Cement Result Review

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					                                                                                                                   Result Review | 3QFY2012
                                                                                                                             February 22, 2012



 Cement Sector
                                                                                                   V Srinivasan
                                                                                                   022-39357800 Ext: 6831
                                                                                                   v.srinivasan@angelbroking.com
 Robust performance
                                                                                                   Sourabh Taparia
 Healthy performance on the volume front: During 3QFY2012, our cement
                                                                                                   022-39357800 Ext 6872
 universe posted reasonably healthy 8.1% yoy growth in volumes, much better
                                                                                                   sourabh.taparia@angelbroking.com
 than 3.9% dispatches growth reported in 1HFY2012. Volume growth in
 3QFY2012 was led by strong pick-up in demand across regions, with the western
 region posting the highest 25.0% yoy growth. The southern region, which had
 been posting a decline in demand over the past six quarters, showed signs of
 revival with 3.2% yoy growth, aided by cooling of Telangana agitation. Demand
 in the western region was boosted by improved offtake from government-
 sponsored projects, infrastructure and individual housing segments. Madras
 Cements, predominantly a south-based player, was the top performer in the
 universe, registering 19.1% yoy volume growth. Ambuja Cements was the top
 performer amongst large players, reporting 10.8% yoy growth.

 Strong performance on the realization front negates cost pressure: Power and fuel
 cost for the universe rose by 10.7% yoy due to twin effects of higher coal prices
 (both domestic and imports) and cheaper INR vs. USD. Freight costs were also
 higher by 12.5% yoy due to the increase in diesel costs and surcharge levied by
 railways. However, growth in cement realization was too strong to offset cost
 pressures. OPM of the cement universe rose by healthy 267bp yoy to 21.6%, with
 all companies under our coverage barring Ambuja Cements posting OPM
 expansion in the range of 100bp to 1,350bp on a yoy basis. JK Lakshmi posted
 the highest expansion in OPM of 1,352bp yoy to 21.4%. Cement realization,
 which had remained strong in the past one year due to producer discipline, was
 aided by pick-up in demand. Our cement universe posted 18.4% yoy higher
 realization during the quarter; on a sequential basis, realization was higher by 7.5%.

 Outlook and valuation: Going ahead, the rate of capacity addition is set to
 moderate, with only 31mtpa of capacity expected to be added over FY2012-13E,
 much lower than 55mtpa added over FY2010-11. However, demand slowdown
 has become a bigger concern with FY2012E demand growth expected to be
 ~5%. Thus all-India utilization in FY2012 is expected to be 72.4%. In our view,
 the cement sector’s valuations in terms of EV/sales and EV/tonne are trading
 ahead of the cycle when compared to utilization levels and are almost 40% more
 expensive than historical valuations during periods of similar utilization levels.
 Hence, we maintain our Neutral view on the sector. That said, we maintain our
 Buy recommendation on JK Lakshmi Cement due to its attractive valuations, as it
 is trading at EV/tonne of US$28 on FY2013E capacity.

 Exhibit 1: Relative valuation
                        CMP Target            Sales (` cr)    OPM (%)       PAT (` cr)     EV/EBITDA (x)      EV/tonne (US $)        Reco Upside
 Company                   (`)     (`)       FY12E    FY13E FY12E FY13E FY12E FY13E        FY12E   FY13E     FY12E      FY13E                (%)
 UltraTech             1,480             - 18,228 20,033      21.7   21.7 2,037 2,267       10.3     9.0          159       154    Neutral     -
 ACC*                  1,325             -   9,660 10,874     20.3   20.6 1,325 1,311       11.6    10.0          140       139    Neutral     -
 Ambuja Cements*         165             -   8,603    9,777   23.4   24.0 1,229 1,422       11.3     9.6          158       157    Neutral     -
 Shree Cement          2,691             -   4,497    5,383   25.3   26.1   237      421     7.5     5.5          104        82    Neutral     -
 India Cements           100             -   4,079    4,318   19.3   18.6   298      301     5.4     5.3           56        55    Neutral     -
 Madras Cements          140             -   3,165    3,327   30.3   28.2   377      379     6.2     5.7           63        55    Neutral     -
 JK Lakshmi Cement        62       79        1,629    1,868   18.5   20.4   123      149     3.8     2.6           34        28       Buy    27
 Source: Company, Angel Research, Note: * December ending companies, EV/tonne adjusted for CPP
Please refer to important disclosures at the end of this report                                                                               1
                                                                                            3QFY2012 Results Review | Cement




