INSTITUTIONAL EQUITY RESEARCH Cement Sectorbackoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Cement_Sector_Update_and...ACC Ltd. Static 1,830 1,547 19% 65 77 24 20 13 11 121

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Cement Sector FY19 to be a turnaround year INDIA | CEMENT | Sector Update

10 April 2018

Read this report to find out: • Why FY19 will be a turnaround year, like 2004 was. • Why we expect UltraTech to lead the cement‐price recovery from Q1FY19. • Why Dalmia Bharat is scaling up to be the most premium stock. • How brand consolidation for ACC and Ambuja will help them and the industry.

Key challenges are behind us, FY19 to be a year of execution: FY18 was a landmark year for the industry. Despite multiple micro and macro challenges, (such as demonetisation, GST, RERA, bans on overloading, sand mining, and pet coke, and the UltraTech‐Jaypee deal), many of which were structural, the industry has delivered reasonably good operating results. FY19 will be a ‘year of pure execution’ driven by improving operating efficiencies, focus on a sustainable rise in volumes, and the industry re‐establishing its attention on improving cement prices, led by UltraTech. The consolidation phase is almost over: Most ‘consolidation targets’ already have potential owners and from here, incremental consolidation will be slow. Industry profile and player dynamics have changed significantly in the last two decades: In the 2000s, current industry leaders such as UltraTech, Dalmia Bharat, Shree Cement, were not as influential. UltraTech did not exist before 2004, but in a short span of less than 14 years, it is the largest industry player. Expect rational behaviour from here; capex will be selective and much slower: In their zeal to gain market share, aggressive manufacturers added robust capacity, leading to capacity utilisations collapsing from peak full capacity in 2008 to less than 70%. However, capex helped many manufacturers gain scale and size. From here, we expect the industry to consolidate its position and then announce greenfield capex. Brownfield expansions and revival of unproductive assets will drive capex from FY19 to FY21. Methods for assessing industry and individual manufacturers are very different now: Historically, the industry has been assessed on volume growth, realisation improvement, efficiency levels, and utilisation increases. Though these parameters will still be used, rather than percentage improvements, one must look at structural shifts and real growth in these numbers over the longer term. These absolute parameters have led to the re‐rating and de‐rating of valuations for individual manufacturers. Pure yoy / qoq growth numbers may lead to incorrect decision‐making. De‐risked business models will have a winning edge: The industry today is a mix of all kinds of manufacturers – aggressive, conservative, defensive, and static. FY19‐21 will yield better results for manufacturers who have been aggressive, as they would have intentionally or unintentionally better de‐risked their business models. Conservative ones have been reluctant to take bold decisions while defensive ones continue to remain followers and are worse‐off. The static ones find it difficult to adapt to new developments, hence, they will eventually lose out. Risks: (1) A collapse in volume momentum. (2) The industry does not work towards sustainable price improvement despite strong volumes. Participation of leaders such as UltraTech is a must for this.

Companies ACC Reco NeutralCMP, Rs 1,547Target Price, Rs 1,830

Ambuja Cements Reco BuyCMP, Rs 237Target Price, Rs 300

UltraTech Cement Reco BuyCMP, Rs 3,918Target Price, Rs 4,800

Shree Cement Reco NeutralCMP, Rs 17,108Target Price, Rs 18,000

Dalmia Bharat Reco BuyCMP, Rs 2,780Target Price, Rs 3,500

India Cements Reco BuyCMP, Rs 151Target Price, Rs 260

JK Lakshmi Cement Reco BuyCMP, Rs 437Target Price, Rs 600

JK Cement Reco BuyCMP, Rs 956Target Price, Rs 1,400

Mangalam Cement Reco BuyCMP, Rs 321Target Price, Rs 420

HeidelbergCement Reco BuyCMP, Rs 155Target Price, Rs 180

Sanghi Industries Reco BuyCMP, Rs 122Target Price, Rs 150

Star Cement Reco BuyCMP, Rs 127Target Price, Rs 150 Vaibhav Agarwal (+ 9122 6246 4124) [email protected]


CEMENT SECTOR UPDATE

Valuation Summary ___EPS (Rs) ___ ____P/E*____ __EV/EBITDA*__ ___EV/tonne___ Implied Company Competitive

Positioning TP (Rs) CMP

(Rs) Upside FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E target

EV/tn(FY20)

ACC Ltd. Static 1,830 1,547 19% 65 77 24 20 13 11 121 122 150Ambuja Cements Defensive 300 237 27% 9 10 27 23 11 10 146 150 190UltraTech Cement Aggressive 4,800 3,918 23% 137 173 29 23 15 13 202 197 235Dalmia Bharat Aggressive 3,500 2,780 26% 88 93 31 30 12 11 188 181 220Shree Cement Aggressive 18,000 17,108 5% 467 541 37 32 19 16 214 205 215JK Cement Conservative 1,400 956 46% 53 49 18 20 10 11 105 115 150JK Lakshmi Cement Conservative 600 437 37% 24 38 18 12 9 7 80 74 100India Cements Conservative 260 151 72% 9 13 17 12 8 7 70 70 100Mangalam Cement Defensive 420 321 31% 21 29 16 11 7 5 38 35 45HeidelbergCement Static 180 155 16% 7 7 23 22 10 9 107 100 115Sanghi Industries Conservative 150 122 23% 2 3 63 51 18 14 166 87 100Star Cement Defensive 150 127 18% 7 8 18 17 12 11 182 137 160

Source: PhillipCapital India Research estimates

Table of Contents FY18 has been a challenging year ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

The macro challenges ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

The micro challenges ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 4

Consolidation phase is almost over ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 7

Industry profile / player dynamics have changed quite a bit ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 8

We see rational behaviour from here, selective capex ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 8

Demand momentum is likely to sustain ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 10

Why we believe that green shoots of demand revival are now visible ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 11

Revival of pricing is a key challenge; incremental cost‐push will not be a concern ∙∙ 11

Cost overhangs are now behind ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 13

Companies Section ACC ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 15

Ambuja Cements ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 18

UltraTech Cement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 24

Shree Cement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 29

Dalmia Bharat ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 34

India Cements ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 38

JK Lakshmi Cement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 41

JK Cement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 44

Mangalam Cement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 47

HeidelbergCement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 50

Sanghi Industries ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 53

Star Cement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 61



All India cement statistics: Incremental demand growth will be much better than incremental supplies from here

Summary for: FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20ECAGR

12‐18ECAGR 18‐20E

EOP Cement Capacity (mtpa) 299 330 350 376 400 421 435 452 470 6.4% 3.9%Average Cement Capacity (mtpa) 293 315 340 363 388 411 428 444 461 6.5% 3.8%Growth YoY 8.8% 7.3% 8.1% 6.8% 6.9% 5.8% 4.3% 3.6% 3.9%Cement Production (mn tonnes) 225 247 256 271 283 280 295 317 343 4.6% 7.7%Growth YoY 7.2% 9.5% 3.7% 5.9% 4.6% ‐1.2% 5.4% 7.5% 8.0%Average Realisation (Rs/tonne) 4024 4314 4168 4387 4262 4267 4436 4686 4873 1.6% 4.8%Growth YoY 10.5% 7.2% ‐3.4% 5.2% ‐2.8% 0.1% 3.9% 5.6% 4.0%Average Opex (Rs/tonne) 3206 3394 3501 3668 3553 3460 3697 3797 3897 2.4% 2.7%Growth YoY 11.0% 5.9% 3.1% 4.8% ‐3.1% ‐2.6% 6.9% 2.7% 2.6%EBITDA/tonne (Rs/tonne) 818 919 668 719 709 808 739 889 976 ‐1.7% 15.0%Growth YoY 8.4% 12.4% ‐27.4% 7.6% ‐1.3% 13.9% ‐8.5% 20.3% 9.8%Average Cement Capacity Utilisation, (%) 77% 78% 75% 75% 73% 68% 69% 72% 74%

Source: PhillipCapital India Research estimates FY18 has been a challenging year FY18 was a landmark year for the industry, with numerous structural challenges such as demonetisation, RERA, and GST. It was among the worst years in terms of costs (around +7%), which were not supported by equivalent price hikes. Average realisations improved by only 4%, implying a fall in EBITDA of 8%. Despite this, there was a 5% volume growth pan‐India. Notably, apart from being structural, few of the challenges (such as demonetisation and RERA) were almost simultaneous. We have classified industry challenges into ‘macro’ and ‘micro’. The macro challenges Demonetisation: Demonetisation (November 2016) had a varied impact on the sector, depending on the region. While north, central, east, and northeast markets took an immediate hit, south and west felt an impact only towards the end of H1CY17. These markets were ‘less‐cash’ in the cement‐distribution system, but end markets in these regions (such as real estate and contractors) continued to depend on cash and were negatively affected, which in turn hurt distributors. To keep business running as usual, cement distributors sought support from cement manufacturers in the form of extended credit periods, which increased the working‐capital cycle of the industry, especially of southern manufacturers in H1CY17. The price leader in the south, India Cements, was most impacted – it saw a nearly Rs 3bn rise in its working capital requirements, which we believe will reverse in H1CY18. RERA: We have been saying that housing is (and will continue to be) the most important demand component for cement. Nearly 60% of cement demand comes from housing, making it the key delta for cement companies’ earnings, irrespective of the pace of infrastructure development in the country. Demand from infrastructure helps, but largely for gaining efficiencies of scale. When RERA came into force, cement volume growth collapsed, as demand from real‐estate construction came to a virtual standstill. Existing projects were tangled in legal formalities such as RERA registration and redefining execution guidelines, etc. The industry’s volume saw the worst drop in Q4FY17, when RERA was implemented, with no recovery even in Q1FY18. The fourth and first quarter of a financial year (March ending) are generally the best for operations, as this is the peak construction period. In the last seven years, the industry has never seen a 12% volume fall, but it happened in Q4FY17; subsequently, volumes fell 3% in Q1FY18.

FY18 – cost escalations not supported by equivalent price hikes led to fall in EBITDA/tonne. Despite this, volumes grew

After demonetisation, cement distributors sought support from cement manufacturers in the form of extended credit periods, which increased the working‐capital cycle of the industry

The industry’s volume saw the worst drop in Q4FY17, when RERA was implemented



Industry yoy volume growth trend

Source: Company, PhillipCapital India Research Implementation of GST: The rollout was smooth, except for initial teething troubles and a few structural changes in the distribution system, which impacted short‐term supply dynamics. The industry was able to maintain flattish yoy volumes (+1%) in Q2FY18, when GST was implemented. However, the rollout led to the proportion of ex‐factory sales increasing multi‐fold, as all buyers were inclined to take full credit by paying the requisite GST on the freight component. Because of GST, the differential EBITDA contribution gap between trade and non‐trade sales reduced significantly (to just about Rs 10 per bag from Rs 20‐25 earlier), as the differential in cost of sales for cement manufacturers narrowed. While this was more of an initial challenge (now streamlined), it is a key structural change in the distribution system of the sector (but for the better). The micro challenges Strict loading compliances severely dampened the earnings profile: After GST, and given the very strong stance on overloading by various NGOs and environmentalists, overloading is finished for the cement sector. Ground checks revealed extremely strict adherence to loading norms in almost all regions of the country. GST has made it extremely difficult for cement manufacturers to avoid complying with truck‐loading norms, as the processes of invoicing and transportation have become much more transparent. It is very unlikely that this will reverse, and ground checks suggest that there is a sustained impact of Rs 4‐10 per bag (depending on the region of operation and lead distance travelled). North and east markets have seen very high overloading in the past, so much so that few plants in east India were shut on grounds of non‐compliance to environmental norms. The overloading practices of these plants were severely damaging the roads around the plant and hurting the local habitat. In order to avoid local agitation, in many cases, loading compliance has also been applied to dumpers for limestone transfer from mines. Shree Cement has been worst hit, visible in the structural de‐rating of the stock by nearly 20%. Impact on Shree Cement was nearly 6x the industry – while the industry’s freight cost increased by 5% (yoy and qoq), Shree’s increased by 28% yoy, 20% qoq.

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Ground checks revealed extremely strict adherence to overloading norms in almost all regions of the country

Ground checks suggest that there is a sustained impact of Rs 4‐10 per bag

Post RERA, the industry volume growth collapsed significantly



Impact on freight cost after compliance with loading norms

Source: Company, PhillipCapital India Research Accommodating the sector’s largest consolidation – UltraTech buying Jaypee: This move had wide‐ranging implications. It affected the distribution dynamics in the states where the acquisitions were made, as UltraTech needed to be accommodated in terms of volume share. Volume pushers such as Shree Cement had to compromise on their volume‐push strategy. Another problem was the difference in the mind‐sets of the managements of UltraTech and Jaypee. While UltraTech has always been predominantly a brand‐conscious company, Jaypee’s business model has been based on a volume‐push strategy. It was difficult to convince erstwhile Jaypee distributors to immediately come on board with UltraTech’s ‘brand premium’ strategy. It is visible from the graph below that from the last two quarters, the industry is strongly compromising market share to accommodate UltraTech’s Jaypee acquisition. The correlation between UltraTech’s volume growth and the industry’s volume growth has completely reversed recently. UltraTech vs. the industry in terms of volume growth

Source: Company, PhillipCapital India Research

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Industry Shree CementRs/tonne

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UltraTech Industry

Companies such as Shree Cement had to compromise on their volume‐push strategy

The correlation between UltraTech’s volume growth and the industry’s volume growth has completely reversed recently

Shree was the worst impacted as compliance norms became stringent

Because of capitalising on Jaypee acquisition, volume growth correlation between UltraTech and industry reversed in the past three quarters



It is also visible from the graphs below that UltraTech has the power to define the industry’s net realisations. Since it has acquired Jaypee, UltraTech has led the industry’s realisation drop because of its aggressive volume‐push strategy to gain immediate market share. Net realisation growth of UltraTech and the industry

Source: Company, PhillipCapital India Research Sand‐mining bans dent cement demand in several states Sand is essential for cement usage. For manufacturing concrete, the ratio is four tonnes of sand for every tonne of cement. For other generic usage, for every tonne of cement, nearly eight tonnes of sand are required. Broadly, the ratio of cement to sand is 1:6. Many state governments of the country such as Tamil Nadu, Bihar, West Bengal, Rajasthan, and Uttar Pradesh have been regularly intervening in sand mining, denting the availability of sand. The worst impacted state is Tamil Nadu, where no resolution was in sight. Various NGOs and environmentalists have raised regular concerns about sand mining, because in many cases it is taken beyond the allotted quota (illegal sand mining). As a result, many states are now depending on ‘crush sand’ or imported sand to fulfil their requirements. The problem is that all states do not have enough crush‐sand infrastructure (factories, licenses) and not all states can import – this continues to affect sand availability. Though this issue is longstanding, FY18 was one of the worst years for cement demand because of lack of sand availability in the states mentioned above. Pet coke ban implemented by the Supreme Court, subsequently withdrawn In November 2017, the Supreme Court of India issued an order implementing a ban on pet coke usage by cement manufacturers in overall plant operations in Rajasthan, Haryana, and Uttar Pradesh. However, we found that during Q3FY18, many cement manufacturers in other regions also voluntarily changed their fuel (to coal from pet coke) anticipating a ban. Few state governments even issued ‘soft notices’ to cement manufacturers; while they did not outright ban pet coke, they seemed to advise cement manufacturers to stop using or avoid using pet coke. The industry filed a petition arguing that as long as emission norms of cement factories are within prescribed environmental norms, the industry should be allowed to use any fuel. This plea was partially successful and cement manufacturers were allowed to use pet coke in kiln operations, subject to the plant fulfilling environmental norms. However, power plants may not be able to use pet coke again.

