Shree Cements Limited Initial Opinion BUY

Equity | India | Building Materials

21 February 2006

Strong And No Longer Very

Small
Reena Verma Bhasin, CFA >> +91 22 5632 8667
Research Analyst
DSP Merrill Lynch (India)
„ 50% Stock Upside
We are initiating coverage on Shree with a Buy rating & a price target of Rs900
reena_verma@ml.com

(50% upside potential). Despite Shree’s ranking as one of the most profitable
cement companies in India, valuations for FY07E are at 20-30% discount vs majors
on PE & EV/EBITDA while EV/capacity at ~US$120/ton is comparable. We see a
„ Stock Data
Price Rs589.50
window for strong stock upside given high earnings momentum & room for push- Price Objective Rs900.00
backs in the industry’s FY08 capacity pipeline. We forecast Shree’s FY07E earnings Date Established 21-Feb-2006
to grow 50% YoY led by 36% growth in volumes & 7% YoY price rise. Investment Opinion C-1-7
Volatility Risk HIGH
52-Week Range Rs291.20-Rs618.00
Ras Commissioning - Right Place, Right Time Mrkt Val / Shares Out (mn) US$463 / 34.8
We believe Shree offers the opportunity to combine significant company-level Average Daily Volume 17,838
volume growth with strong industry-level pricing. The company’s recent 1.5mn pa ML Symbol / Exchange XREEF / BSE
expansion (+50% of previous capacity) at Ras in north India comes at a time when Bloomberg / Reuters SRCM IN / SHCM.BO
ROE (2006E) 35.7%
capacity utilization in north India is averaging ~103%, the highest across regions.
Net Dbt to Eqty (Mar-2005A) 80.5%
We expect this tight supply-demand situation to continue for the next 15-18 months. Est. 5-Yr EPS / DPS Growth 21.0% / 13.0%
Post-Ras, Shree ranks (9th) among the top-10 producers in India, by size. Free Float 36.3%

Cost Leadership To Sustain

Shree is arguably one of the lowest cost producers in the industry. We expect this
cost leadership to sustain due to 3 key factors: 1) Use of relatively cheaper pet
coke instead of coal for energy; 2) Relatively high efficiency in use of power &
fuel; and 3) Locational proximity to key markets resulting in low freight costs.

Capacity Pipeline In North Threatens Long-term Outlook

We are aware, from discussions with the industry & equipment vendors, that there
is a significant capacity addition pipeline in north India. Our FY08 forecasts
assume timely commissioning of the entire pipeline.

„ Estimates
(Rs)
(Mar)
2004A 2005A 2006E 2007E 2008E
Net Income (Adjusted - mn) 130 816 1,213 1,818 1,735
EPS 3.74 23.42 34.83 52.19 49.80
EPS Change (YoY) 94.6% 525.7% 48.7% 49.9% -4.6%
Dividend / Share 3.00 3.50 4.63 5.63 6.13
Free Cash Flow / Share 7.68 (4.97) (8.09) (22.02) 59.32

Valuation (Mar)
2004A 2005A 2006E 2007E 2008E
P/E 157.51x 25.17x 16.93x 11.30x 11.84x
Dividend Yield 0.509% 0.594% 0.785% 0.955% 1.04%
EV / EBITDA* 18.68x 14.41x 12.60x 8.41x 8.02x
Free Cash Flow Yield* 1.30% -0.843% -1.37% -3.74% 10.06%
* For full definitions of iQmethod SM measures, see page 13.

Produced in conjunction with DSP Merrill Lynch Limited.