                                          Universe reports 28.9% top-line growth in 3QFY2012
                                          Exhibit 1: 3QFY2012 revenue growth strong on a yoy basis...
Revenue growth was the highest for           (%)
players with capacities in North India,     70.0
                                                                                          61.4
primarily because of strong yoy             60.0
realization growth in the northern and
                                            50.0
western regions – the main markets for                                                                                        39.7
these players                               40.0
                                                                   27.8       30.2                               28.0
                                            30.0       23.1
                                                                                                      20.4
                                            20.0

                                            10.0

                                              0.0
                                                     UltraTech     ACC       Ambuja       Shree      India     Madras JK Lakshmi
                                                                             Cements     Cement     Cements    Cements Cement

                                          Source: Company, Angel Research, Note: The red horizontal line represents the average for our
                                          coverage universe; Shree Cement’s cement business posted revenue growth of 44.9%


                                          Exhibit 2: ...due to a sharp yoy increase in realization
                                            (%)
                                           40.0
                                           35.0                                         33.2

                                           30.0                                                                              26.3
                                           25.0
                                                                 20.3
                                           20.0       16.4                   17.5                   16.2
                                           15.0
                                                                                                                8.6
                                           10.0
                                             5.0
                                             0.0
                                                    Ultra Tech    ACC       Ambuja      Shree      India       Madras JK Lakshmi
                                                     Cement                 Cements    Cement     Cements     Cements Cements


                                          Source: Company, Angel Research


                                          Exhibit 3: ...and healthy yoy growth in dispatches
                                              (%)
                                             20.0                                                                19.1
                                             18.0
                                             16.0
                                             14.0                                                                             12.8
                                             12.0                             10.8
                                             10.0                                          8.8
                                              8.0                                                     6.9
                                                        5.7         6.3
                                              6.0
                                              4.0
                                              2.0
                                              0.0
                                                     UltraTech     ACC       Ambuja       Shree      India     Madras JK Lakshmi
                                                                             Cements     Cement     Cements    Cements Cement

                                          Source: Company, Angel Research




February 22, 2012                                                                                                                    2
                                                                                         3QFY2012 Results Review | Cement




                                           Exhibit 4: Realization per tonne growth on a qoq basis
South-based players witnessed a qoq           (%)
                                             16.0                                                                    15.0
decline in realization because 3Q is the
                                             14.0
monsoon season for major part of                                    11.3      11.8      11.4
                                             12.0
southern India                               10.0
                                               8.0        6.0
                                               6.0
                                               4.0
                                               2.0                                                0.7
                                               0.0
                                              (2.0)
                                              (4.0)                                                         (2.4)
                                                       Ultra Tech   ACC      Ambuja     Shree    India     Madras JK Lakshmi
                                                        Cement               Cements   Cement   Cements   Cements Cements


                                           Source: Company, Angel Research


                                           Operating costs per tonne of the universe rose by 9.9% yoy

                                           Exhibit 5: Power and fuel cost per tonne increased on a yoy basis
Both imported as well as domestic coal         (%)
costs were higher on a yoy basis. Power       25.0                  21.7
tariffs were also higher on a yoy basis.      20.0        18.1
However, for JK Lakshmi Cement,               15.0
                                                                                        10.8
power and fuel costs per tonne declined
                                              10.0                                                7.4
because of improvement in usage
                                               5.0
efficiency                                                                     (4.6)                        (0.2)    (8.5)
                                               0.0

                                               (5.0)

                                             (10.0)
                                                       Ultra Tech   ACC      Ambuja     Shree    India    Madras JK Lakshmi
                                                        Cement               Cements   Cement   Cements   Cements Cements


                                           Source: Company, Angel Research


                                           Exhibit 6: Freight cost per tonne also witnessed a yoy increase
Higher petroleum products cost and            (%)
higher railway freight charges played        25.0
the spoiler here                                                                        21.1
                                             20.0                   18.3
                                                                                                           15.6
                                             15.0                             12.2
                                                          9.1                                                         8.4
                                             10.0
                                                                                                  5.1
                                              5.0

                                              0.0
                                                       Ultra Tech   ACC      Ambuja     Shree    India     Madras JK Lakshmi
                                                        Cement               Cements   Cement   Cements   Cements Cements


                                           Source: Company, Angel Research




February 22, 2012                                                                                                              3
                                                                                         3QFY2012 Results Review | Cement