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UltraTech has the power to define the industry’s net realisations

FY18 was one of the worst years for cement demand because of lack of sand availability

Broadly, the ratio of cement to sand is 1:6

Cement manufacturers were allowed to use pet coke in kiln operations, subject to the plant fulfilling environmental norms. However, power plants may not be able to use pet coke again

UltraTech’s price leadership is necessary for the industry



This was another setback for the industry in FY18. The stay, which lasted for nearly a quarter, had significant cost implications for cement manufacturers. Consolidation phase is almost over Industry consolidation is now touching its peak. Today, the top‐5 players control nearly 50% of the industry’s capacity. These same players used to control just 30% of capacity a decade ago. Going forward, we don’t anticipate any major consolidation moves, except for existing unproductive assets, which have already identified potential buyers. The share of the top‐5 in the total pie will remain stable or marginally improve from here. But, there is more scope… One of the key benefits that the industry is moving towards is reduced competition due to consolidation (with lesser brands) – such as UltraTech consolidating Jaypee in its umbrella and Dalmia Bharat unfolding a unified ‘Dalmia Cement’ brand portfolio. Brand consolidation also leads to rationalisation of the distribution network, with better alignment and synchronization of all channel partners, which eventually means better earnings potential for cement companies because of lower selling expenses. While these are bold calls to take, they can be very effective if executed correctly. ‘UltraTech’ and ‘Dalmia Cement’ as lead examples Though there are numerous precedents, the notable ones are two of the largest cement majors of the industry – UltraTech Cement and Dalmia Bharat. The UltraTech Cement brand did not exist before 2004 and Dalmia Cement had very minimal recognition until the beginning of 2010. These are good examples of brands being created with great efforts from their managements. Today, we can see the difference this brand strengthening has brought to both companies, in terms of bridging the realisation gap and making these companies the leaders in operating margins. We will discuss this in more detail in the individual company sections. Currently the biggest opportunity – brand consolidation of ACC and Ambuja This is a huge opportunity for these companies. Merging the brands will create synergies that could be much larger than the synergies created simply by a merger of the companies or by any agreement (such as an MSA). Notably, ACC is already a subsidiary of Ambuja. For both companies, the move will dramatically change their cost curve – with reduced selling and other expenses (discussed in detail in the Ambuja company section), and better price realisations. Possible reasons ACC and Ambuja are delaying brand consolidation: • ACC and Ambuja have argued that both brands have their own pros and cons,

and a brand merger will kill their brands. • Both companies fear disruptions to their distribution channels’ alignment. The

channel is unlikely to welcome this move as it would lower its earnings. • Substantial layoffs – both in the companies themselves and in their channel.

We don’t anticipate any major consolidation moves, except for existing unproductive assets, which have already identified potential buyers

Brand consolidation mean that peers have one lesser brand to compete with in the markets where both brands are present. This leads to price consolidation and stability, and improving pricing power



Industry profile / player dynamics have changed quite a bit The industry today is more mature than a decade ago. It has evolved both structurally and in size. Today, Dalmia Bharat, Shree Cement, and UltraTech (which had no material existence in early 2000) are amongst the largest players in the industry. They command significant bargaining power and define the sector’s operating dynamics. Industry is now accustomed to working at lower capacity utilisations The industry touched peak capacity utilisations in FY08, but since then, utilisation have dropped, driven by sizeable capex and capacity creation. In the last decade, the industry added capacity at a CAGR of nearly 9%, which should reduce to about 4% over FY18‐20. Today, the industry operates at about 70% utilisation (pan‐India) and based on our recent interactions with industry leaders, we believe the sector is now comfortable operating at lower utilisations. The industry exited its +80% capacity utilisations era in FY10, and it is unlikely to achieve these levels again in the next five years, even at the best demand‐growth expectations. At a pan‐India level, we expect utilisations to improve by about 5% in the next two years. However, they may differ on a regional basis. The industry has evolved a lot in terms of supply management and maintaining favourable pricing. Over FY18‐20, we see the CAGR of incremental supply at nearly half the CAGR of incremental demand. Smaller players have now become large, should behave more responsibly Many of the current industry leaders have evolved in size and scale in the capex cycle. Regional leaders such as Shree Cement and Dalmia Bharat are now multi‐regional leaders and are in the process of becoming pan‐India majors. We expect them to act more responsibly. Business strategies of these players differ; most of them have seen a dramatic shift and realignment. The industry does not depend only on capacity utilisations for earnings growth – scale efficiencies and pricing power are the other two important factors. We see rational behaviour from here, selective capex The toughest lesson that the industry learnt in the last capex cycle is that creation of ad‐hoc capacities, just driven by availability of limestone mining leases, can be disastrous. It also became judicious in creating capacities. The next phase of capacity addition by the industry will be much slower; we don’t expect more than 4% CAGR over the 4‐5 years. Existing industry leaders will lead capacity additions, with nearly half of the incremental capex; hence, this capex is unlikely to disturb industry discipline. The industry will mature more as existing players strengthen and get better bargaining power. FY19 capex will be driven by a revival of non‐productive assets We don’t expect any material greenfield or brownfield expansions to go on stream in FY19. More than 80% of the capex in FY19 will be driven by a revival of unproductive assets such as Binani Cement, Murli Industries, and Kalyanpur Cement. Dalmia Bharat has emerged as the leading contender for acquiring most of these assets; hence, it will be fair to say that UltraTech and Dalmia Bharat will gain maximum market share in FY19, driven by their capex. Brownfield will drive capex for FY20/21 We expect limited brownfield capacity additions in FY20/21, limited in size, unlikely to go beyond 15mn tonnes per annum. JK Cement, Wonder Cement, and Sanghi Industries will lead this expansion. Greenfield opportunities are limited, herculean task to execute greenfield capex Incremental greenfield capex will remain very limited. Only few capacity additions – Shree Cement in south India, UltraTech in central and north India, and Ambuja

Today, Dalmia Bharat, Shree Cement, and UltraTech are amongst the largest players in the industry

The industry now operates at about 70% utilisation (pan‐India); it seems comfortable operating at lower utilisations

At a pan‐India level, we expect industry utilisations to improve by about 5% in the next two years

Existing industry leaders will lead capacity additions, so industry disciplineis likely to remain intact

More than 80% of the capex in FY19 will be driven by a revival of unproductive assets such as Binani Cement, Murli Industries, and Kalyanpur Cement

We don’t expect greenfield capex of more than 20mn tonnes p.a. over the next three years



Cements in north India – remain visible. Split grinding units such as JK Lakshmi’s in east India will also be a part of this capex. Once these greenfield projects are executed, we don’t anticipate any new incremental and sizeable greenfield expansion announcements. Overall, we don’t expect greenfield capex of more than 20mn tonnes p.a. over the next three years. Executing a greenfield capacity is more tough than before – procuring land and obtaining environmental clearances is becoming increasingly difficult. Our resources indicate that execution in few of the greenfield projects (already announced) will be slow and unlikely to be completed on time. Difficult terrain for new entrants Many companies – such as Nirma Cement, JSW Cement, Emami Cement, Wonder Cement, Nuvoco Vistas (who acquired Lafarge’s east India assets), and Vadraj Cement (formerly ABG Cement) – entered the sector in the last 2‐3 years. Adani also has plans to enter the sector. There have been players such as Reliance Cement, who came in to the industry with ambitious plans, but ultimately left because of lack of expertise and eventually monetised its asset. While players such as Wonder Cement and Emami Cement have been quite successful, and are presumed to be focused and committed by industry peers, not all new players are perceived to be so. Greenfield executor Vadraj Cement is facing tough times in terms of working‐capital management, while Nuvoco Vistas, who came into the business by acquiring erstwhile assets of Lafarge India, has not yet been able to carry forward the legacy. JSW Cement is attempting to make it big through the inorganic or organic route, but it is yet to make a mark on the industry. Adani, as per our ground checks, is reconsidering entering the business because of the complications involved in setting up new capacities, and as the industry is already well catered by the established players. Assessment methodology of industry and individual manufacturers has evolved Judging the industry’s performance based on near‐term volume growth and pure utilisation improvements may not be correct anymore. We believe that identifying potential players who can keep surprising positively on a sustainable basis, and redefining their earnings potential will be the key to evaluate future performance. For example, UltraTech and Dalmia Bharat have surpassed the industry volume growth structurally with CAGRs of 7% and 19% over the past 24 quarters, whereas ACC and Ambuja have remained flat despite recent robust volume growth numbers. ACC and Ambuja, which used to be among the most premium stocks in terms of valuations, are finding it tough to match the valuations of UltraTech and Dalmia Bharat. In fact, even mid‐cap stocks such as JK Cement, with consistency in earnings and faster decision‐making, have moved closer to the valuations of ACC and Ambuja. From here, industry players should be assessed on the probability of improvement in return ratios, differing potential of capitalising on improvement in demand, and the ability to sustain structural volume growth (like UltraTech and Dalmia Bharat). The industry should be assessed more holistically rather than individually. De‐risked business models will have a winning edge over others: Aggressive manufacturers such as UltraTech and Dalmia Bharat have significantly de‐risked their business model (better than peers) by growing in size and scale, foraying into newer regions, and maintaining the best position on the cost curve. Such manufacturers have much better long‐term potential than their peers do, because of their defined roadmap to growth and proven execution capabilities.

Our ground checks reveal that only a few new entrants have been able to make a mark in the industry

ACC, Ambuja delivered high double‐digit volume growth, but this is only a recovery of what they have lost in the past six years to UltraTech and Dalmia Bharat

Aggressive manufacturers such as UltraTech and Dalmia Bharat have better long‐term potential



Erstwhile aggressive capacity creators and cost leaders such as Shree Cement may not continue to remain leaders of the industry in terms of valuation, as they have missed out significantly on brand creation, which will become an important factor for margin improvement ahead. Manufacturers who have worked simultaneously on all operating parameters (brand, cost, and capacity creation) will have a significant edge in terms of earnings delta over their peers (substantiated with examples in the companies section). Demand momentum is likely to sustain Pre‐election year augurs well for sustaining demand momentum: Historically, we have seen that cement demand starts gathering momentum nearly 15 months before elections, and it sustains till the elections begin. This is because of the enhanced focus of the central government on delivering the promises made for infrastructure creation, housing, etc., before it can ask for votes again. On an average, a +7% industry demand growth is a given in pre‐election years. Pre‐election demand trend

Source: Company, PhillipCapital India Research Infra demand will help utilisations, but not improve the earnings profile much Though we remain optimistic on the demand potential for cement improving from infrastructure creation such as roads, airports, metros, etc., infra‐based cement demand may not contribute much towards improving the earnings profile. This is because most of the supplies in the infra space are at predetermined negotiated rates. The bargaining power of cement companies on infra contracts is much lower, and the rates offered are chosen through competitive bidding. However, infra demand will help manufacturers gain in terms of better utilisations. Every 1% increase in capacity utilisation leads to a savings of Rs 10‐20/tonne of variable cost on a case‐to‐case basis. Housing will continue to remain the key driver Out of total cement demand, 60% comes from housing, of which nearly 50% is from the individual house builder (IHB) segment. This is the segment where the delta of pricing really plays out and which can contribute materially in improving the sector’s earnings profile, and thereby the return ratios. The IHB segment is the only ‘brand conscious’ demand for the cement sector. Players such as UltraTech, Dalmia Bharat, JK Cement, and JK Lakshmi, who have toiled to create a ‘brand pull’, will benefit. The rest are likely to miss out on the incremental earnings delta from housing demand.

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Demand growth in the pre‐election era tends to be robust



Why we believe that green shoots of demand revival are now visible? FY18 demand was about 5% even with multiple challenges We believe the best part of FY18 is that pan‐India demand grew at nearly 5% despite multiple challenges. Given the historical evidence of pre‐election demand, and reconciling it with current ground realities, we believe demand growth of 8% for FY19 is quite likely. What changes for the sector with a revival of demand growth? Even as we see 8% demand CAGR over FY19‐22, we don’t see capacity utilisations touching 80% on pan‐India basis anytime soon. What will change though is – as volume off‐take revives, the sector’s sentiment will improve. It has seen very low volume growth for the last 5‐7 years at 0‐6%, with FY18 becoming the first year of some revival. Infra demand to have a multiplier effect; will lead to demand revival from housing Infra demand always has a multiplier impact – creation of better infrastructure ultimately leads to new demand from the real‐estate segment and IHB. Though we do not expect big changes in FY19, we see housing demand gaining momentum from FY20, driven by an infrastructure‐creation thrust. Affordable housing projects are also likely to gain substantial momentum as we approach the 2019 general elections. Traction in the housing space is already visible in regions such as east India (with very low density of concrete houses), which is now growing in double digits. Revival of pricing is a key challenge; incremental cost‐push will not be a concern The biggest challenge today is reviving cement prices. The sector has seen a demand revival, but prices have not yet risen much. We believe this is mainly because: 1. The industry has seen volume momentum strengthening after a long spell, so it is

more focused on capitalising this opportunity. Basically, for now, it is happy with just the revival in volume growth.

2. There is a major structural change in the industry’s supply dynamics because of UltraTech’s Jaypee acquisition.

Why UltraTech’s Jaypee acquisition is not immediately cement‐price accretive? In Q1FY18, UltraTech closed the biggest M&A transaction in the history of the Indian cement industry, by acquiring nearly 21mn tonnes of Jaypee Cement’s capacity across central, south, and north India. This permanently changed the industry’s supply dynamics. A brief history of Jaypee Jaypee Cement was amongst the top‐5 cement manufacturers in India. It rose to a capacity of nearly 35mn tonnes in a very short span, but in our opinion, because of misallocation of capital and an unfocused management, the Jaypee Group had to monetise its cement assets in order to service its elevated debt levels. Jaypee was a prominent brand in the non‐trade cement segment and was not a brand‐conscious player. Its dealer network consisted largely of exclusive channel partners. Challenges that emerged from this move The biggest challenge that emerged for UltraTech was bringing on board Japyee’s channel partners. Jaypee was a volume pusher and convincing dealers to participate in pricing was tough. To align the channel and gain in terms of capacity utilisations, UltraTech took the bold call of pushing volumes and reaching a compromise with the terms of the acquired channel, in the initial phase.