>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Refer to important disclosures on page 14 to 15. Analyst Certification on page 12. Price Objective Basis/Risk on page 12. 10511454
 Shree Cements Limited
21 Februa ry 2006

iQprofile Shree Cements Limited

SM

Key Income Statement Data (Mar) 2004A 2005A 2006E 2007E 2008E Company Description
(Rs Millions) Shree is a pure cement company located in Rajasthan
Sales 4,732 5,821 6,228 9,211 10,559 (north India). It is one of the largest producers in northern
Gross Profit 1,310 1,698 1,943 2,910 3,050 India. The company is also one of the lowest-cost cement
Sell General & Admin Expense ––– ––– ––– ––– ––– producers across the industry. Shree’s founding
Operating Profit 576 1,011 1,449 2,314 2,281 shareholder is the Bangur family.
Net Interest & Other Income (358) (175) (124) (248) (215)
Associates ––– ––– ––– ––– –––
Pretax Income 217 836 1,325 2,066 2,065 Stock Data
Tax (expense) / Benefit (87) (21) (112) (248) (330) Price to Book Value 6.3x
Net Income (Adjusted) 130 816 1,213 1,818 1,735
Average Fully Diluted Shares Outstanding 35 35 35 35 35
Key Cash Flow Statement Data
Net Income (Reported) 130 816 1,213 1,818 1,735
Depreciation & Amortization 734 687 493 596 769
Change in Working Capital (263) 541 (38) (315) (154)
Deferred Taxation Charge ––– ––– ––– ––– –––
Other Adjustments, Net 347 (4) 0 74 157
Cash Flow from Operations 949 2,040 1,668 2,173 2,506
Capital Expenditure (681) (2,213) (1,950) (2,940) (439)
(Acquisition) / Disposal of Investments 0 8 0 0 0
Other Cash Inflow / (Outflow) 0 880 0 0 0
Cash Flow from Investing (681) (1,326) (1,950) (2,940) (439)
Shares Issue / (Repurchase) 0 0 0 0 0
Cost of Dividends Paid (118) (138) (182) (273) (260)
Cash Flow from Financing 33 440 (646) (1,313) 1,546
Free Cash Flow 268 (173) (282) (767) 2,067
Net Debt 3,418 2,841 3,305 4,345 2,539
Change in Net Debt (150) (577) 464 1,040 (1,806)
Key Balance Sheet Data
Property, Plant & Equipment 5,370 6,353 6,510 9,034 8,705
Other Non-Current Assets 8 0 0 0 0
Trade Receivables 297 239 254 370 427
Cash & Equivalents 76 130 130 130 131
Other Current Assets 756 421 446 651 751
Total Assets 7,095 7,870 8,109 11,307 11,309
Long-Term Debt 2,317 2,467 2,919 3,860 2,006
Other Non-Current Liabilities ––– ––– ––– ––– –––
Short-Term Debt 1,177 504 516 615 664
Other Current Liabilities ––– ––– ––– ––– –––
Total Liabilities 4,581 4,341 4,848 6,322 4,849
Total Equity 2,514 3,529 3,261 4,986 6,461
Total Equity & Liabilities 7,095 7,870 8,109 11,308 11,310
iQmethod SM - Bus Performance
Return On Capital Employed 5.3% 13.2% 18.0% 23.3% 19.0%
Return On Equity 5.5% 27.0% 35.7% 44.1% 30.3%
Operating Margin 12.2% 17.4% 23.3% 25.1% 21.6%
EBITDA Margin 27.7% 29.2% 31.2% 31.6% 28.9%
iQmethod SM - Quality of Earnings
Cash Realization Ratio 7.3x 2.5x 1.4x 1.2x 1.4x
Asset Replacement Ratio 0.9x 3.2x 4.0x 4.9x 0.6x
Tax Rate (Reported) 40.0% 2.5% 8.4% 12.0% 16.0%
Net Debt-to-Equity Ratio 136.0% 80.5% 101.4% 87.1% 39.3%
Interest Cover 1.5x 5.1x 9.8x 8.5x 9.6x
Key Metrics
* For full definitions of iQmethod SM measures, see page 13.

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50% Stock Upside Potential, Buy

We are initiating coverage on Shree Cement with a Buy rating. We think the stock
could offer significant (+50%) upside from current levels notwithstanding a heady
7-fold rise in share price over the last 2 ½ years. We recommend to Buy the stock
for 3 key reasons:

1) Timely Volume Expansion In Otherwise Tight Market: Shree’s recent

expansion at Ras, in end-CY05, by 1.5mn tpa (+50% of previous capacity)
makes it one of the few companies that offer strong volume growth in the
otherwise tightly supplied markets of northern India (pls see table below).
Note that Shree’s capacity utilization in Jan ’06, post expansion, stood at
85% indicating the room for volume growth; we forecast FY07 utilisation at
93%. Also note that the Ras expansion has catapulted Shree from being a
regional player to ranking (9th) amongst the top 10 producers in the country.

