0.4
0.0
(0.2)
EPS (`)
Balance Sheet
1.0
0.6
2.7
1.6
0.9
0.1
(0.5)
Pre-tax RoCE
12.5% 16.9%
20.8%
33.4%
44.3%
Post-tax RoCE
9.6% 13.2%
16.2%
25.9%
33.5%
Valuation
EV/EBITDA (X)
EV/tonne (`)
EV/tonne (USD)
9.2
7.4
6.1
4.2
3.5
5,472
5,472
5,472
4,392
4,392
82
82
82
66
66
Page 107
Orient Cement
Volumes: We expect strong volume growth in FY17 and FY18, driven by scale-up
of capacities in Karnataka we expect 50% capacity utilisation in FY17 and 75%
in FY18. Moreover, we expect the sharp demand recover in AP-Telangana to
sustain, driven by ramp-up in government spending, especially in irrigation.
Exhibit 20: Financial assumptions expect strong EBITDA recovery over the next two years
Particulars (` mn
unless mentioned)
Assumptions
YoY growth
FY15
FY16
FY17E
FY18E
FY17E
FY18E
4.1
4.4
6.0
7.0
35.8%
16.7%
82%
55%
75%
88%
Cement Realisation
3,736
3,400
3,502
3,817
3.0%
Operating costs
3,018
3,002
2,882
2,910
-4.0%
718
399
620
908
55.6%
15,470
15,092
21,088
26,799
39.7%
3,067
1,834
3,798
6,431
107.1%
19.8
12.2
18.0
24.0
586 bps
599 bps
Adjusted PBT
2512
603
1222
3732
102.7%
205.5%
16.2
4.0
5.8
13.9
180 bps
813 bps
Tax
564
(20)
391
1,194
44.3%
-101.7%
1,948
623
831
2,538
134.5%
-75.5%
Cement sales
Capacity utilisation
Comments
Strong volume growth over the next two years driven by
ramp up of the Karnataka plant
EBITDA
Financials (` mn
unless specified)
Net Revenues
EBITDA
Adjusted PAT
Adjusted PAT margin (%)
12.6
4.1
3.9
9.5
EPS (`)
9.5
3.0
4.1
12.4
Capex
9,222
3,697
497
1.2
0.7
0.7
0.8
49 bps
(7,664)
(1,121)
1,755
1,380
-536.6%
GB Turnover
FCF
3,635 1757.3%
-75.5%
1.7%
-5 bps We build in capex for further expansions of 1.5-2mn tonnes
-181.2%
Page 108
Orient Cement
Exhibit 21: Ambit vs Consensus
Particulars
Ambit
Consensus
FY2017
21,079
20,418
FY2018
26,787
25,380
FY2017
3,795
3,310
FY2018
6,427
5,485
Divergence Comments
Revenue (` mn)
3% Our sales estimates are higher than consensus since we expect a sharp realisation up6% tick as pricing discipline improves
EBITDA (` mn)
15% Our EBITDA estimates are higher than consensus, mainly due to higher than
consensus realisation estimates; consensus EBITDA saw significant downgrades due to
17% weak pricing in Maharashtra but we believe improved pricing discipline will lead to
strong unitary EBITDA expansion in 2HFY17 and FY18
PAT (` mn)
FY2017
829
813
FY2018
2,535
2,380
2% Despite higher EBITDA estimates, our PAT estimates are lower than consensus, which
7% could be on account of a higher tax estimate
Score
Comments
Accounting
GREEN
The company is in the second quartile of Ambit's forensic accounting screener of BSE-500 companies.
Moreover in the last two years, the company delivered cumulative CFO/EBITDA of 100%. On our accounting
checks too, we do not find any major red-flags.
Predictability
AMBER
Orient Cement has made timely announcements in terms of expansions and has not misguided on growth
expectations. However, EBITDA/tonne is a function of realisations, which is volatile and difficult to predict given
the fragmented and low growth nature of the market it operates in.
RED
FY17/FY18 EBITDA estimates have seen sharp downgrades in the past three months, which are not a cause for
concern.