Given the historical evidence of pre‐election demand, and reconciling it with current ground realities, we believe demand growth of 8% for FY19 is quite likely

Jaypee was a prominent brand in the non‐trade cement segment and was not a brand‐conscious player

UltraTech took the bold call of pushing volumes and reaching a compromise with the terms of the acquired channel, in the initial phase



However, once UltraTech completes consolidation and wins the confidence of the channel it will shift towards pricing – we believe. The industry should start seeing price upticks from Q1FY19, led by UltraTech in most markets. Price upticks to be reasonable and not aggressive In 2004, cement prices (per bag) used to hover around Rs 150. In the last 15 years, these saw a CAGR (pan‐India) of 4.5% to touch nearly Rs 300 currently. Traditionally, industry price hikes used to be small (say by Rs 3‐7), but from 2012, we believe that the industry took a judgement call based on its production discipline that did not produce the desired results. It began to take price hikes of Rs 10‐20. In fact, in some specific markets such as south India, the industry even attempted price hikes of Rs 25‐40 in one go. With these sharp hikes, it attracted unnecessary attention, and voices of dissent led by the builder lobby and powerful ‘consuming centres’ began to rise. In FY12‐18, cement realisations CAGR dropped to less than 2%. In the middle of CY17, industry leaders were quizzed by the government about the sharp price hikes, especially about why these were taken ‘in one go’. Our interactions with leading industry people suggests that the government’s objection was more about the ‘all in one go’ part, rather than the price increases per se. The sharp price hike trends also increased price volatility. Very small cement manufacturers (who work with short‐term goals) became more opportunistic in selling every additional tonne of cement, thereby disturbing pricing. Effectively, cement prices did not really move in the last six years. Our recent ground checks revealed that with a clear message from the central government, the industry should revert to its traditional pricing ways, and should increase cement prices by only Rs 5‐10 per bag (in each attempt) with an expectation of 50% absorption. FY19 being a pre‐election period, sharp price increases will result in sensational news flow; hence, we believe the industry will be more cautious. PC’s take: Our interactions with leading industry personnel suggest that the centre objected to the attempts by the industry to increase prices all in one go. The government was not miffed about the price increases per se. The message from the centre was clear to the industry – that the centre would not want to intervene in the normal course of business of the industry, but that the industry should avoid robust price hikes in one go. We believe that incremental price hikes of Rs 20‐25 per bag are sustainable for FY19 if the industry pitches a softer strategy. In terms of percentage, these look marginally higher than the historical CAGR, but since there have been no material price hikes for the last 4‐5 years, and with demand momentum rising, we believe our expectation is realistic.

We believe the industry is ready to revert to its traditional pricing ways, and should attempt to increase cement prices by only Rs 5‐10 per bag (in each attempt) with an expectation of 50% absorption by the market

We believe that incremental price hikes of Rs 20‐25 per bag are sustainable for FY19



Cost overhangs are now behind Costs have risen sharply in FY18 – up by nearly 7% because of multiple challenges that the industry faced. We expect costs to normalise ahead – in line with long‐term CAGR of about 2.5%; the cost curve will remain stable over FY19, or in a worst‐case scenario, it will increase by Rs 100 per tonne, largely driven by a change in fuel usage in power plants (to coal from pet coke), and marginally because of an increase in fuel prices. Industry EBITDA/tonne is likely to improve by Rs 150 in FY19 Driven by modest price improvements and limited cost escalations, we expect EBITDA/tonne for the industry to improve by about Rs 150/87 in FY19/20, translating into about 15% CAGR over FY18‐20. Over the last six years, the industry’s EBITDA per tonne has fallen at a CAGR of 2%, as price increases have been unable to offset cost push. Our price CAGR assumption for FY18‐20 is 5%. In three out of past six fiscals, industry’s realisation growth has been well ahead of our assumption; so we expect our assumptions to be met. The improvement in pricing power (with recent consolidation moves) and better demand momentum add to our confidence in the industry’s capacity to improve prices from Q1. The correlation of EBITDA/tonne to improvement in capacity utilisations will have limited meaning as the industry is now accustomed to working at low utilisations. EBITDA/tonne vs. utilisation trends for the industry


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We expect EBITDA/tonne for the industry to improve by about Rs 150/87 in FY19/20, translating into about 15% CAGR over FY18‐20

Our price CAGR assumption for FY18‐20 is 5%

UltraTech’s change in stance – back to pricing from costs – will be a game changer

Upticks in capacity utilisations will mean revival in industry sentiments – EBITDA/tonne should see a CAGR of 15% over FY18‐20



Compa

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ACC Ltd. (ACC IN) Revival seems away; volume growth traction appears a myth INDIA | CEMENT | Company Update

10 April 2018

Stuck with Ambuja; consolidation not helping in terms of material cost savings yet ACC has always had the highest opex in the industry, despite being a pan‐India major with evenly spread capacity. Though the market expected synergy after ACC became a subsidiary of Ambuja in mid CY16, ACC’s cost curve has not become better. Its cost CAGR since mid CY16 is not really different from industry and peers (ACC’s 1.7% vs. the industry’s 1.9%). UltraTech’s cost CAGR was 1.4% despite the company facing larger headwinds (aggressive inorganic growth with equally inefficient assets). ACC’s volume growth is more myth than reality Even the recent volume traction has not really helped. Data suggests that ACC has structurally underperformed both industry and peers by a large margin. In the last 24 quarters, its volume CAGR was less than 1%, so the recent uptick is just a restoration of its potential, and this is much lower than what its peers have achieved. In the same period, UltraTech’s volume CAGR was nearly 7% and Dalmia Bharat’s nearly 19%. Though the merger would be a step forward, brand consolidation is the key Since the erstwhile Holcim declared the consolidation of ACC into Ambuja through restructuring, it has iterated that the move was prompted by huge potential cost savings. However, ACC hasn’t really surprised on the cost curve substantially. Savings prospects (with ACC becoming an Ambuja subsidiary), the potential merger of ACC and Ambuja, and now the ‘Master Supply Agreement (MSA)’ kept the market excited. But in our view brand consolidation can be a much larger driver. An MSA, though useful, will be far less advantageous than brand consolidation; the latter will make a big difference to the cost curve (more details in the Ambuja company section). Better realisation is the only trigger for boosting EBITDA ACC’s only visible valuation trigger now seems its ability to improve cement realisations. We have seen volume traction building up in CY17, but this is not something we find very exciting for ACC, because its underperformance on this front remains huge. We expect volume growth at 10%/4% in CY18/19, as capex remains muted. The only saviour can be its ability to improve cement prices, and thereby EBITDA. At Rs 594 EBITDA/tonne for CY17, ACC is the lowest among pan‐India majors. Absence of decision‐making ability has led to absence of re‐rating In the last decade, when peers have gained significant strength and bargaining power, ACC’s lack of decision‐making has worsened its position among peers. Since CY11, it has not rolled out any strategic business plans, except one capex that helped volume growth in CY17. As a result, its valuation failed to rise and companies such as Dalmia Bharat and even mid‐caps such as JK Cement, who used to trade at a discount, now trade at premiums or at near‐par valuations to ACC. Outlook We are maintaining our Neutral stance with our earlier target of Rs 1,830. We continue to believe that if ACC doesn’t surprise positively on the operating front in CY18/19, the stock can potentially de‐rate. Improving price realisations and (thereby) operating earnings is the only visible trigger, though an agreement such as MSA will also help. At our target, the stock will trade at nearly US$ 145/tonne, which we believe is fair for ACC.

Neutral (Maintain) CMP RS 1,547 TARGET RS 1,830 (+19%) COMPANY DATA O/S SHARES (MN) : 188MARKET CAP (RSBN) : 290MARKET CAP (USDBN) : 4.552 ‐ WK HI/LO (RS) : 1869 / 1461LIQUIDITY 3M (USDMN) : 8.8PAR VALUE (RS) : 20 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 54.5 54.5 54.5FII / NRI : 13.9 13.8 14.9FI / MF : 17.4 17.0 16.2NON PRO : 3.8 4.8 4.1PUBLIC & OTHERS : 10.4 9.9 10.3 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 0.5 ‐14.9 5.2REL TO BSE ‐0.9 ‐13.0 ‐0.9 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn CY17 CY18E CY19E Net Sales 129,310 147,483 158,128EBIDTA 15,583 19,659 24,035Net Profit 9,267 12,118 14,545EPS, Rs 49.3 64.5 77.4PER, x 31.3 23.9 19.9EV/EBIDTA, x 16.9 13.3 11.0P/BV, x 2.0 1.8 1.7ROE, % 9.9 12.4 14.1Debt/Equity (%) ‐ (0.6) 2.3

Source: PhillipCapital India Research Est.

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ACC BSE Sensex


ACC LTD COMPANY UPDATE

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ACC LTD COMPANY UPDATE

Financials

Consolidated Income Statement Y/E Dec, Rs mn CY16 CY17E CY18E CY19ENet sales 109,456 129,310 147,483 158,128Growth, % ‐4 18 14 7Total income 109,456 129,310 147,483 158,128Raw material expenses ‐16,944 ‐19,809 ‐23,289 ‐23,846Employee expenses ‐7,899 ‐8,214 ‐9,467 ‐10,276Other Operating expenses ‐72,625 ‐85,705 ‐95,067 ‐99,970EBITDA (Core) 11,988 15,583 19,659 24,035Growth, % 2.2 30.0 26.2 22.3 Margin, % 11.0 12.1 13.3 15.2 Depreciation ‐6,151 ‐6,436 ‐7,750 ‐7,831EBIT 5,837 9,146 11,909 16,204Growth, % 14.4 56.7 30.2 36.1 Margin, % 5.3 7.1 8.1 10.2 Interest paid ‐689 ‐985 1,665 656Other Non‐Operating Income 3,291 4,853 3,629 3,810Pre‐tax profit 8,527 13,123 17,311 20,779Tax provided ‐2,096 ‐3,856 ‐5,193 ‐6,234Profit after tax 6,431 9,267 12,118 14,545Net Profit 6,430 9,267 12,118 14,545Growth, % (14.5) 44.1 30.8 20.0 Net Profit (adjusted) 6,430 9,267 12,118 14,545 Unadj. shares (m) 188 188 188 188 Wtd avg shares (m) 188 188 188 188 Balance Sheet Y/E Dec, Rs mn CY16 CY17E CY18E CY19E Cash & bank 2,784 27,286 27,286 27,286Debtors 4,664 6,660 8,355 8,958Inventory 12,246 14,048 17,624 20,786Loans & advances 14,254 2,640 3,011 3,228Other current assets 610 7,923 9,036 9,688Total current assets 34,557 58,556 65,312 69,946Investments 15,989 1,038 1,038 1,038Gross fixed assets 144,557 155,876 154,128 159,128Less: Depreciation ‐66,238 ‐72,674 ‐80,424 ‐88,255Add: Capital WIP 5,000 2,693 5,000 5,000Net fixed assets 83,320 85,894 78,704 75,872Total assets 133,865 145,488 145,053 146,857 Current liabilities 34,441 42,731 38,989 33,442Provisions 7,387 6,624 6,044 5,184Total current liabilities 41,829 49,355 45,033 38,626Non‐current liabilities 5,594 2,546 1,997 4,880Total liabilities 47,422 51,901 47,029 43,506Paid‐up capital 1,880 1,880 1,880 1,880Reserves & surplus 84,535 91,679 96,116 101,441Shareholders’ equity 86,443 93,587 98,024 103,350Total equity & liabilities 133,865 145,488 145,053 146,857 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Dec, Rs mn CY16 CY17E CY18E CY19E Pre‐tax profit 8,527 13,123 17,311 20,779Depreciation 6,151 6,436 7,750 7,831Chg in working capital 2,984 8,029 ‐11,078 ‐11,041Total tax paid ‐1,207 ‐6,903 ‐5,193 ‐6,234Cash flow from operating activities 16,455 20,685 8,790 11,336Capital expenditure ‐6,671 ‐9,011 ‐559 ‐5,000Chg in investments ‐3,714 14,951 0 0Cash flow from investing activities ‐10,771 9,690 ‐559 ‐5,000Free cash flow 5,685 30,375 8,231 6,336Debt raised/(repaid) 0 0 ‐550 2,883Dividend (incl. tax) ‐3,841 ‐5,874 ‐7,681 ‐9,219Cash flow from financing activities ‐3,840 ‐5,873 ‐8,231 ‐6,336Net chg in cash 1,844 24,502 0 0 Valuation Ratios

CY16 CY17E CY18E CY19EPer Share data EPS (INR) 34.2 49.3 64.5 77.4Growth, % (14.5) 44.1 30.8 20.0Book NAV/share (INR) 459.7 497.7 521.3 549.6FDEPS (INR) 34.2 49.3 64.5 77.4CEPS (INR) 66.9 83.5 105.7 119.0CFPS (INR) 69.6 83.6 26.9 39.5DPS (INR) 17.0 26.0 34.0 40.8Return ratios Return on assets (%) 5.2 7.1 7.6 9.7Return on equity (%) 7.4 9.9 12.4 14.1Return on capital employed (%) 7.0 9.8 10.6 12.9Turnover ratios Asset turnover (x) 1.3 1.7 1.9 1.9Sales/Total assets (x) 0.8 0.9 1.0 1.1Sales/Net FA (x) 1.3 1.5 1.8 2.0Working capital/Sales (x) (0.0) (0.1) (0.0) 0.1Working capital days (8.9) (32.3) (2.4) 21.3Liquidity ratios Current ratio (x) 1.0 1.4 1.7 2.1Quick ratio (x) 0.6 1.0 1.2 1.5Interest cover (x) 8.5 9.3 n/a n/aDividend cover (x) 2.0 1.9 1.9 1.9Total debt/Equity (%) ‐ ‐ (0.6) 2.3Net debt/Equity (%) (21.7) (30.3) (29.5) (25.2)Valuation PER (x) 45.1 31.3 23.9 19.9Price/Book (x) 3.4 3.1 3.0 2.8Yield (%) 1.1 1.7 2.2 2.6EV/Net sales (x) 2.6 2.0 1.8 1.7EV/EBITDA (x) 23.9 16.9 13.3 11.0EV/EBIT (x) 49.2 28.7 22.0 16.3