Note that capacity utilization in north India averaged around 103% in YTD
FY06, the highest across regions. We expect this tight supply-demand
situation to continue for at least the next 15-18 months although the longer
term risk of capacity additions is also highest for north India.

2) Strong Cement Prices Yielding 71% YoY Earnings Growth: We believe

cement prices in north India will continue to rise strongly over the next 15-18
months. We expect prices in north India to rise 7-8% YoY in FY07 to ~
Rs171/bag. This compares with ~5-6% YoY price rise forecast for the
industry. The combination of strong volumes (+36% YoY) & higher prices
(+7% YoY) will drive an est. 50% YoY growth in Shree’s FY07 earnings.

3) Attractive Stock Valuations: Shree is one of the lowest cost producers of

cement in the industry, today and its EBITDA/ton ranks among the highest in
the industry owing to a combination of low operating costs & right marketing
location. Despite this, Shree’s valuations are lower than those of the larger
producers. On an EV/EBITDA basis, Shree currently trades ~8.5x Mar ’07E
versus ~11x for most cement majors. We think any discount for size should
be relatively small (~10%) given the relatively low scale-economies in this
industry and strong cost credentials of the company.

Our 12-month price target of Rs900/sh places Shree at an EV/EBITDA of 12x

Mar ’07, implying ~10% discount versus our target valuation for the cement
majors. Our expectation of 13x EV/E for the cement majors pegs their FY07
valuations on par with peak levels witnessed during the previous cyclical
boom in FY95-96. Among the large-cap cement stocks, ACC is our top pick.

Table 1: Current (Jan ’06) utilization levels of major units in north India
Unit State Capacity (mtpa) Capacity Utilization
Shree Cement RAJ 4.5 85%
ACC (Gagal) HP 3.5 112%
JK Cement RAJ 2.8 87%
Gujarat Ambuja (Ropar) PUB 2.5 111%
JK Lakshmi Cement RAJ 2.2 128%
Binani Cement RAJ 2.2 97%
Gujarat Ambuja (Pali) RAJ 1.8 97%
Grasim (Shambhupura) RAJ 1.7 111%
Birla Corp (Chittorgarh) RAJ 1.3 127%
Grasim (Bhatinda) PUB 1.2 105%
Source: CMA

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Industry Supply-Demand Balance To Tighten

Further
We expect supply-demand balance in the Indian cement industry to tighten
further over the next 12-15 months and forecast the industry’s capacity utilization
(clinker ex-exports) at ~88% by Mar ’07 versus ~85% in FY06E. We believe these
utilization levels are very tight for a process industry.

Owing to the tight supply-demand outlook, we expect cement prices to remain on

an uptrend. For the industry as a whole, we forecast cement prices to rise 5-6%
YoY in FY07E versus 3-4% YoY rise in YTD FY06.

Our forecasts likely carry the risk of under-estimating supply tightness as we have
assumed demand to grow 8% YoY in FY07, in line with the industry’s long term
CAGR. However, demand growth in YTD FY06 was ~12% YoY supplied by 11%
growth in domestic consumption and 46% rise in cement exports. So far, despite
an uptick in interest rates and a sharp rally in real estate prices, there are no
visible signs of any slowdown in construction activity.