                                          Operating margin improved despite higher costs
                                          Exhibit 7: Operating margin improvement on a yoy basis...
Resultantly, all players barring north-      (bp)
based players faced margin pressure.      1,600
                                                                                                                     1,352
Northern players witnessed a huge         1,400
increase in margins on account of a       1,200
sharp yoy increase in realization         1,000
                                            800                                        697
coupled with cost savings due to usage
efficiency (particularly for JK Lakshmi     600                                                 443
                                            400       284                                                 243
Cement power consumption per tonne
                                            200                  101
of cement declined from 80 to 77)                                            (63)
                                              0
                                           (200)
                                                    UltraTech   ACC         Ambuja     Shree    India    Madras    JK Lakshmi
                                                                            Cements   Cement   Cements   Cements    Cement


                                          Source: Company, Angel Research




February 22, 2012                                                                                                               4
                                                                                                     3QFY2012 Results Review | Cement




  Research Team Tel: 022 - 39357800                   E-mail: research@angelbroking.com                      Website: www.angelbroking.com

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 Disclosure of Interest Statement
                         Analyst ownership     Angel and its Group companies    Angel and its Group companies'         Broking relationship
                           of the stock            ownership of the stock       Directors ownership of the stock      with company covered
 ACC                            No                          No                                No                               No
 Ambuja                         No                          No                                No                               No
 India Cements                  No                          No                                No                               No
 J K Lakshmi                    No                          No                                No                               No
 Madras Cements                 No                          No                                No                               No
 Shree Cements                  No                          No                                No                               No
 UltraTech                      No                          No                                No                               No

  Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors


 Ratings (Returns):              Buy (> 15%)                            Accumulate (5% to 15%)                     Neutral (-5 to 5%)
                                 Reduce (-5% to 15%)                    Sell (< -15%)

February 22, 2012                                                                                                                             5
                                                                                                                                                                                                           3QFY2012 Results Review | Cement



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Research Team
Fundamental:
Sarabjit Kour Nangra                                                                 VP-Research, Pharmaceutical                                                                              sarabjit@angelbroking.com
Vaibhav Agrawal                                                                      VP-Research, Banking                                                                                     vaibhav.agrawal@angelbroking.com
Shailesh Kanani                                                                      Infrastructure                                                                                           shailesh.kanani@angelbroking.com
Bhavesh Chauhan                                                                      Metals & Mining                                                                                          bhaveshu.chauhan@angelbroking.com
Sharan Lillaney                                                                      Mid-cap                                                                                                  sharanb.lillaney@angelbroking.com
V Srinivasan                                                                         Research Associate (Cement, Power)                                                                       v.srinivasan@angelbroking.com
Yaresh Kothari                                                                       Research Associate (Automobile)                                                                          yareshb.kothari@angelbroking.com
Hemang Thaker                                                                        Research Associate (Capital Goods)                                                                       hemang.thaker@angelbroking.com
Nitin Arora                                                                          Research Associate (Infra, Real Estate)                                                                  nitin.arora@angelbroking.com
Ankita Somani                                                                        Research Associate (IT, Telecom)                                                                         ankita.somani@angelbroking.com
Varun Varma                                                                          Research Associate (Banking)                                                                             varun.varma@angelbroking.com
Sourabh Taparia                                                                      Research Associate (Cement, Power)                                                                       Sourabh.taparia@angelbroking.com

Technicals:
Shardul Kulkarni                                                                     Sr. Technical Analyst                                                                                    shardul.kulkarni@angelbroking.com
Sameet Chavan                                                                        Technical Analyst                                                                                        sameet.chavan@angelbroking.com
Sacchitanand Uttekar                                                                 Technical Analyst                                                                                        sacchitanand.uttekar@angelbroking.com

Derivatives:
Siddarth Bhamre                                                                      Head - Derivatives                                                                                       siddarth.bhamre@angelbroking.com

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Mayuresh Joshi                                                                       VP - Institutional Sales                                                                                 mayuresh.joshi@angelbroking.com
Hiten Sampat                                                                         Sr. A.V.P- Institution sales                                                                             Hiten.Sampat@angelbroking.com
Meenakshi Chavan                                                                     Dealer                                                                                                   meenakshis.chavan@angelbroking.com
Gaurang Tisani                                                                       Dealer                                                                                                   gaurangp.tisani@angelbroking.com
Akshay Shah                                                                          Sr. Executive                                                                                            akshayr.shah@angelbroking.com

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Simran Kaur                                                                          Research Editor                                                                                          simran.kaur@angelbroking.com
Dilip Patel                                                                          Production                                                                                               dilipm.patel@angelbroking.com




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 February 22, 2012                                                                                                                                                                                                                                                                          6