Ambuja Cements (ACEM IN)

Can rerate if it expedites bold decisions INDIA | CEMENT | Company Update

10 April 2018

It has the ingredients to re‐rate, but will require bold and courageous decisions Ambuja is now ACC’s parent and technically in control of nearly 63mn tonnes of capacity. Since ACC became its subsidiary, we expected cost savings for ACC and better positioning for Ambuja in the industry because of increased bargaining power. However, this has not panned out. Decision making ability (for both ACC and Ambuja) remains weak. Ambuja’s north India expansion, which it envisaged around 2010, is yet to come on stream; our ground checks indicate that execution remains slow. These factors created a vacuum, on which peers have significantly capitalised. For Ambuja, the only way is to expedite capex execution and to take some bold decisions. Brand consolidation is the key – merger is a step forward ACC is now a subsidiary of Ambuja, but the synergies between the two are restricted to production. Despite ACC being a subsidiary, both companies run parallel distribution channels. Nearly 30% of the costs in the industry comprise of freight and selling costs, and channel incentives. Both ACC and Ambuja can achieve sustainable cost savings of +Rs2bn p.a. each if they move towards brand consolidation, which will be facilitated by a merger more effectively (but it isn’t mandatory in our view). The MSA will deliver few synergies, but not very substantial. Slow decision making at ACC and Ambuja is the biggest bottleneck In early CY17, ACC and Ambuja said that they were evaluating a potential merger. Nearly a year later, the merger is being held back because of certain ‘constraints’. We believe both managements are unable to validate merger synergies vis‐à‐vis the transaction costs (given cost implications such as stamp duty, transfer fees). We expect it has been difficult for the India local managements to convince the LafargeHolcim board, but they continue to iterate that the merger is the ‘ultimate objective’. However, if this is true, why not move ahead right now? Instead, both have lost a year with all management energy and bandwidth focused on a merger. The merger expectations had built up the stock valuations momentum, which is now spoilt. Absence of strategic growth plans is another concern area With the management busy with consolidation, Ambuja (like ACC) has not taken any significant initiatives in the last decade to increase its capacity or market share. As a parent, except for one north India expansion, Ambuja still does not have a strategic roadmap to improve its overall positioning, which is worrying. Improving ACC’s operational performance is Ambuja’s key challenge Ambuja has performed reasonably well and much more consistently than its subsidiary ACC, driven by its better cost matrix. ACC’s poor performance is hurting Ambuja’s consolidated numbers, so it needs to improve ACC’s efficiencies and operating performance. However, given limitations of ACC’s cost curve, this appears difficult (though not impossible). Outlook We are upgrading Ambuja to a BUY, but this is only driven by its steep stock‐price correction. We are still waiting for synergies for Ambuja (with it becoming the parent of ACC) and an increase in its overall bargaining power. We maintain our target at Rs 300. At our target, the stock will trade at around US$ 190 EV/tonne (CY19 earnings).

BUY (Upgrade) CMP RS 237 TARGET RS 300 (+27%) COMPANY DATA O/S SHARES (MN) : 1986MARKET CAP (RSBN) : 470MARKET CAP (USDBN) : 7.252 ‐ WK HI/LO (RS) : 292 / 223LIQUIDITY 3M (USDMN) : 12.1PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 63.6 63.6 63.6FII / NRI : 17.4 16.6 16.9FI / MF : 12.0 12.2 11.6NON PRO : 1.7 1.8 1.9PUBLIC & OTHERS : 5.4 5.8 6.0 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 0.5 ‐14.6 ‐15.6REL TO BSE ‐0.9 ‐12.7 ‐21.7 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn CY17 CY18E CY19E Net Sales 234,616 267,822 283,283EBIDTA 34,684 42,805 49,261Net Profit 17,101 17,189 20,505EPS, Rs 8.6 8.7 10.3PER, x 27.5 27.4 23.0EV/EBIDTA, x 12.7 10.4 9.3P/BV, x 2.3 2.2 2.1ROE, % 8.4 8.1 9.2Debt/Equity (%) 2.7 0.5 (1.3)


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AMBUJA CEMENTS COMPANY UPDATE

How brand consolidation will help Distribution costs of the industry broadly comprise of: • Employee costs • Packing costs • Freight costs • Advertisement and branding costs • Channel incentives, including bonus monetary commissions / non‐monetary

incentives on reaching threshold sales Barring employee costs, all the above costs are generally categorised either under ‘freight’ or under ‘other expenses’. Together, they account for nearly 56% of the industry’s operating costs. Cost composition of the industry

Source: Company, PhillipCapital India Research On other expense per tonne and freight cost per tonne, ACC and Ambuja remain amongst the worst performers vs. the only pan‐India comparable peer – UltraTech. Other expenses and freight cost comparison of ACC and Ambuja vs. UltraTech


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On both other expenses and freight cost, UltraTech is the cost leader – which also proves the importance of unified branding



Savings due to brand consolidation • The ultimate potential cost savings of these synergies can be as high as 15‐20%

of total current costs: Assuming bare minimum synergies of just 10% in distribution costs because of the brand consolidation for both ACC and Ambuja, cost savings for each company will be easily more than Rs 2.5bn p.a. This implies an EBITDA/tonne savings of Rs 110‐125/tonne (nearly 10% of current), which is a very conservative estimate.

• We have not yet accounted for savings in employee costs in these calculations. • Brand consolidation can help to achieve a minimum saving of Rs 5‐6bn p.a. at the

consolidated level. • The amount of savings appears to be similar to the savings potential indicated by

erstwhile Holcim in July 2013, when it announced the restructuring and consolidation plans. Then, the savings expected were Rs 7.8‐9bn, of which nothing substantial has come through yet, in our opinion.

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In the most conservative scenario, in our view, ACC and Ambuja can each save +Rs 2.5bn because of brand consolidation



Synergies and brand consolidation The synergies today between ACC and Ambuja are only restricted to production. Despite sharing a parent‐subsidiary relationship, they run parallel distribution channels – one for each company. Distribution is one of the biggest costs for the industry. Brand consolidation will deliver the following substantial savings, in terms of: 1. Employee costs: As the distribution channel merges, the marketing and distribution head count

should reduce by at least 25‐30%. Once brands merge, the sales force needed will also be much lower.

2. Freight costs: Brand consolidation will lead to rationalisation of lead distances and a fall in warehousing overheads. As channel partners also consolidate, the secondary freight distance and costs will reduce, helping to lower loading and unloading overheads.

3. Advertisement and branding costs: Today we see both ACC and Ambuja on multiple advertising platforms simultaneously. Brand consolidation will rid duplication and reducing advertising and branding costs significantly.

4. Packing costs: Though brand consolidation may not materially help reduce packing costs much, it will definitely help rationalise sourcing of packing materials, and will lead to better distribution of non‐trade and trade sales from various factories, thereby improving the overall cost structure.

5. Channel incentives (monetary and non‐monetary): Channel incentives are one of the key areas where brand consolidation will help reduce the cost structure significantly. Today, a dealer who sells both ACC and Ambuja earns dual milestone commissions from both brands separately (milestone commissions are paid to channel partners on achieving a certain sales threshold). Additionally, channel partners also enjoy non‐monetary incentives such as foreign tours and gifts. Brand consolidation will help to rationalise these supplementary channel commissions and incentives, as it will eliminate duplication. It will also help to lower the basic incentive structure to channel partners.

Challenges for brand consolidation: We believe the following challenges are more ‘one time’ and will not be long lasting: 1. Killing two successful brands and taking the risk of creating a new one: The biggest challenge

for brand consolidation is the management’s argument – that ACC and Ambuja are strong brands in their respective markets. However, we have many examples in the sector where brands have been created with dedicated management focus. Some of the top brands of the country today – UltraTech, Dalmia, JK Cement, and JK Lakshmi – are good examples of successful brand creation. We are not convinced by the management’s argument. Though ACC and Ambuja are strong brands in their own markets, they should still be consolidated. And once this is done, the management will need to dedicate considerable bandwidth to ensure that the merged brand is a success – we believe this is possible.

2. Brand consolidation will lead to huge layoffs: Another reason for the delay could be the lay‐offs that will happen at all levels – from senior management to the junior level. It would also mean merging the two distribution channels, which would lead to significant staff rationalisation in the channel – a key reason why we have seen no indication from both managements towards this, in our opinion. The success of a brand consolidation requires tremendous management bandwidth to establish the new brand – seen in the case of Dalmia Bharat, UltraTech, JK Lakshmi, and JK Cement. We believe both ACC and Ambuja managements are unwilling to deal with the moral implications of significant layoffs.

3. The channel will not support a brand consolidation move: As brand consolidation will result in a streamlined incentive structure for the channel, it is unlikely to be supportive. From a channel’s perspective, the more number of brands it sells, the better it earns, which would worry the management. In past brand consolidations in the industry, there has been initial agitation in the channel, but eventually, by providing the channel with better volumes and a more transparent and promising incentive structure, managements have overcome protests.




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Financials

Consolidated Income Statement Y/E Dec, Rs mn CY16 CY17E CY18E CY19ENet sales 200,940 234,616 267,822 283,283Growth, % ‐4.3 18.1 14.1 7.2Total income 200,940 234,616 267,822 283,283Raw material expenses ‐23,508 ‐28,506 ‐32,373 ‐34,363Employee expenses ‐13,836 ‐16,342 ‐18,846 ‐20,124Other Operating expenses ‐134,903 ‐155,085 ‐173,797 ‐179,535EBITDA (Core) 28,693 34,684 42,805 49,261Growth, % 99.5 20.9 23.4 15.1Margin, % 14.3 14.8 16.0 17.4Depreciation ‐14,632 ‐13,741 ‐15,780 ‐16,862EBIT 14,061 20,943 27,025 32,399Growth, % 73.0 48.9 29.0 19.9Margin, % 7.0 8.9 10.1 11.4Interest paid ‐1,405 ‐1,147 ‐1,544 ‐1,545Other Non‐Operating Income 7,680 11,703 8,212 9,404Pre‐tax profit 20,336 31,500 33,693 40,257Tax provided ‐5,760 ‐9,765 ‐10,445 ‐12,480Profit after tax 14,576 21,735 23,248 27,777Others (Minorities, Associates) ‐3,067 ‐4,634 ‐6,059 ‐7,273Net Profit 11,509 17,101 17,189 20,505Growth, % 42.5 48.6 0.5 19.3Net Profit (adjusted) 11,509 17,101 17,189 20,505Unadj. shares (m) 1,986 1,986 1,986 1,986Wtd avg shares (m) 1,769 1,986 1,986 1,986 Balance Sheet Y/E Dec, Rs mn CY16 CY17E CY18E CY19ECash & bank 16,962 33,953 27,075 11,761Debtors 7,635 10,109 12,297 13,058Inventory 21,646 24,826 29,941 33,595Loans & advances 24,354 14,614 16,694 17,459Other current assets 8,927 8,319 9,490 10,160Total current assets 79,524 91,821 95,496 86,034Investments 27,951 42,757 42,757 42,757Gross fixed assets 285,952 295,283 306,727 334,920Less: Depreciation ‐71,920 ‐85,661 ‐101,441 ‐118,303Add: Capital WIP 5,822 7,693 10,000 10,000Net fixed assets 219,854 217,315 215,286 226,617Total assets 327,330 351,893 353,540 355,408 Current liabilities 58,020 64,446 58,841 49,960Provisions 19,229 18,534 16,932 14,243Total current liabilities 77,249 82,980 75,773 64,203Non‐current liabilities 10,849 16,065 11,580 7,670Total liabilities 88,097 99,045 87,353 71,873Paid‐up capital 3,971 3,971 3,971 3,971Reserves & surplus 191,483 200,465 207,745 217,820Shareholders’ equity 239,232 252,847 266,187 283,534Total equity & liabilities 327,330 351,893 353,540 355,408 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Dec, Rs mn CY16 CY17E CY18E CY19EPre‐tax profit 20,336 31,500 33,693 40,257Depreciation 14,632 13,741 15,780 16,862Chg in working capital 5,088 10,426 ‐17,760 ‐17,421Total tax paid ‐876 ‐9,765 ‐10,445 ‐12,480Cash flow from operating activities 39,181 45,901 21,268 27,219Capital expenditure ‐165,560 ‐11,201 ‐13,752 ‐28,193Chg in investments ‐6,759 ‐14,806 0 0Other investing activities 86,471 0 0 0Cash flow from investing activities ‐85,847 ‐26,008 ‐13,752 ‐28,193Free cash flow ‐46,667 19,894 7,516 ‐974Equity raised/(repaid) 868 0 0 0Debt raised/(repaid) 29 5,216 ‐4,485 ‐3,909Dividend (incl. tax) ‐6,462 ‐8,119 ‐9,908 ‐10,430Cash flow from financing activities 35,145 ‐2,903 ‐14,394 ‐14,340Net chg in cash ‐11,522 16,991 ‐6,877 ‐15,314 Valuation Ratios

CY16 CY17E CY18E CY19EPer Share data EPS (INR) 6.5 8.6 8.7 10.3Growth, % 25.0 32.4 0.5 19.3Book NAV/share (INR) 110.5 103.0 106.6 111.7FDEPS (INR) 5.8 8.6 8.7 10.3CEPS (INR) 14.8 15.5 16.6 18.8CFPS (INR) 17.8 17.2 6.6 9.0DPS (INR) 3.1 3.5 4.3 4.5Return ratios Return on assets (%) 6.6 6.6 6.9 8.1Return on equity (%) 5.9 8.4 8.1 9.2Return on capital employed (%) 7.9 8.1 8.3 9.6Turnover ratios Asset turnover (x) 1.4 1.1 1.2 1.2Sales/Total assets (x) 0.9 0.7 0.8 0.8Sales/Net FA (x) 1.4 1.1 1.2 1.3Working capital/Sales (x) 0.0 (0.0) 0.0 0.1Working capital days 8.3 (10.2) 13.1 31.3Liquidity ratios Current ratio (x) 1.4 1.4 1.6 1.7Quick ratio (x) 1.0 1.0 1.1 1.0Interest cover (x) 10.0 18.3 17.5 21.0Dividend cover (x) 2.1 2.4 2.0 2.3Total debt/Equity (%) 0.2 2.7 0.5 (1.3)Net debt/Equity (%) (22.8) (30.6) (28.5) (25.9)Valuation PER (x) 36.4 27.5 27.4 23.0Price/Book (x) 2.1 2.3 2.2 2.1Yield (%) 1.3 1.5 1.8 1.9EV/Net sales (x) 2.3 1.9 1.7 1.6EV/EBITDA (x) 15.8 12.7 10.4 9.3EV/EBIT (x) 32.3 21.1 16.5 14.1