Table 2: Industry Supply-Demand Scenario

As on 31 March (mn tpa) FY04 FY05 FY06E FY07E FY08E
Cement Capacity 145 152 163 172 191
Effective Clinker Capacity 116 120 128 132 150
Capacity growth 6% 4% 7% 3% 13%
Cement Demand 117 125 139 149 161
Demand growth 6% 7% 11% 8% 8%
Domestic Consumption 113.8 120.8 132.9 143.5 155.0
Growth in domestic consumption 6% 6% 10% 8% 8%
Exports 3.4 4.1 5.9 5.9 5.9
Export growth -3% 21% 45% 0% 0%
Cement - Capacity Utilisation 81% 82% 85% 87% 84%
Cement/Clinker Ratio 1.24 1.26 1.28 1.28 1.28
Blended Cement as % of total production 54% 57% 59% 59% 59%
Clinker Exports 5.6 5.9 3.6 3.6 3.6
Clinker - Capacity Utilisation (incl. Exports) 87% 88% 87% 91% 86%
Clinker - Capacity Utilisation (excl. Exports) 82% 83% 85% 88% 84%
Source: CMA, ML Estimates

North India – Window Of Opportunity

In YTD FY06, north India had the highest (~103%) capacity utilization level across
regions. We believe this supply tightness will continue for the next 15-18 months.
We are aware, from discussions with the industry & equipment vendors, that the
capacity addition pipeline is also the highest for north India but the first of these
capacities (Shree and Jaiprakash) will likely commission in 2Q/3Q FY08 leaving
investors with a decent 15-18 month window of opportunity to play further rise in
cement prices.

We estimate that north India could see almost 12mn tons of composite capacity
addition in FY08, of which ~60% has been ordered and ~70% are greenfield
capacities. The additions totally represent nearly one-third of total cement
demand in the northern market. By March 2008, capacity utilization in north India
could fall back sharply to ~77%, likely the lowest across all regions at that point.

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Table 3: Regionwise Supply-Demand Scenario

As on 31 March (mn tpa) FY05 FY06E FY07E FY08E
North
Capacity 28 31 32 44
Demand 27 29 31 34
Utilisation 97% 92% 97% 77%
South
Capacity 47 53 56 60
Demand 37 44 47 51
Utilisation 78% 83% 85% 85%
East
Capacity 23 25 27 29
Demand 19 21 23 25
Utilisation 81% 86% 86% 87%
West
Capacity 29 29 30 30
Demand 23 23 25 27
Utilisation 79% 80% 86% 92%
Central
Capacity 25 25 28 28
Demand 20 19 21 23
Utilisation 80% 77% 76% 81%
ALL INDIA TOTAL
Total Cement Capacity 152 163 173 191
Total Demand Demand 125 137 148 159
Utilisation 83% 84% 86% 83%
Source: CMA, ML Estimates

Table 4: Expected/Announced Capacity Additions

Yr to 31March (mn tpa) FY06E FY07E FY08E
Kesoram 0.8 1.3
ACC Chaibasa 0.6
ACC Lakheri 0.6
JK Nimbahera 0.3
Dalmia 1.2
Shree Cement 2.0 1.5
Jaiprakash 3.0
Gujarat Ambuja 2.3
Penna Cement 1.5 1.0
MyHome Cement 1.6 1.2
Lafarge 1.6
Grasim - Kotputli 2.6
Binani Cement 2.2
Madras Cements 1.0
Zuari-Italcementi 1.6
ANNOUNCED - COMPOSITE CLINKER ADDITIONS 7.9 3.1 16.8
Chettinad 0.5
Birla Corp 1.0
ACC Gagal 1.0
ACEL 1.0
Gujarat Ambuja (G) 1.0
Grasim (G) 0.3 1.3
ACC-Bargarh/Damodar 0.6
ANNOUNCED - GRINDING ADDITIONS 2.3 4.4 0.0
ANNOUNCED CAPACITY ADDITIONS - TOTAL 10.2 7.5 16.8
Expected Debottlenecking Across The Industry 1.5 1.6 1.7
TOTAL CAPACITY ADDITION 11.7 9.1 18.5
Source: Industry, Media reports

Shree – A Cost Leader

Shree is arguably the lowest cost producer of cement in the industry with an
operating cost of around Rs1400/ton.

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Power, fuel & freight costs together constitute around 55% of Shree’s operating
cost versus 60-70% for most other producers. This advantage is partly offset by
higher raw material costs especially limestone & fly-ash. Limestone costs are high
likely owing to location of Shree’s Beawar unit at a distance from limestone
mines.