Earnings Momentum
Page 109
Orient Cement
6,000
10
5,000
4,000
3,000
Average EV/EBITDA
its
average
EV/tonne
Oct-16
12
Apr-14
Jun-14
Aug-14
7,000
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
8,000
Apr-14
Jun-14
Aug-14
16
with
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
(`/tonne)
(x)
in-line
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Average EV/Tonne
Page 110
Orient Cement
Exhibit 25: Relative valuation summary mid-cap cement companies
Capacity
Mcap
(mn tonnes)
Orient Cement
Ramco Cements
**
Dalmia Bharat
#@
Century Tex#
(` bn) US$ mn
FY17
FY18
8.0
8.0
36
537
13.5
13.5
147
21.0
21.0
12.8
8.0
US$ mn
EV/EBITDA
EV/tonne
(x)
CAGR (FY16-18)
Sales EBITDA
FY17
FY18
FY17
FY18
0.6
14.6
8.8
6,049
6,049
30
73
2,193
2.0
14.2
12.3
12,430
12,430
12
184
2,736
1.8
12.9
11.1
11,834
11,834
12.8
102
1,520
14.1
16.0
NA
12,391
8.0
54
799
0.7
13.1
9.3
9,228
10.8
10.8
67
990
0.4
13.2
10
11.0
11.0
58
858
0.8
13.8
10.5
10.5
60
895
1.3
6.0
6.0
33
496
3.5
3.5
3.5
3.5
13
Prism Cement #
JK Cement
Jk Lakshmi
Cement
Birla Corp #
Advt 6m
Heidelberg India
Mangalam
Cement
Sagar Cement
ROE
EPS
(%)
FY17
FY18
95
19
12
15
18
19
16
19
72
10
14
12,391
NA
NA
NA
NA
9,228
12
43
NA
12
24
8,712
8,712
15
31
152
12
20
9.5
6,458
6,458
22
66
NA
10
18
10.9
8.2
5,398
5,398
16
55
64
11
13
0.6
12.6
9.8
6,773
6,773
12
28
115
11
16
139
0.4
9.6
7.0
3,788
3,788
20
107
NA
10
15
190
0.3
7.9
7.0
4,145
4,145
32
47
61
17
Page 111
Orient Cement
Risks
Acquisition-led dilution risk: The companys debt/equity has increased to 1.1x in
FY16-end post commissioning of the Karnataka plant. If the acquisition of Jaypees
assets goes through in the next 6 months, debt/equity will rise to 1.2-1.3x.
Teething problems and dilution of cost efficiencies in Karnataka plant: Whilst
management claims that the inefficiencies of power and fuel at the Karnataka plant
have been addressed, if such problems sustain cost savings will fail to come through.
Increase in petcoke prices: Orient Cement has adopted 50% petcoke at its AP
plant and the new plant in Karnataka will be largely run on petcoke. Petcoke prices
are up 50% from the lows of Mar-16 and are now only at a 10-12% discount to coal.
Further increase in petcoke prices could dilute cost savings.
Page 112
Orient Cement
Balance Sheet
Year to March (Rs Mn)
Share capital
FY15
FY16
FY17E
FY18E
FY19E
205
205
205
205
205
9,551
9,958
10,886
13,273
16,227
Total Networth
9,755
10,163
11,091
13,478
16,432
11,057
12,898
12,898
11,898
11,898
Loans
Deferred tax liability (net)
Sources of funds
Net block
1,250
1,228
1,228
1,228
1,228
22,064
24,289
25,217
26,604
29,558
7,981
21,497
26,268
25,248
24,214
Capital work-in-progress
13,194
2,391
3,131
7,306
428
378
1,086
288
320
Sundry debtors
832
921
1,019
1,221
1,216
Inventories
1,099
1,410
1,155
1,468
1,555
1,802
1,771
2,310
2,936
3,110
4,482
4,744
5,974
6,426
6,744
Current Liabilities
3,130
3,906
3,465
4,403
4,665
Provisions
Current liabilities and provisions
Net current assets
Application of funds
464
438
245
336
579
3,594
4,344
3,710
4,739
5,243
888
400
2,264
1,687
1,501
22,064
24,289
25,217
26,604
29,558
FY15
FY16
FY17E
FY18E
FY19E
15,470
15,092
21,079
26,787
28,376
8%
-2%
40%
27%
6%
12,403
13,258
17,283
20,360
20,786
3,067
1,834
3,795
6,427
7,590
yoy growth
37%
-40%
111%
69%
18%
Net depreciation
473
763
1,374
1,523
1,546
2,594
1,071
2,422