UltraTech Cement (UTCEM IN)

Its return to the price curve is the key for itself and industry INDIA | CEMENT | Company Update

10 April 2018

Capacity consolidation now appears to be complete UltraTech’s capacity CAGR over the last 15 years has been 13%, the highest long‐term capacity CAGR for any company. When the brand UltraTech was conceived around 2004, it envisaged a 100mn tonne capacity, which is now almost complete. We don’t expect any incremental and aggressive capex from here except for the announced ones and the Binani Cement bid. For the next two financial years, its focus will be on consolidation, before it revisits capex plans. Our ground checks also suggest that as UltraTech enters the consolidation phase, execution of its capex plans (especially in north India) can be slower (we understand that it had to announce this capex because of the risk of surrendering limestone mines). Driven by capex, UltraTech’s volume outperformance has been far superior UltraTech’s quarterly volumes CAGR since FY12 is 7% – its average volumes used to be around 12mn tonnes/quarter, which is now +16mn. Peers, who had no meaningful capex, have seen their volumes remaining almost stagnant on an absolute basis. UltraTech has further levers to drive volume growth, with its recent acquisition of Jaypee’s assets. Its consolidated volumes (annual) CAGR is 11% over FY04‐18, which is far superior to the volume growth trajectory of the industry at 7%. Jaypee consolidation pushed UltraTech to temporarily dilute its price positioning UltraTech’s Jaypee acquisition was not just a consolidation move, but also a very important structural and permanent change in the industry’s supply dynamics. However, initially, it was forced to compromise on its price positioning – but this is recoverable. Its price realisation CAGR over Q1‐Q3 FY18 was ‐2% CAGR vs. near‐flat for the industry. As volumes stabilise, all its energies will again be turned towards brand building – which is a significant positive for the industry in FY19. Growth catalysts are already visible for UltraTech on all parameters UltraTech is the only large‐cap company for whom growth catalysts across all three crucial parameters – volumes, prices and opex – are already in place. While we see volume growth in high double digits, price realisation could improve by Rs 200‐300/tonne vs. Q3FY18, and cost efficiencies are likely to optimise as it brings Jaypee’s opex close to its own. Driven by these operational parameters, its earnings CAGR is likely to be 33% over FY18‐20. Risks UltraTech not returning to the price curve (also a key risk for the industry). If we fail to see a price recovery for UltraTech from Q1FY19, the industry’s profitability may also not improve for longer than anticipated. Another key risk with UltraTech is its aggression in the Binani bid process. Amicable settlement of this issue among industry leaders – UltraTech and Dalmia Bharat – is a must to ensure price stability, especially in north India. Outlook We continue to maintain BUY and reiterate UltraTech as our top large cap pick. We maintain our target of Rs 4,800, at which the stock will trade at ~US$ 235/tonne on FY20 earnings.

BUY (Maintain) CMP RS 3,918 TARGET RS 4,800 (+23%) COMPANY DATA O/S SHARES (MN) : 275MARKET CAP (RSBN) : 1074MARKET CAP (USDBN) : 16.552 ‐ WK HI/LO (RS) : 4594 / 3774LIQUIDITY 3M (USDMN) : 14PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 62.1 62.1 62.1FII / NRI : 22.2 22.2 21.9FI / MF : 5.7 5.6 5.5NON PRO : 0.9 0.9 0.9PUBLIC & OTHERS : 9.2 9.3 9.5 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐4.2 ‐11.4 ‐4.2REL TO BSE ‐5.6 ‐9.5 ‐18.0 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 317,116 429,709 514,020EBIDTA 63,928 85,972 98,348Net Profit 26,869 37,491 47,427EPS, Rs 97.9 136.6 172.8PER, x 40.0 28.7 22.6EV/EBIDTA, x 20.5 14.9 12.7P/BV, x 4.0 3.6 3.1ROE, % 10.0 12.5 13.8Debt/Equity (%) 96.9 77.2 57.3


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ULTRATECH CEMENT COMPANY UPDATE

UltraTech‐Jaypee implications In Q1FY18, UltraTech closed the biggest consolidation move ever in the history of the Indian cement industry by acquiring nearly 21mn tonnes of Jaypee’s assets. This move was not just consolidation, but also one that redefined the supply dynamics of the industry in all regions where the acquisitions were made. Why UltraTech’s Jaypee consolidation was an initial price spoiler for the industry Jaypee’s business strategies were exactly the opposite of UltraTech’s. Jaypee never believed in building a brand and pushed volumes with minimal focus on realisations. On the other hand, UltraTech’s business strategy has always been to create a brand and command a premium in price realisations in all its markets through its unified brand – UltraTech. As a part of the acquisition, UltraTech also acquired Jaypee’s entire distribution channel. Two qualitative factors that were instrumental in defining the erstwhile Jaypee distribution network were: 1. More focussed on non‐trade / institutional sales. 2. Channel partner loyalty maintained through a wide network of exclusive

partners. UltraTech’s biggest challenge in its initial acquisition phase was: 1. Win the confidence of the acquired channel network and encourage them to

work with UltraTech. 2. Increase capacity utilisation of the acquired assets. UltraTech did not have a material presence in most the markets in which it acquired Japyee’s assets; hence, the channel had no experience of working with UltraTech. So, the solution was to pump in as much volume into the system as possible and show the acquired channel the true potential of working hand‐in‐hand with UltraTech. Over the whole of FY18, UltraTech pressed the volume trigger much more aggressively than its peers, in order to capitalise on its strategy of gaining market share of the erstwhile Jaypee markets. FY18 volume growth trends: UltraTech and its peers

Source: Company, PhillipCapital India Research Since Jaypee was not a brand conscious player, it would be unfair to assume that UltraTech could have retained its brand premium in the process of gaining market share for its brand ‘UltraTech’. UltraTech compromised in the initial stages on its price positioning in order to gain and capture market share and win the confidence of the channel. Our checks with various senior sales personnel and channel partners suggest that there will be a shift in the company’s strategy from Q1FY19, once it stabilises its market share. After it wins the confidence of its channel partners, it will work hand‐in‐hand with the channel to recoup the realisation losses and regain the

ACC Ambuja

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ACC Ambuja UltraTech CAGR over last 24 quarters

UltraTech’s volume CAGR over the past 24 quarters is way ahead of peers. It is a myth that ACC and Ambuja have added anything to their volume share

UltraTech did not have a material presence in most the markets in which it acquired Japyee’s assets; hence, the channel had no experience of working with UltraTech



lost brand premium. On a blended basis, UltraTech has lost nearly Rs 200/tonne of realisation between Q1FY18 and Q3FY18. FY18 realisation trend: UltraTech, peers

Source: Company, PhillipCapital India Research UltraTech has significant leverage to reduce opex per tonne UltraTech’s opex has been rising after its Jaypee acquisition, mainly because of inefficiencies in the acquired assets. Among efficient peers, UltraTech’s opex has been 1% higher than Ambuja since UltraTech consolidated Jaypee. On an absolute basis, UltraTech’s opex increased by Rs 160/tonne in the past two quarters vs. Ambuja’s Rs 59/tonne. Incrementally, we can say that growth in UltraTech’s opex/tonne is Rs 100/tonne, higher than peers. We assume that this will substantially reverse as we see it improving the efficiencies of its acquired assets and bringing them on par with its own utilisations and efficiencies. In the last management call, UltraTech has said that the opex/tonne gap between the acquired assets and erstwhile assets has now narrowed to Rs 200/tonne from Rs 400‐500/tonne earlier. Even at Rs 100/tonne of consolidated incremental cost savings, the EBITDA delta is Rs 6‐7bn, which is 8% of our FY19 EBITDA estimate. Opex trend since Jaypee was acquired: UltraTech vs. peers


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UltraTech’s opex has been rising since it took over Jaypee’s assets. Rationalisation of the opex curve will be a key earnings trigger




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Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 253,749 317,116 429,709 514,020Growth, % 0 25 36 20Total income 253,749 317,116 429,709 514,020Raw material expenses ‐40,189 ‐48,818 ‐63,082 ‐73,634Employee expenses ‐15,223 ‐22,402 ‐35,601 ‐49,027Other Operating expenses ‐146,213 ‐181,968 ‐245,054 ‐293,010EBITDA (Core) 52,124 63,928 85,972 98,348Growth, % 12.8 22.6 34.5 14.4Margin, % 20.5 20.2 20.0 19.1Depreciation ‐13,484 ‐18,637 ‐22,078 ‐21,957EBIT 38,640 45,291 63,894 76,392Growth, % 18.9 17.2 41.1 19.6Margin, % 15.2 14.3 14.9 14.9Interest paid ‐6,401 ‐15,131 ‐19,666 ‐19,297Other Non‐Operating Income 6,481 8,224 9,330 10,658Pre‐tax profit 38,721 38,384 53,559 67,753Tax provided ‐11,586 ‐11,515 ‐16,068 ‐20,326Profit after tax 27,135 26,869 37,491 47,427Others (Minorities, Associates) 14 0 0 0Net Profit 27,149 26,869 37,491 47,427Growth, % 18.7 (1.0) 39.5 26.5Net Profit (adjusted) 27,149 26,869 37,491 47,427Unadj. shares (m) 275 275 275 275Wtd avg shares (m) 275 275 275 275Net sales 253,749 317,116 429,709 514,020 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 22,488 22,488 22,488 22,488Debtors 17,571 27,448 37,194 44,492Inventory 24,006 36,002 43,906 47,268Loans & advances 29,150 36,429 49,363 59,048Total current assets 93,215 122,367 152,950 173,296Investments 54,252 54,252 54,252 54,252Gross fixed assets 391,703 604,841 639,962 671,959Less: Depreciation ‐138,195 ‐156,832 ‐178,910 ‐200,867Add: Capital WIP 9,215 10,000 5,000 5,001Net fixed assets 262,722 458,009 466,052 476,094Non‐current assets 10,851 10,851 10,851 10,851Total assets 421,039 645,478 684,105 714,492 Current liabilities 68,952 86,079 116,538 139,297Provisions 4,579 5,722 7,754 9,275Total current liabilities 73,531 91,801 124,291 148,572Non‐current liabilities 103,592 286,005 258,996 223,171Total liabilities 177,123 377,807 383,287 371,743Paid‐up capital 2,745 2,745 2,745 2,745Reserves & surplus 241,171 264,926 298,073 340,004Shareholders’ equity 243,916 267,671 300,818 342,749Total equity & liabilities 421,039 645,478 684,105 714,492 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 38,721 38,384 53,559 67,753Depreciation 13,484 18,637 22,078 21,957Chg in working capital ‐15,474 ‐10,881 1,906 3,935Total tax paid ‐17,124 ‐11,515 ‐16,068 ‐20,326Cash flow from operating activities 19,606 34,624 61,475 73,319Capital expenditure ‐20,857 ‐213,924 ‐30,121 ‐31,998Chg in investments ‐9,976 0 0 0Other investing activities 9,395 67 94 119Cash flow from investing activities ‐21,438 ‐213,857 ‐30,027 ‐31,879Free cash flow ‐1,832 ‐179,232 31,448 41,440Equity raised/(repaid) 1 0 0 0Debt raised/(repaid) 4,797 182,413 ‐27,010 ‐35,825Dividend (incl. tax) ‐3,212 ‐3,181 ‐4,438 ‐5,615Cash flow from financing activities 1,599 179,232 ‐31,448 ‐41,439Net chg in cash ‐233 0 0 0 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 98.9 97.9 136.6 172.8Growth, % 18.7 (1.0) 39.5 26.5Book NAV/share (INR) 888.6 975.1 1,095.8 1,248.6FDEPS (INR) 98.9 97.9 136.6 172.8CEPS (INR) 148.0 165.8 217.0 252.8CFPS (INR) 47.0 96.2 190.0 228.3DPS (INR) 10.0 9.9 13.8 17.5Return ratios Return on assets (%) 7.5 6.8 7.4 8.4Return on equity (%) 11.1 10.0 12.5 13.8Return on capital employed (%) 9.2 8.0 8.8 10.3Turnover ratios Asset turnover (x) 1.0 0.9 0.9 1.1Sales/Total assets (x) 0.6 0.6 0.6 0.7Sales/Net FA (x) 1.0 0.9 0.9 1.1Working capital/Sales (x) 0.0 0.0 0.0 0.0Working capital days 2.6 15.9 11.8 8.2Liquidity ratios Current ratio (x) 1.4 1.4 1.3 1.2Quick ratio (x) 1.0 1.0 0.9 0.9Interest cover (x) 6.0 3.0 3.2 4.0Dividend cover (x) 9.9 9.9 9.9 9.9Total debt/Equity (%) 31.5 96.9 77.2 57.3Net debt/Equity (%) (4.7) 63.9 44.2 28.4Valuation PER (x) 39.6 40.0 28.7 22.6PEG (x) ‐ y‐o‐y growth 2.1 (38.7) 0.7 0.9Price/Book (x) 4.4 4.0 3.6 3.1Yield (%) 0.3 0.3 0.4 0.4EV/Net sales (x) 4.4 4.1 3.0 2.4EV/EBITDA (x) 21.7 20.5 14.9 12.7EV/EBIT (x) 29.2 28.9 20.1 16.3



Shree Cement (SRCM IN)

Competitive advantage now lost INDIA | CEMENT | Company Update

10 April 2018

Not a ‘further re‐rating’ story; stock price will move in tandem with capex Shree Cement is the most premium stock in the sector, driven by its excellent record of delivering robust operational performance led by its volume‐growth strategy. However, this story seems to have played out; its strategy of pushing volumes may not work in its favour and it may not be able to maintain its existing return ratios. The only way for Shree to safeguard its return ratios is through better cement realisations. Volume growth may remain robust, but will not be margin accretive Shree will continue to deliver robust volume growth, but this growth will not be margin accretive. The only way Shree can make this growth margin accretive is by making its realisations better, but this will also have an inherent limitation, as the brand discount will prevail (because of its historical aggressive volume push strategy with no focus on branding, which caused its brand to get a low tier‐2 or tier‐3 position in most markets). It will be very difficult for Shree to bridge the brand‐premium gap. However, Shree already realises this, and it has been the only stock in the sector to surprise consensus in terms of realisations for the last three quarters; its realisation CAGR was ~3% (among the better ones in the industry) but the realisation discount for Shree vs. comparable peers is still 7‐15%. Worst impacted as compliance norms become more stringent Over the last eight quarters, since compliance norms became stringent (truck loads, environmental norms, blending ratios), Shree was one of the worst affected. Its quarterly opex/tonne CAGR was nearly 3% over Q1FY17‐Q3FY18 vs. 0‐1% for its peers. Its erstwhile non‐compliance to such norms helped it save a lot on opex, so it saw the worst structural de‐rating after norms changed. On an absolute basis, Shree’s opex/tonne increased by nearly Rs 520/tonne vs. Rs 300‐350 for other comparable peers. Acquisitions in the Middle East will only add to problems The recent Middle East acquisition will add to the return ratios challenges (sustainability). UltraTech and JK Cement are already present in similar markets from the last 4‐5 years, and both have failed to make significant returns from their assets. We do not believe that Shree’s investment argument of ‘zero tax rate’ and currency fluctuations can justify its investments. Shree will now provide a natural support to cement prices – a big positive for the industry As its volumes strategy will not help it to sustain return ratios anymore, Shree will have a natural inclination for better cement prices. We believe that with the most aggressive volume‐push cement major (Shree) coming on board, it will provide the industry with the much‐awaited strong support for cement pricing in FY19 – a big positive. Outlook We maintain our Neutral view on Shree with our earlier target of Rs 18,000. We don’t see any material re‐rating unless Shree materially reduces its realisation gap vs. peers and improves its margins. We also believe that Shree will lose its position as the most premium stock because of lack of improvement in profit margins. At our target, the stock will trade at an FY20 EV/tonne of ~US$ 215/tonne, which is still quite rich.