Proforma Comparison Of FY06E Cost Structure - Shree Vs Cement Majors

Rs/ton Shree ACC* UltraTech^ Grasim-Cement
Raw materials 240 439 128 106
Wages 92 158 53 80
Power 133 267 276 322
Fuel 287 293 279 288
Freight 349 411 430 557
Others 287 589 613 393
Total operating cost 1388 2156 1779 1,745
*ACC numbers are for nine months ending Dec '05; ^UltraTech's costs are per ton of total - domestic & export - volume. Source: ML Research

Shree’s cost leadership is mostly attributable to 3 factors:

1) Pet coke usage instead of coal: Shree uses relatively cheaper pet coke as
its key energy source. Pet coke is cheaper than coal per unit of energy,
despite a sharp rise in pet coke prices over the last 1-2 years. Assuming 20-
25% YoY rise in pet coke prices through FY07E, we estimate Shree’s cost of
capitive power generation at ~Rs2/unit versus around Rs6/unit for state-grid
power and ~Rs2.3/unit for coal-based captive power plants.

While some other cement companies have also started using pet coke, it
may take time for these companies to completely substitute their existing
energy mix. Fuel substitution carries risk of interruptions in the production
process and most companies may not want to suffer any loss of production
during the current uptrend in cement prices.

We find Shree has an earnings sensitivity of ~6% for every 10% change in
pet coke prices.

2) Relatively high efficiency: Shree scores better than most of its peers in
use of power and fuel (key cost inputs) for cement production. We expect
these efficiencies to sustain.

Table 5: Comparison of FY05A consumption norms: Shree Vs Cement Majors

Power (KwH/ton) Coal (Kgs/ton)
Shree Cement 75 110
ACC 106 137
Ultratech 87 130
Grasim 83 127
Source: Company Reports

3) Locational proximity to key markets: Shree’s freight costs are low in

comparison with most other producers in the industry and in Rajasthan. This
is owing to Shree’s concentrated sales effort and its relatively better
geographical proximity to its principal markets of Delhi & Haryana that
account for around 40% of the company’s total sales volumes. Shree’s lead
distance per ton of cement currently averages around 373kms.

Most of the above cost advantages should sustain on the expanded capacity for 3
reasons:

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1) The new Ras unit is also located close to the primary cement markets, hence
freight costs will stay low.

2) Limestone costs could be lower as the Ras unit is located at the pit-head of
the limestone mines, unlike the Beawar unit that requires transportation of
limestone over a distance of around 40 kms.

3) Shree has hiked its existing captive power capacity from 36MW to 42MW to
partly meet requirements for the expanded capacity. Further, in FY07E, the
company will set up additional 18MW captive power capacity to meet power
requirements of the new unit.

Earnings Outlook
50% YoY Earnings Growth In FY07E
We forecast Shree’s earnings to grow ~50% YoY in FY07 on the back of 50%
YoY growth in EBITDA. The strong EBITDA growth will be supported by a
combination of higher volumes (+36% YoY) and better cement prices (+7% YoY).
Our volume forecasts assume 8% YoY demand growth in the overall north India
market and ~80% capacity utilization of the recently commissioned Ras unit.

Flat FY08E But Potential For Upside Surprise

Beyond FY07, we currently expect Shree’s earnings to remain flat (-5%) YoY.
This modest long-term outlook reflects our caution over strong capacity-addition
pipeline in north India that could drag cement prices in FY08E (-4% YoY).

Our conversations with the industry indicate that we may be too conservative in
assuming timely commissioning of the entire pipeline. If there is any push-back in
commissioning of new capacities, we could witness upside surprise to our FY08
estimates.

Shree’s earnings change by 7% in FY07E and 8% in FY08E, for every 1%

change in cement prices.

Earnings Sensitivity To Cement Prices & Gearing: Shree Versus Majors

% Change In Earnings For 1% Change In
Cement Prices Gearing
FY07E FY08E FY06E
Shree 7% 8% -1.0
ACC 5% 4% -0.5
UltraTech 7% 7% -1.2
Grasim 4% 4% -0.8
Source: ML Estimates

Valuation Outlook
Strong Historical Outperformance Vs Majors
Shree’s share price has risen 7-fold over the last 2 ½ years, strongly
outperforming cement majors and the local market. The rally was likely driven by:

1) Investor appreciation of the company’s cost reduction efforts that led to

strong YoY reduction in operating cost/ton by 9% and 10% during FY02 and
FY03, respectively.