4,904
6,044
141
544
1,290
1,240
1,190
EBIT
Interest
Other income
Adj PBT
Provision for taxation
Adj PAT
yoy growth
Reported PAT
59
75
87
64
66
2,512
603
1,219
3,728
4,920
564
(20)
390
1,193
1,574
1,948
623
829
2,535
3,345
93%
-68%
33%
206%
32%
1,948
623
829
2,535
3,345
EPS (Rs)
9.5
3.0
4.0
12.4
16.3
9.5
3.0
4.0
12.4
16.3
DPS (Rs)
1.4
0.2
0.2
0.6
1.6
Page 113
Orient Cement
Cash Flow Statement
Year to March (Rs Mn)
FY15
FY16
FY17E
FY18E
FY19E
PBT
2,512
602
1,219
3,728
4,920
Depreciation
473
763
1,374
1,523
1,546
Others
107
(23)
(87)
(64)
(66)
544
1,290
1,240
1,190
3,097
1,886
3,795
6,427
7,590
(1,005)
824
(1,155)
(222)
218
(534)
(134)
(390)
(1,193)
(1,574)
1,558
2,576
2,250
5,012
6,234
(9,222)
(3,697)
(497)
(3,635)
(4,686)
87
64
66
(9,223)
(3,691)
(409)
(3,571)
(4,621)
7,771
1,841
(1,000)
158
(0)
(0)
(134)
(519)
(1,290)
(1,240)
(1,190)
(57)
(42)
(391)
CFF
7,268
1,065
(1,132)
(2,240)
(1,581)
(397)
(50)
709
(798)
32
815
418
378
1,086
288
418
368
1,086
288
320
(7,664)
(1,121)
1,754
1,377
1,547
FCF
Source: Company, Ambit Capital research
Ratio Analysis
Particulars
FY15
FY16
FY17E
FY18E
FY19E
Revenue growth
7.5
(2.4)
39.7
27.1
5.9
EBITDA growth
37.4
(40.3)
111.3
69.3
18.1
PAT growth
92.8
(68.0)
33.1
205.8
32.0
92.8
(68.0)
33.1
205.8
32.0
EBITDA margin
19.8
12.2
18.0
24.0
26.7
EBIT margin
16.8
7.1
11.5
18.3
21.3
Net margin
12.6
4.1
3.9
9.5
11.8
RoCE
11.8
3.4
6.9
13.0
14.8
RoIC
24.1
5.2
7.5
14.3
18.4
RoE
21.6
6.3
7.8
20.6
22.4
Debt/Equity(x)
1.1
1.3
1.2
0.9
0.7
Net debt/Equity(x)
1.1
1.2
1.1
0.9
0.7
Valuation Parameters
Particulars
FY15
FY16
FY17E
FY18E
FY19E
P/E (x)
18.2
56.9
42.8
14.0
10.6
P/B(x)
3.6
3.5
3.2
2.6
2.2
EV/Sales(x)
3.1
3.1
2.2
1.8
1.7
EV/EBITDA(x)
15.6
25.8
12.5
7.4
6.2
9,593
5,907
5,907
5,907
5,907
152
94
94
98
98
EV/tonne (US$)
Source: Company, Ambit Capital research.
Page 114
Orient Cement
(022) 30433174
saurabh.mukherjea@ambit.co
Research Analysts
Name
Industry Sectors
Desk-Phone E-mail
(022) 30433241
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Sales
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Regions
UK
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Page 115
Orient Cement
Orient Cement Ltd (ORCMNT IN, BUY)
250
200
150
100
50
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
5,000
4,000
3,000
2,000
1,000
0
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
2,500
2,000
1,500
1,000
500
0
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Orient Cement
Explanation of Investment Rating
Investment Rating
BUY
>10%
SELL
NO STANCE
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW
NOT RATED
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE
We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE
We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
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Additional information on recommended securities is available on request.
Disclaimer
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7.
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Orient Cement
Additional Disclaimer for UK Persons
26. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research
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Disclosures
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Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
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