NEUTRAL (Maintain) CMP RS 17,108 TARGET RS 18,000 (+5%) COMPANY DATA O/S SHARES (MN) : 35MARKET CAP (RSBN) : 596MARKET CAP (USDBN) : 9.252 ‐ WK HI/LO (RS) : 20560/15600LIQUIDITY 3M (USDMN) : 6.7PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 64.8 64.8 64.8FII / NRI : 23.6 25.1 25.0FI / MF : 5.7 4.4 4.3NON PRO : 1.2 0.9 0.9PUBLIC & OTHERS : 4.7 4.9 5.0 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 6.8 ‐11.9 ‐3.4REL TO BSE 5.3 ‐10.0 ‐17.1 PRICE VS. SENSEX



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SHREE CEMENT COMPANY UPDATE

Freight cost CAGR of cement manufacturers over eight quarters

Source: Company, PhillipCapital India Research Shree understands it has to tone down its volume growth strategy


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UltraTech Cement Ambuja Cements ACC LimitedShree Cement Dalmia Bharat

Shree remains the worst impacted in terms of freight cost. In the last eight quarters, since compliance norms became more stringent, its freight cost CAGR was 4%, the highest in the industry

In the last four quarters, it has tremendously toned down its volume‐push aggression in order to work on pricing and accommodate UltraTech‐led large industry consolidation moves In the last two quarters, Shree’s volume growth (at 8%) has been the lowest among cement majors (double‐digit)



Shree’s realisation CAGR before it incorporated volume discipline

Source: Company, PhillipCapital India Research We believe Shree realises that working on realisations is the only way out Until Q3FY17, Shree’s realisation CAGR was among the worst in the industry. We believe it accepted about four quarters ago that realisation push is the only way to sustain its return ratios. Over Q4FY12 and Q3FY17, Shree’s realisation CAGR was only 0.5%, amongst the lowest in the industry. However, over the last four quarters, with a its shift from volume growth to price realisations, its realisation CAGR has increased to 3% – the best in the industry Shree’s realisation CAGR after it implemented volume discipline

Source: Company, PhillipCapital India Research Nonetheless, on absolute terms, Shree’s realisations continue to remain at a discount of 7‐15% to cement majors. It will be very difficult for Shree to bridge this gap as it continues to be positioned as a ‘tier‐2’ or ‘tier‐3’ brand in almost all markets

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Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 84,292 100,071 123,447 150,073Growth, % 14 19 23 22Total income 84,292 100,071 123,447 150,073Raw material expenses ‐6,807 ‐8,071 ‐10,137 ‐12,490Employee expenses ‐5,372 ‐6,486 ‐7,795 ‐9,368Other Operating expenses ‐48,441 ‐59,902 ‐73,200 ‐89,221EBITDA (Core) 23,672 25,612 32,315 38,994Growth, % 79.3% 8.2% 26.2% 20.7%Margin, % 28.1 25.6 26.2 26.0Depreciation ‐12,147 ‐9,298 ‐11,323 ‐13,978EBIT 11,525 16,314 20,992 25,016Growth, % 179.9% 41.6% 28.7% 19.2%Margin, % 13.7 16.3 17.0 16.7Interest paid ‐1,294 ‐796 ‐1,589 ‐2,511Other Non‐Operating Income 5,076 3,394 3,868 4,460Pre‐tax profit 15,284 18,889 23,248 26,942Tax provided ‐1,917 ‐5,674 ‐6,981 ‐8,089Profit after tax 13,367 13,215 16,267 18,852Net Profit 13,367 13,215 16,267 18,852Growth, % 193.8 (1.1) 23.1 15.9Net Profit (adjusted) 13,367 13,215 16,267 18,852Unadj. shares (m) 35 35 35 35Wtd avg shares (m) 35 35 35 35 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 10,000 10,000 10,000 10,000Debtors 4,975 5,906 7,286 8,858Inventory 12,341 14,652 18,074 21,973Loans & advances 21,094 25,043 30,893 37,556Total current assets 48,411 55,601 66,253 78,386Gross fixed assets 98,815 107,815 143,815 166,815Less: Depreciation ‐77,815 ‐87,114 ‐98,437 ‐112,416Add: Capital WIP 4,000 3,000 3,000 3,000Net fixed assets 25,000 23,701 48,378 57,400Non‐current assets 23,907 23,907 23,907 23,907Total assets 97,317 103,209 138,538 159,693 Current liabilities 9,087 14,259 17,599 21,625Provisions 5,706 3,304 4,067 4,713Total current liabilities 14,793 17,563 21,665 26,338Non‐current liabilities 13,039 6,228 25,231 27,550Total liabilities 27,833 23,790 46,896 53,889Paid‐up capital 348 348 348 348Reserves & surplus 69,136 79,071 91,294 105,456Shareholders’ equity 69,484 79,419 91,642 105,804Total equity & liabilities 97,317 103,209 138,538 159,693 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 15,284 18,889 23,248 26,942Depreciation 12,147 9,298 11,323 13,978Chg in working capital ‐12,754 ‐2,019 ‐7,312 ‐8,106Total tax paid ‐1,917 ‐5,674 ‐6,981 ‐8,089Cash flow from operating activities 12,760 20,495 20,278 24,724Capital expenditure ‐4,000 ‐8,000 ‐36,000 ‐23,000Other investing activities 23 23 23 23Cash flow from investing activities ‐3,977 ‐7,977 ‐35,977 ‐22,977Free cash flow 8,783 12,518 ‐15,699 1,747Debt raised/(repaid) ‐644 ‐6,812 19,003 2,320Dividend (incl. tax) ‐970 ‐5,706 ‐3,304 ‐4,067Cash flow from financing activities ‐1,614 ‐12,518 15,699 ‐1,747Net chg in cash 7,169 0 0 0 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 383.7 379.3 466.9 541.2Growth, % (43.5) 100.0 350.0 (36.1)Book NAV/share (INR) 1,994.5 2,279.7 2,630.6 3,037.1FDEPS (INR) 383.7 379.3 466.9 541.2CEPS (INR) 732.4 646.3 792.0 942.4CFPS (INR) 221.2 491.5 471.7 582.3DPS (INR) 163.8 94.8 116.7 135.3Return ratios Return on assets (%) 15.5 13.7 14.3 13.7Return on equity (%) 19.2 16.6 17.8 17.8Return on capital employed (%) 18.0 16.3 17.0 16.3Turnover ratios Asset turnover (x) 1.6 1.8 1.7 1.6Sales/Total assets (x) 0.9 1.0 1.0 1.0Sales/Net FA (x) 2.9 4.1 3.4 2.8Working capital/Sales (x) 0.3 0.3 0.3 0.3Working capital days 102.3 102.3 102.3 102.3Liquidity ratios Current ratio (x) 3.3 3.2 3.1 3.0Quick ratio (x) 2.4 2.3 2.2 2.1Interest cover (x) 8.9 20.5 13.2 10.0Dividend cover (x) 2.3 4.0 4.0 4.0Total debt/Equity (%) 22.6 11.2 30.4 28.5Net debt/Equity (%) (26.2) (31.5) (6.6) (3.5)Valuation PER (x) 44.6 45.1 36.6 31.6Price/Book (x) 8.6 7.5 6.5 5.6Yield (%) 1.0 0.6 0.7 0.8EV/Net sales (x) 7.1 5.9 5.0 4.1EV/EBITDA (x) 25.4 23.2 19.0 15.8EV/EBIT (x) 52.2 36.5 29.2 24.6



Dalmia Bharat (DBEL IN) On its way to become the most expensive stock INDIA | CEMENT | Company Update

10 April 2018

Has the inherent potential to command the most expensive valuations in the sector From a valuation of mere about US$ 40/tonne in FY11, Dalmia is today among the most premium companies in the sector, trading at near 4‐5x its base EV/tonne valuation. It is also the best performing stock of the sector in the last decade, driven by the consistency and sustainability of its operating performance. This is the only company that has not disappointed consensus in terms of its operational performance even once since FY12. With its robust track record and a visible roadmap, we expect Dalmia to command the most premium valuation in the sector in the next 1‐2 years. Sustained strategic focus on all key operational parameters is its differentiating factor Dalmia is the only manufacturer putting the right foot forward strategically on all operational parameters. We see sustainable and visible triggers for volume growth, better realisation then peers, and an upper hand in terms of cost efficiencies. Since mid FY15, Dalmia’s product realisation has been among the best, driven by brand consolidation and focus on creating a brand premium. Dalmia’s quarterly volume CAGR since FY12 is 19% vs. the industry’s 5%; its costs have seen a CAGR of 1.7% vs. the industry’s 2.4%. This in operating outperformance has been a key for its substantial re‐rating. Deleveraging – the best amongst peers. Geared up for next phase of capex Dalmia’s debt leveraging has been the best among cement majors in the past three years. Its net debt to EBITDA has come off from 6.8x in FY15 to 2.0x in Q3FY18. Its net debt to equity is also now less than 1x, which enables Dalmia to gear up for its next capex. Pan‐India vision on the verge of fulfilment; consolidation will be the medium‐term target In 2009, Dalmia envisaged a pan‐India scope – and it is on its way to achieve this. The company added ‘Bharat’ to its original name ‘Dalmia’ to reflect a pan‐India reach and its logo also consists of the tricolour. It has emerged as a successful bidder for Murli Industries and Kalyanpur Cement and is still in the race for the Binani Cement asset. Acquiring Binani will make Dalmia a true pan‐India player. Once these transactions are done, Dalmia should consolidate its capex over the next 2‐3 fiscals, like it did over FY15‐18. Positioning as the ‘greenest cement company globally’ means much more Over the past couple of years, Dalmia has aggressively positioned itself as ‘the greenest cement company globally’. To us, this statement means much more – it is an indication that Dalmia will exercise caution in its business practices in terms of environmental norms, transport load factor, and blending ratios – and will never indulge in activity that could spoil this stance. It also means that on operating parameters, Dalmia will have to sustain and improve to keep the tag intact. It will be a long‐term competitive advantage vs. peers, especially the currently most expensive stock, Shree Cement. Outlook We maintain Dalmia Bharat among our top large‐cap picks and our target of Rs 3,500, at which the stock will trade at ~US$220/tonne, at par with the current valuation leader Shree. Since we expect Dalmia to be the most premium valued stock in the sector, we strongly believe that it has the scope to be rerated further.

BUY (Maintain) CMP RS 2,780 TARGET RS 3,500 (+26%) COMPANY DATA O/S SHARES (MN) : 89MARKET CAP (RSBN) : 247MARKET CAP (USDBN) : 3.852 ‐ WK HI/LO (RS) : 3349 / 2041LIQUIDITY 3M (USDMN) : 7.36PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 58.0 58.0 58.0FII / NRI : 15.7 14.5 14.0FI / MF : 7.1 7.8 7.5NON PRO : 5.6 6.1 6.6PUBLIC & OTHERS : 13.6 13.5 13.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 1.5 ‐13.0 28.7REL TO BSE 0.0 ‐11.1 14.9 PRICE VS. SENSEX



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Dalmia’s premium brand positioning has helped it to improve profit margins Since FY15, when Dalmia’s brand consolidation initiative gained momentum, we can see that Dalmia has consistently outperformed the industry on its product realisations – this helped it to improve its EBITDA. Realisation trend – Dalmia vs. industry EBITDA trend – Dalmia vs. industry

Volume growth at Dalmia remains the best in industry

Focus on cost improvement

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Dalmia’s consistent premium in its realisation trend vs. industry is one of the key reasons for its superior EBITDA/tonne

On quarterly CAGRs, Dalmia Bharat leads the industry on volume growth over past six years (OCL is a part of Dalmia Bharat Group)

Dalmia also consistently outperforms the industry on two of the most crucial operational cost parameters – power and fuel and freight costs