2) Firm uptrend in cement prices across the industry from FY04 onwards.

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3) Persistent expectation of further industry consolidation led by global and

domestic cement majors.

Chart 1: Relative Performance Of Shree Versus Cement Majors

700

600

500 Shree

400

300

200

100

0
Oct-02

Oct-03

Oct-04

Oct-05
Apr-02

Jul-02

Jan-03

Apr-03

Jul-03

Jan-04

Apr-04

Jul-04

Jan-05

Apr-05

Jul-05

Jan-06
Shree Cement Adj BSE Adj ACC Adj Grasim Adj Ultratech

Source: ML Research

Valuations Are Still Cheap, PO of Rs900/sh

Shree is currently trading at a PE of ~12x Mar ’07 and EV/EBITDA of 8.5x Mar
’07. This represents a 20-30% discount versus current valuations of cement
majors (pls see valuation comparison below). We think the valuation discount is
unjustified given that Shree’s EBITDA/ton ranks among the highest in the
industry. In our view, any discount for size should be relatively small (~10%) given
the relatively low scale-economies in this industry and strong cost credentials of
the company.

Our 12-month price target of Rs900/sh places Shree at an EV/EBITDA of 12x Mar
’07, implying ~10% discount versus our target valuation for the cement majors.
Our expectation of 13x EV/E for the cement majors pegs their FY07 valuations on
par with peak levels witnessed during the previous cyclical boom in FY95-96.
Among the large-cap cement stocks, ACC is our top pick.

On an EV/capacity basis, Shree is currently trading ~US$120/ton, almost at par

with cement majors. We believe Shree should trade at a premium given the
superior per-ton profitability of its capacity. Our PO places Shree’s FY07E-
EV/capacity at ~US$175/ton.

Table 6: Proforma Trend In EBITDA/ton For Shree Versus Cement Majors

Yr to 31 March (Rs/ton ) FY04A FY05A YTDFY06A FY06E FY07E
Shree 461 555 634 629 693
ACC* 255 386 407 438 512
UltraTech^ 215 231 312 329 386
Grasim-Grey Cement* 280 367 420 451 548
*Proforma numbers as these companies have some non-cement businesses; ^UltraTech's numbers are per ton of total (cement & clinker) volume.
Source: Company Reports, ML Estimates

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Table 7: Valuation Comparison Of Shree Versus Majors

QRQ Share Price M Cap (US$ mn) EPS CAGR (FY06E-08E) PE Relative (FY07E)
Shree Cement [XREEF] C-1-7/Buy 605 468 20% 0.7
ACC [ADCLF] C-1-7/Buy 587 2406 31% 1.1
Grasim- Cement (Consolidated) [GRSJF/GRSJY] C-1-7/Buy 1699 3540 16% 1.0
UltraTech [XDJNF] C-2-7/Neutral 545 1507 41% 1.7
BSE30 9981
Yr To 31 March FY04A FY05A FY06E FY07E FY08E
EV/Capacity (US$/ton)
Shree Cement 210 207 119 123 96
ACC 151 146 137 127 120
Grasim- Cement (Consolidated) 128 128 137 131 123
UltraTech 110 110 110 110 109
REPLACEMENT COST BENCHMARK 80 80 80 80 80

RoE (%)
Shree Cement 5 23 37 36 27
ACC 14 23 24 28 29
Grasim- Cement (Consolidated) 24 36 32 30 26
UltraTech 7 4 13 19 19
MARKET RoE 20 23 24 24 NA

P/E (x)
Shree Cement 161.7 25.8 17.4 11.6 12.1
ACC 59.5 30.7 24.7 17.8 14.4
Grasim- Overall 22.0 16.1 19.3 16.0 14.4
UltraTech 174.6 178.3 46.3 27.4 23.2
MARKET PE 18.8 22.4 18.9 16.0 NA