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Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 74,044 84,731 95,211 104,238Growth, % 16 14 12 9Total income 74,044 84,731 95,211 104,238Raw material expenses ‐4,529 ‐4,975 ‐5,586 ‐6,046Employee expenses ‐1,960 ‐1,988 ‐2,304 ‐2,817Other Operating expenses ‐48,535 ‐55,217 ‐61,233 ‐67,823EBITDA (Core) 19,019 22,551 26,088 27,552Growth, % 26.1 18.6 15.7 5.6Margin, % 25.7 26.6 27.4 26.4Depreciation ‐6,027 ‐6,301 ‐6,518 ‐6,762EBIT 12,992 16,250 19,570 20,790Growth, % 23.1 25.1 20.4 6.2Margin, % 17.5 19.2 20.6 19.9Interest paid ‐8,900 ‐7,388 ‐6,215 ‐6,216Other Non‐Operating Income 2,988 2,689 2,420 2,178Pre‐tax profit 7,080 11,550 15,775 16,752Tax provided ‐2,762 ‐4,620 ‐6,310 ‐6,701Profit after tax 4,318 6,930 9,465 10,051Others (Minorities, Associates) ‐870 ‐1,354 ‐1,623 ‐1,752Net Profit 3,448 5,577 7,842 8,299Growth, % 80.7 61.7 40.6 5.8Net Profit (adjusted) 3,448 5,577 7,842 8,299Unadj. shares (m) 89 89 89 89Wtd avg shares (m) 89 89 89 89 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 1,750 3,167 3,471 3,789Debtors 5,933 5,836 7,858 8,338Inventory 6,488 8,687 11,625 12,233Loans & advances 12,006 9,596 13,533 14,695Total current assets 29,258 27,392 36,605 39,185Investments 27,434 27,434 27,434 27,434Gross fixed assets 143,176 141,099 144,599 149,100Less: Depreciation ‐21,415 ‐27,716 ‐34,234 ‐40,996Add: Capital WIP 1,325 4,500 4,501 4,503Net fixed assets 123,086 117,883 114,866 112,607Total assets 179,778 172,708 178,905 179,226 Current liabilities 39,869 25,317 25,571 25,164Provisions 5,554 5,993 6,726 7,354Total current liabilities 45,423 31,310 32,297 32,518Non‐current liabilities 78,577 78,900 74,853 65,110Total liabilities 124,000 110,209 107,149 97,628Paid‐up capital 178 178 178 178Reserves & surplus 49,471 54,839 62,472 70,561Shareholders’ equity 55,778 62,499 71,755 81,597Total equity & liabilities 179,778 172,708 178,905 179,226 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 7,080 11,550 15,775 16,752Depreciation 6,027 6,301 6,518 6,762Chg in working capital 11,884 ‐10,830 ‐7,922 ‐2,041Total tax paid 7,328 ‐3,256 ‐4,946 ‐5,337Cash flow from operating activities 32,319 3,766 9,425 16,136Capital expenditure ‐23,113 ‐1,098 ‐3,501 ‐4,503Chg in investments ‐1,681 0 0 0Other investing activities 7,841 0 0 0Cash flow from investing activities ‐16,954 ‐1,098 ‐3,501 ‐4,503Free cash flow 15,366 2,668 5,924 11,633Debt raised/(repaid) ‐17,573 ‐1,042 ‐5,411 ‐11,107Dividend (incl. tax) ‐209 ‐209 ‐209 ‐209Cash flow from financing activities ‐16,099 ‐1,251 ‐5,620 ‐11,316Net chg in cash ‐733 1,417 304 318 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 38.8 62.7 88.2 93.3Growth, % 80.2 61.7 40.6 5.8Book NAV/share (INR) 558.2 618.5 704.3 795.3FDEPS (INR) 38.8 62.7 88.2 93.3CEPS (INR) 106.5 133.5 161.4 169.3CFPS (INR) 272.3 167.3 78.8 156.9DPS (INR) 2.0 2.0 2.0 2.0Return ratios Return on assets (%) 5.8 6.5 7.5 7.7Return on equity (%) 6.9 10.1 12.5 11.7Return on capital employed (%) 7.3 8.0 8.8 9.0Turnover ratios Asset turnover (x) 0.6 0.7 0.8 0.8Sales/Total assets (x) 0.4 0.5 0.5 0.6Sales/Net FA (x) 0.6 0.7 0.8 0.9Working capital/Sales (x) (0.2) (0.0) 0.1 0.1Working capital days (60.9) (4.7) 29.0 35.8Liquidity ratios Current ratio (x) 0.7 1.1 1.4 1.6Quick ratio (x) 0.6 0.7 1.0 1.1Interest cover (x) 1.5 2.2 3.1 3.3Dividend cover (x) 19.3 31.2 43.9 46.5Total debt/Equity (%) 154.3 69.1 51.6 29.5Net debt/Equity (%) 106.6 69.1 51.6 29.5Valuation PER (x) 71.7 44.3 31.5 29.8Price/Book (x) 5.0 4.5 3.9 3.5EV/Net sales (x) 4.3 3.6 3.2 2.8EV/EBITDA (x) 16.9 13.6 11.5 10.5EV/EBIT (x) 24.8 18.8 15.3 13.9



India Cements (ICEM IN)

Maintaining price leadership will help earnings recovery INDIA | CEMENT | Company Update

10 April 2018

Tamil Nadu sand issues severely impacted operational performance in FY18 India Cements’ biggest concern in FY18 was low demand off‐take from its highest contributing state, Tamil Nadu; severe issues (availability of sand, political instability) severely damaged its operating profit margins. As per the management, Tamil Nadu contributes nearly Rs 2000/tonne EBITDA. Low off‐take from this state spoiled the recovery in its blended EBITDA. No compromise on its brand positioning will help revival as prices recover India Cements’ brand positioning strategy is to be the price leader in all its markets. This is the last company to compromise on price positioning. Its last six year volume CAGR is less than 1% vs. the industry’s 5%, while its price realisation CAGR is in line at ~1%. Its ability to maintain its prices will be a key turnaround factor in its earnings, when volume off‐take improves in its core market. Improvement in opex visible, long‐term cost CAGR is lower than industry India Cements’ high opex has led to its lower valuations vs. peers. Over the past six years, it has been able to bridge this difference through better efficiencies and operating parameters. Since Q4FY12, India Cements opex CAGR was 1.7% vs. industry’s 2.4%. When the efficiency improvement sustains, the valuation gap will bridge. Exit from non‐core business will help re‐rating Over the past several quarters the management has reiterated that it is working on a complete exit from its non‐core businesses – towards making India Cements a ‘pure’ cement company. The de‐merger of its cricket investments and closing the infrastructure division were steps that aligned with this goal. We expect India Cements to streamline its core business operations and completely exit from non‐core ventures over the next 12‐18 months, which will be a key for its re‐rating. Increase in debt in FY18 was a valuation drag Because of its strong focus on price positioning and to maintain its price leadership, India Cements pumped funds into the distribution channel to help meet working‐capital requirements. In FY18, India Cements’ debt increased by Rs 3bn as south India felt the impact of demonetisation. However, this increased its short‐term debt, which should reverse shortly. We believe this was an important reason for its underperformance in FY18. Outlook As the stock trades at a deep discount to its peers (at US$ 70/tonne), we see deep value. At our target (Rs 260), the stock will trade at US$ 100/tonne, which is still at a discount to replacement. Maintain BUY, given its deep discount to peers. At a size of 16mn tonnes, the company has the potential to trade at higher multiples.

BUY (Maintain) CMP RS 151 TARGET RS 260 (+72%) COMPANY DATA O/S SHARES (MN) : 308MARKET CAP (RSBN) : 47MARKET CAP (USDBN) : 0.752 ‐ WK HI/LO (RS) : 226 / 136LIQUIDITY 3M (USDMN) : 11.4PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 28.4 28.4 28.4FII / NRI : 20.5 22.2 24.0FI / MF : 26.4 24.5 23.0NON PRO : 4.5 5.3 6.0PUBLIC & OTHERS : 20.2 19.5 18.6 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 4.3 ‐21.3 ‐7.1REL TO BSE 2.9 ‐19.4 ‐20.8 PRICE VS. SENSEX



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INDIA CEMENTS COMPANY UPDATE


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Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 58,637 61,027 63,870 70,785Growth, % 21 4 5 11Total income 58,637 61,027 63,870 70,785Raw material expenses ‐9,377 ‐9,812 ‐10,694 ‐12,318Employee expenses ‐4,833 ‐5,113 ‐5,164 ‐5,423Other Operating expenses ‐35,516 ‐38,626 ‐38,466 ‐42,174EBITDA (Core) 8,910 7,475 9,546 10,870Growth, % 2.8 (16.1) 27.7 13.9Margin, % 15.2 12.2 14.9 15.4Depreciation ‐2,760 ‐2,721 ‐2,907 ‐2,975EBIT 6,150 4,754 6,638 7,895Growth, % 2.1 (22.7) 39.6 18.9Margin, % 10.5 7.8 10.4 11.2Interest paid ‐3,800 ‐3,322 ‐3,087 ‐2,809Other Non‐Operating Income 286 286 286 286Pre‐tax profit 2,571 1,652 3,772 5,306Tax provided ‐940 ‐446 ‐1,018 ‐1,433Profit after tax 1,631 1,206 2,754 3,873Others (Minorities, Associates) 0 0 0 0Net Profit 1,631 1,206 2,754 3,873Growth, % 18.7 (26.0) 128.3 40.7Net Profit (adjusted) 1,631 1,206 2,754 3,873Unadj. shares (m) 308 308 308 308Wtd avg shares (m) 308 308 308 308 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 380 380 380 380Debtors 5,230 5,443 5,697 6,314Inventory 7,736 8,052 8,427 9,339Loans & advances 16,498 16,933 17,367 17,802Other current assets 1,395 1,395 1,395 1,395Total current assets 31,239 32,202 33,266 35,230Investments 4,167 4,167 4,167 4,167Gross fixed assets 117,184 119,526 121,869 124,211Less: Depreciation ‐44,585 ‐47,899 ‐51,399 ‐54,968Add: Capital WIP 1,343 500 500 500Net fixed assets 73,941 72,127 70,969 69,744Total assets 109,347 108,497 108,402 109,141 Current liabilities 17,610 18,328 19,182 21,258Total current liabilities 19,219 18,328 19,182 21,258Non‐current liabilities 38,023 38,494 36,428 32,852Total liabilities 57,242 56,822 55,610 54,110Paid‐up capital 3,082 3,082 3,082 3,082Reserves & surplus 48,668 48,238 49,356 51,593Shareholders’ equity 52,105 51,675 52,793 55,030Total equity & liabilities 109,347 108,497 108,402 109,141 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 2,571 1,652 3,772 5,306Depreciation 2,760 2,721 2,907 2,975Chg in working capital ‐3,056 ‐1,872 ‐247 60Total tax paid ‐940 ‐446 ‐1,018 ‐1,433Cash flow from operating activities 1,335 2,056 5,414 6,908Capital expenditure ‐1,398 ‐1,470 ‐2,313 ‐2,313Chg in investments 21 0 0 0Other investing activities 536 64 65 65Cash flow from investing activities ‐841 ‐1,471 ‐2,313 ‐2,313Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) ‐204 488 ‐2,028 ‐3,523Dividend (incl. tax) ‐357 ‐1,072 ‐1,072 ‐1,072Cash flow from financing activities ‐471 ‐585 ‐3,101 ‐4,595Net chg in cash 23 0 0 0 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 5.3 3.9 8.9 12.6Growth, % 18.7 (26.0) 128.3 40.7Book NAV/share (INR) 167.9 166.5 170.2 177.4FDEPS (INR) 5.3 3.9 8.9 12.6CEPS (INR) 14.2 12.7 18.4 22.2CFPS (INR) 3.4 6.0 16.9 21.7DPS (INR) 1.2 3.5 3.5 3.5Return ratios Return on assets (%) 3.7 3.0 4.3 5.1Return on equity (%) 3.2 2.4 5.3 7.1Return on capital employed (%) 4.4 3.6 5.2 6.3Turnover ratios Asset turnover (x) 0.7 0.8 0.8 0.9Sales/Total assets (x) 0.5 0.6 0.6 0.7Sales/Net FA (x) 0.8 0.8 0.9 1.0Working capital/Sales (x) 0.2 0.2 0.2 0.2Working capital days 82.5 80.7 78.3 70.1Liquidity ratios Current ratio (x) 1.8 1.8 1.7 1.7Quick ratio (x) 1.3 1.3 1.3 1.2Interest cover (x) 1.6 1.4 2.2 2.8Dividend cover (x) 4.6 1.1 2.6 3.6Total debt/Equity (%) 60.7 62.1 56.9 48.2Net debt/Equity (%) 58.3 59.8 52.2 45.9Valuation PER (x) 28.5 38.6 16.9 12.0Price/Book (x) 0.9 0.9 0.9 0.9EV/Net sales (x) 1.3 1.2 1.1 1.0EV/EBITDA (x) 8.7 10.0 7.6 6.7EV/EBIT (x) 12.6 15.7 10.9 9.2



JK Lakshmi Cement (JKLC IN) Cost savings will drive re‐rating INDIA | CEMENT | Company Update

10 April 2018

Cost savings initiatives to drive improvement in opex in FY19 Over FY19, JKLC will address all its opex concerns. Full production from Waste Heat Recovery power plants at sites in east India, Udaipur Cement Works, and the commissioning of thermal power capacity in east India will help drive cost savings. JKLC’s target is incremental of Rs 200/tonne as at end of FY19 vs. FY18. Efficiency parameters are already amongst the best for JKLC Since JKLC has one of the best efficiency parameters in the industry, none of its cost disadvantages are because of this reason. The only major concern is the absence of captive power in east India. There is scope for marginal efficiency improvements with the commissioning of its conveyor belt in east India (from the limestone mines to the plant, expected by the end of FY19). Will save on logistics cost as it scales up to optimum utilisations at all its sites Except for its Odisha grinding unit, all its sites are now fully commissioned. As the Odisha grinding unit also commissions by Q3FY19, JKLC is targeting a logistics costs saving of Rs 50‐100/tonne (incremental) driven by optimum capacity utilisation at all sites and realignment of lead distances from various factories. No incremental capex announcements till the end of FY20; will focus on consolidation The only material capex pending at JKLC is the commissioning of its grinding unit in Odisha, which is likely to be commissioned in Q3FY19. As we understand, beyond this 0.6mn tn of grinding expansion, JKLC will look to consolidate its capacity portfolio and will not announce any further expansion till the end of FY20. The only agenda will be to ramp‐up utilisations and bridge the gap in opex with its peers. On power alone, at a consolidated level, JKLC has an opex disadvantage of Rs 100‐150/tonne vs. peers because of the absence of sufficient captive power. Scope of brownfield is phenomenal, can potentially add +50% at 50% of replacement Its scope for brownfield expansions remains the highest among peers. JKLC claims it has the potential of touching +20mn tonnes of capacity, vs. 13mn tonnes currently, at a capex of US$ 70‐75/tonne. This is nearly half of the replacement capex. Though these calls are unlikely to be taken before end of FY20, this will be JKLC’s competitive advantage over peers in the long term. For now, the management will remain conservative. Reduction in debt and improving balance sheet strength also remain focus areas JKLC’s immediate objective (over FY18‐20) will be to reduce its debt and improve its balance sheet. All excess cash flow will go towards debt reduction, as no significant capex is on the cards. It is likely to maintain a healthy dividend pay‐out of about 25%. Outlook We maintain JK Lakshmi as our strong conviction mid‐cap pick. We retain our BUY rating with our earlier target of Rs 600, at which it will trade at US$ 100 FY20 earnings. This is still at a significant discount to replacement cost, so potential upgrades cannot be ruled out.