EV/EBITDA (x)
Shree Cement 18.4 14.1 12.3 8.5 8.0
ACC 21.6 15.8 13.4 10.9 8.7
Grasim- Cement (Consolidated) 23.1 18.8 15.1 11.7 9.2
UltraTech 23.0 22.5 16.1 12.5 9.8
Local Market EV/EBITDA 12.5 10.2 12.5 10.6 NA
Source: ML Estimates, Company Reports

Capex Plans
Shree has plentiful limestone reserves (more than 40 years) allowing room for
further capacity expansion if required. Post the greenfield expansion that was
recently commissioned at Ras, Shree is working towards doubling capacity at
Ras. Shree aims to have a total cement capacity of 6mn tpa by Mar ’07. Shree
recognizes the geographical risk owing to its locational concentration in
Rajasthan/north-India. The company is open to growth in other regions once it
captures 20-25% of the north India market.

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Table 8: Profit & Loss - Shree Cement

Yr to 31 Mar (Rs mn) 2004 2005 2006E 2007E 2008E
Turnover 4,732 5,821 6,228 9,211 10,559
Operating costs (3,422) (4,123) (4,285) (6,301) (7,510)
EBITDA 1,310 1,698 1,943 2,910 3,050
EBITDA Margin (%) 27.7 29.2 31.2 31.6 28.9
Depreciation (734) (687) (493) (596) (769)
Operating profit 576 1,011 1,449 2,314 2,281
Recurring 'other' items 29 23 23 23 23
EBIT 604 1,035 1,473 2,337 2,304
Net interest income(expense) (387) (198) (148) (271) (239)
Profit before tax 217 836 1,325 2,066 2,065
Tax (87) (21) (112) (248) (330)
Profit after tax 130 816 1,213 1,818 1,735
Recurring net profit 130 816 1,213 1,818 1,735
Net Margin (%) 2.8 14.0 19.5 19.7 16.4
Non-recurring items 0 (525) (1,300) 180 0
Reported net profit 130 290 (87) 1,998 1,735
Source: ML Estimates, Company Reports

Table 9: Cash Flow - Shree Cement

Yr to 31 Mar (Rs mn) 2004 2005 2006E 2007E 2008E
Recurring net profit 130 816 1,213 1,818 1,735
Profit kept from minorities 0 0 0 0 0
Deferred taxes 70 (4) 0 74 157
Depreciation 1,012 687 493 596 769
Changes in working capital (263) 541 (38) (315) (154)
Non-recurring items
Operating Cashflow 949 2,040 1,668 2,173 2,506

Capital expenditure (681) (2,213) (1,950) (2,940) (439)

Net acquisitions 0 8 0 0 0
Investing Cashflow (681) (2,205) (1,950) (2,940) (439)
Other Items 0 880 0 0 0
Free cash flow 268 714 (282) (767) 2,067

Dividends paid (118) (138) (182) (273) (260)

Equity issued 0 0 0 0 0
(Inc)/dec in net debt 151 577 (464) (1,040) 1,806
Financing Cashflow 33 440 (646) (1,313) 1,546
Source: ML Estimates, Company Reports

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Table 10: Balance Sheet - Shree Cement

Yr to 31 Mar (Rs mn) 2004 2005 2006E 2007E 2008E
Fixed assets 5,370 6,353 6,510 9,034 8,705
Investments in associates 0 0 0 0 0
Other non-current assets 8 0 0 0 0
Inventory 588 726 769 1,122 1,295
Trade debtors 297 239 254 370 427
Other working capital assets 756 421 446 651 751
Cash & cash equivalents 76 130 130 130 131
Current assets 1,718 1,517 1,599 2,273 2,604

Working capital liabilities (452) (739) (782) (1,142) (1,318)

Short-term debt (1,177) (504) (516) (615) (664)
Current liabilities (1,630) (1,243) (1,298) (1,757) (1,982)

Total net assets 5,466 6,627 6,810 9,550 9,328

Shareholders funds 2,514 3,529 3,261 4,986 6,461

Minority interest 0 0 0 0 0
Long-term debt 2,317 2,467 2,919 3,860 2,006
Deferred liabilities 635 631 631 705 861
Capital Employed 5,465 6,627 6,810 9,551 9,328
Source: ML Estimates, Company Reports

Table 11: Ratios - Shree Cement

Yr to 31 Mar (Rs mn) 2004 2005 2006E 2007E 2008E
FDREPS (Rs) 3.7 23.4 34.8 52.2 49.8
FDREPS growth (%) 94.6 525.7 48.7 49.9 -4.6
PE (X) 161.7 25.8 17.4 11.6 12.1
P/GCF (X) 22.2 10.3 12.6 9.7 8.4
P/FCF (X) 78.8 na na na 10.2
P/BV (X) 8.4 6.0 6.5 4.2 3.3
Gearing -136% -80% -101% -87% -39%
EV/Capacity (US$/ton) 210.0 206.9 119.3 123.0 95.6
Dividend yield (%) 0.5 0.6 0.8 0.9 1.0
Dividend payout (%) 80.2 14.9 13.3 10.8 12.3
Source: ML Estimates, Company Reports

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Price Objective Basis & Risk

Our 12-month price target of Rs900/sh puts Shree at an EV/EBITDA of 12x Mar
’07E, implying ~10% discount versus our target valuation of 13x FY07E for the
cement majors.

Key risks stem from 1) unexpected demand slowdown in north India and/or 2)
unforeseen rise in energy costs.

Analyst Certification
I, Reena Verma Bhasin, CFA, hereby certify that the views expressed in this
research report accurately reflect my personal views about the subject securities
and issuers. I also certify that no part of my compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or view expressed in
this research report.

Special Disclosures
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iQmethod SM Measures Definitions

Business Performance Numerator Denominator
Return On Capital Employed NOPAT = (EBIT + Interest Income) * (1 - Tax Rate) + Goodwill Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill
Amortization Amortization
Return On Equity Net Income Shareholders’ Equity
Operating Margin Operating Profit Sales
Earnings Growth Expected 5-Year CAGR From Latest Actual N/A
Free Cash Flow Cash Flow From Operations – Total Capex N/A
Quality of Earnings
Cash Realization Ratio Cash Flow From Operations Net Income
Asset Replacement Ratio Capex Depreciation
Tax Rate Tax Charge Pre-Tax Income
Net Debt-To-Equity Ratio Net Debt = Total Debt, Less Cash & Equivalents Total Equity
Interest Cover EBIT Interest Expense
Valuation Toolkit
Price / Earnings Ratio Current Share Price Diluted Earnings Per Share (Basis As Specified)
Price / Book Value Current Share Price Shareholders’ Equity / Current Basic Shares
Dividend Yield Annualised Declared Cash Dividend Current Share Price
Free Cash Flow Yield Cash Flow From Operations – Total Capex Market Cap. = Current Share Price * Current Basic Shares
Enterprise Value / Sales EV = Current Share Price * Current Shares + Minority Equity + Net Debt + Sales
Other LT Liabilities
EV / EBITDA Enterprise Value Basic EBIT + Depreciation + Amortization
iQmethod SM is the set of Merrill Lynch standard measures that serve to maintain global consistency under three broad headings: Business Performance, Quality of Earnings, and validations. The key features of iQmethod are: A consistently
structured, detailed, and transparent methodology. Guidelines to maximize the effectiveness of the comparative valuation process, and to identify some common pitfalls.
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Important Disclosures

Investment Rating Distribution: Building Group(as of 31 Dec 2005)

Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 29 45.31% Buy 4 13.79%
Neutral 29 45.31% Neutral 4 13.79%
Sell 6 9.38% Sell 1 16.67%
Investment Rating Distribution: Global Group(as of 31 Dec 2005)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1119 40.44% Buy 376 33.60%
Neutral 1429 51.64% Neutral 401 28.06%
Sell 219 7.91% Sell 44 20.09%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK
RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return
(price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk
Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility
Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend
considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.

In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for
sale: Shree Cements.
The country in which this company is organized has certain laws or regulations that limit or restrict ownership of the company's shares by nationals of other
countries: Shree Cements.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill
Lynch, including profits derived from investment banking revenues.

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