BUY (Maintain) CMP RS 437 TARGET RS 600 (+37%) COMPANY DATA O/S SHARES (MN) : 118MARKET CAP (RSBN) : 51.2MARKET CAP (USDBN) : 0.852 ‐ WK HI/LO (RS) : 535 / 375LIQUIDITY 3M (USDMN) : 0.9PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 45.9 45.9 45.9FII / NRI : 9.4 9.8 10.3FI / MF : 19.8 19.0 18.8NON PRO : 6.6 6.8 6.8PUBLIC & OTHERS : 18.3 18.5 18.1 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 4.2 ‐1.9 ‐3.6REL TO BSE 2.8 0.0 ‐17.4 PRICE VS. SENSEX



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JK LAKSHMI CEMENT COMPANY UPDATE


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JK LAKSHMI CEMENT COMPANY UPDATE

Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 29,216 35,449 39,746 44,053Growth, % 11 21 12 11Total income 29,216 35,449 39,746 44,053Raw material expenses ‐5,705 ‐6,928 ‐7,585 ‐8,279Employee expenses ‐2,245 ‐2,735 ‐3,004 ‐3,289Other Operating expenses ‐17,568 ‐20,746 ‐22,145 ‐23,601EBITDA (Core) 3,697 5,042 7,012 8,883Growth, % 36.4 36.4 39.1 26.7Margin, % 12.7 14.2 17.6 20.2Depreciation ‐1,750 ‐2,247 ‐2,327 ‐2,427EBIT 1,947 2,795 4,686 6,457Growth, % 84.6 43.5 67.6 37.8Margin, % 6.7 7.9 11.8 14.7Interest paid ‐2,444 ‐2,129 ‐1,587 ‐1,003Other Non‐Operating Income 1,226 1,104 883 883Pre‐tax profit 730 1,769 3,981 6,336Tax provided 78 ‐531 ‐1,194 ‐1,901Profit after tax 808 1,238 2,787 4,435Net Profit 808 1,238 2,787 4,435Growth, % 246.4 53.3 125.0 59.2Net Profit (adjusted) 808 1,238 2,787 4,435Unadj. shares (m) 118 118 118 118Wtd avg shares (m) 118 118 118 118 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 102 102 102 102Debtors 904 1,097 1,230 1,363Inventory 3,212 3,897 4,370 4,843Loans & advances 1,143 1,386 1,554 1,723Total current assets 5,361 6,483 7,256 8,031Investments 7,646 3,823 1,912 956Gross fixed assets 53,713 56,915 59,415 61,915Less: Depreciation ‐18,067 ‐20,314 ‐22,640 ‐25,067Add: Capital WIP 3,071 500 500 500Net fixed assets 38,717 37,101 37,274 37,348Total assets 51,724 47,407 46,442 46,335 Current liabilities 16,445 17,350 18,088 18,759Provisions 197 239 268 297Total current liabilities 16,643 17,589 18,357 19,056Non‐current liabilities 20,939 14,761 10,971 6,889Total liabilities 37,582 32,350 29,328 25,946Paid‐up capital 589 588 588 588Reserves & surplus 13,554 14,468 16,526 19,801Shareholders’ equity 14,142 15,056 17,114 20,389Total equity & liabilities 51,724 47,407 46,442 46,335 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 730 1,769 3,981 6,336Depreciation 1,750 2,247 2,327 2,427Chg in working capital 4,839 ‐175 ‐6 ‐75Total tax paid ‐672 ‐531 ‐1,194 ‐1,901Cash flow from operating activities 6,647 3,310 5,107 6,786Capital expenditure ‐4,792 ‐630 ‐2,500 ‐2,500Chg in investments ‐3,772 3,823 1,912 956Other investing activities ‐98 0 0 0Cash flow from investing activities ‐8,662 3,193 ‐588 ‐1,544Free cash flow ‐2,014 6,503 4,519 5,242Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) 2,010 ‐6,179 ‐3,790 ‐4,082Dividend (incl. tax) ‐222 ‐324 ‐729 ‐1,161Cash flow from financing activities 1,788 ‐6,503 ‐4,519 ‐5,242Net chg in cash ‐226 0 0 0 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 6.9 10.5 23.7 37.7Growth, % 246.4 53.3 125.0 59.2Book NAV/share (INR) 120.2 128.0 145.4 173.3FDEPS (INR) 6.9 10.5 23.7 37.7CEPS (INR) 21.7 29.6 43.5 58.3CFPS (INR) 27.7 31.6 43.8 58.6DPS (INR) 0.8 1.1 2.5 3.9Return ratios Return on assets (%) 4.8 5.2 8.0 10.9Return on equity (%) 5.7 8.2 16.3 21.8Return on capital employed (%) 6.8 7.8 12.9 18.0Turnover ratios Asset turnover (x) 0.9 1.1 1.4 1.5Sales/Total assets (x) 0.6 0.7 0.8 0.9Sales/Net FA (x) 0.8 0.9 1.1 1.2Working capital/Sales (x) (0.4) (0.3) (0.3) (0.2)Working capital days (139.8) (112.9) (100.4) (89.7)Liquidity ratios Current ratio (x) 0.3 0.4 0.4 0.4Quick ratio (x) 0.1 0.1 0.2 0.2Interest cover (x) 0.8 1.3 3.0 6.4Dividend cover (x) 9.2 9.6 9.6 9.6Total debt/Equity (%) 130.5 96.9 68.9 42.3Net debt/Equity (%) 130.5 96.9 68.9 42.3Valuation PER (x) 63.4 41.3 18.4 11.5PEG (x) ‐ y‐o‐y growth 0.3 0.8 0.1 0.2Price/Book (x) 3.6 3.4 3.0 2.5EV/Net sales (x) 2.6 2.0 1.6 1.4EV/EBITDA (x) 20.9 13.8 9.3 6.7EV/EBIT (x) 39.7 24.9 13.8 9.3



JK Cement (JKCE IN) New capex will make its business model ‘similar’ to Shree INDIA | CEMENT | Company Update

10 April 2018

Out of its first phase of capex; ahead of mid‐cap peers in terms of execution Amongst all mid‐caps, JK Cement has displayed the best execution capability in terms of timely commissioning of new capex. This has helped it to deliver and sustain better operating numbers vs. Peers. It is now out of its first capex phase and is reaping the benefits. In its core operations (north India), it has seen a six‐year volume CAGR of 5%, in line with the industry. Inclusive of its south India performance (where volume growth has remained the lowest for the industry), its CAGR is at +4%, which is also a healthy CAGR relative to industry. Its second capex phase should help it improve its position vs. peers JK Cement is one of the few mid‐caps to already announce its second capex phase, which will add nearly 40% to its existing capacity over the next two years. From FY21, JKCE will once again have the ability to ramp up volumes and gain more market share than peers. The second capex phase will also help it to grow its presence in its non‐core markets of western and central India, which will complement the growth plans of its third phase of greenfield capex in central India, which will be announced only after consolidation of JKCE’s second capex phase – in our view. Will be in line with the best on operating matrix as second capex phase commissions The biggest historic concern for JK Cement was its high opex because of the vintage of its mother plant in Nimbahera, North India. JK Cement has largely addressed this issue through newer technology capex in a phased manner at Nimbahera and its adjacent site, Mangrol. Its ~Rs 500/tonne gap in opex (on consolidated operations) vs. UltraTech (as UltraTech is the only other company with white cement business and hence comparable on opex) has now narrowed to ~Rs 200/tonne. With further capex at Mangrol and Nimbahera, JK Cement will be almost at par with the best of the industry in terms of opex. We understand that only on the power‐consumption front, it will be able to save incremental 10 units of power at Nimbahera, which implies a savings of Rs 60‐70/tonne. The throughput increase of the plant will add to the opex savings. The second phase of its capex will enable the company to align itself with the best of industry opex standards. JK Cement’s business model will be similar to Shree’s, but not identical With its new capex in Mangrol, the company will achieve similar efficiencies of scale as Shree’s Ras unit. Notably, Mangrol is just adjacent to Nimbahera, and for all practical purposes, Nimbahera and Mangrol can be considered a single site. One of the key factors that allows Shree’s Ras unit to maintain low production costs is the efficiency of scale because all its clinker production lines are at one location. JK Cement’s business model will also evolve in a similar way from here, and the new clinker unit at Mangrol will only add to efficiencies. Like Shree, JK Cement should also be among the best on opex, led by the capex and scale efficiencies of consolidating clinker capacities at virtually a single location. White cement business is an ‘add‐on’ to valuations White cement business is a bonus vs. mid‐cap peers and will always fetch better valuations then grey cement, as this business is consistent (not a traditional cyclical commodity business). Outlook We maintain our Buy rating on JKCE with our earlier target of Rs 1,400. We strongly believe that the valuation gap between efficient mid‐caps (who have been consistent on their operating performance such as JKCE) and large‐caps will bridge. We have seen this happening with Dalmia Bharat and we cannot rule out a similar scenario for JKCE. At our target, it will trade at US$ 150/tonne FY20 earnings.

BUY (Maintain) CMP RS 956 TARGET RS 1,400 (+46%) COMPANY DATA O/S SHARES (MN) : 70MARKET CAP (RSBN) : 67MARKET CAP (USDBN) : 1.152 ‐ WK HI/LO (RS) : 1195 / 892LIQUIDITY 3M (USDMN) : 0.7PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 64.2 64.2 64.2FII / NRI : 10.6 11.2 11.6FI / MF : 16.7 16.4 13.1NON PRO : 2.2 2.2 2.2PUBLIC & OTHERS : 6.3 6.1 9.1 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐4.8 ‐16.7 3.4REL TO BSE ‐6.2 ‐14.8 ‐10.4 PRICE VS. SENSEX



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JK CEMENT COMPANY UPDATE


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JK CEMENT COMPANY UPDATE

Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 39,694 43,854 51,242 53,397Growth, % 6 10 17 4Total income 39,694 43,854 51,242 53,397Raw material expenses ‐6,326 ‐7,313 ‐8,518 ‐9,028Employee expenses ‐3,155 ‐4,777 ‐6,272 ‐6,968Other Operating expenses ‐23,471 ‐23,433 ‐26,975 ‐27,577EBITDA (Core) 6,741 8,331 9,477 9,823Growth, % 32.0 23.6 13.8 3.7Margin, % 17.0 19.0 18.5 18.4Depreciation ‐2,169 ‐2,121 ‐2,191 ‐2,261EBIT 4,572 6,209 7,285 7,562Growth, % 32.0 23.6 13.8 3.7Margin, % 17.0 19.0 18.5 18.4Interest paid ‐2,954 ‐2,711 ‐2,745 ‐3,461Other Non‐Operating Income 1,303 781 786 799Pre‐tax profit 2,921 4,279 5,326 4,900Tax provided ‐649 ‐1,284 ‐1,598 ‐1,470Profit after tax 2,272 2,996 3,728 3,430Net Profit 2,272 2,996 3,728 3,430Growth, % 258.4 31.8 24.5 (8.0)Net Profit (adjusted) 2,272 2,996 3,728 3,430Unadj. shares (m) 70 70 70 70Wtd avg shares (m) 70 70 70 70 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 4,272 4,609 5,301 5,835Debtors 2,019 2,179 2,506 2,758Inventory 5,609 6,656 7,656 8,427Loans & advances 493 531 611 673Other current assets 1,758 1,897 2,182 2,402Total current assets 14,152 15,873 18,255 20,095Investments 653 653 653 653Gross fixed assets 61,863 60,611 62,611 64,611Less: Depreciation ‐13,892 ‐16,013 ‐18,205 ‐20,466Add: Capital WIP 1,267 2,000 9,000 22,000Net fixed assets 49,238 46,597 53,406 66,144Total assets 64,043 63,122 72,314 86,892 Current liabilities 12,269 12,961 14,727 16,343Provisions 655 983 1,311 1,311Total current liabilities 12,925 13,944 16,037 17,653Non‐current liabilities 33,483 29,531 34,212 45,054Total liabilities 46,408 43,475 50,249 62,708Paid‐up capital 699 699 699 699Reserves & surplus 16,935 18,948 21,365 23,485Shareholders’ equity 17,635 19,647 22,065 24,184Total equity & liabilities 64,043 63,122 72,314 86,892 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 2,921 4,279 5,326 4,900Depreciation 2,169 2,121 2,191 2,261Chg in working capital 2,823 ‐693 75 311Total tax paid ‐649 ‐1,284 ‐1,598 ‐1,470Cash flow from operating activities 7,265 4,424 5,995 6,002Capital expenditure ‐5,787 520 ‐9,000 ‐15,000Chg in investments ‐38 0 0 0Cash flow from investing activities ‐6,062 520 ‐9,000 ‐15,000Debt raised/(repaid) ‐1,312 ‐3,952 4,680 10,843Dividend (incl. tax) ‐328 ‐655 ‐983 ‐1,311Cash flow from financing activities ‐1,738 ‐4,607 3,697 9,532Net chg in cash ‐535 337 692 534 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 32.5 42.8 53.3 49.1Growth, % 258.4 31.8 24.5 (8.0)Book NAV/share (INR) 252.2 281.0 315.5 345.8FDEPS (INR) 32.5 42.8 53.3 49.1CEPS (INR) 63.5 73.2 84.7 81.4CFPS (INR) 44.9 62.0 73.4 70.0DPS (INR) 8.0 12.0 16.0 16.0Return ratios Return on assets (%) 6.5 7.4 8.0 6.9Return on equity (%) 12.9 15.2 16.9 14.2Return on capital employed (%) 8.0 9.3 10.2 8.8Turnover ratios Asset turnover (x) 0.9 1.0 1.1 1.0Sales/Total assets (x) 0.6 0.7 0.8 0.7Sales/Net FA (x) 0.8 0.9 1.0 0.9Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)Working capital days (28.0) (22.3) (22.0) (23.2)Liquidity ratios Current ratio (x) 1.1 1.1 1.1 1.1Quick ratio (x) 0.7 0.7 0.7 0.7Interest cover (x) 1.5 2.3 2.7 2.2Dividend cover (x) 4.1 3.6 3.3 3.1Total debt/Equity (%) 177.8 139.5 145.4 177.5Net debt/Equity (%) 149.9 112.7 118.4 150.7Valuation PER (x) 29.5 22.4 18.0 19.5Price/Book (x) 3.8 3.4 3.0 2.8EV/Net sales (x) 2.4 2.0 1.8 1.9EV/EBITDA (x) 14.0 10.8 9.9 10.6EV/EBIT (x) 14.0 10.8 9.9 10.6



Mangalam Cement (MGC IN)

Being small has its own advantages INDIA | CEMENT | Company Update

10 April 2018

Small size will be an advantage as the cement cycle recovers With the cement cycle turning positive from FY19, small cement manufacturers such as Mangalam will be among the key beneficiaries. Small manufacturers can afford to operate capacities at higher‐than‐industry utilisation levels and thus gain more than the industry, especially in volumes. Its size will become its competitive advantage, as industry utilisations recover. Volume growth triggers are now visible for Mangalam Absence of volume growth, despite the commissioning of its Aligarh grinding unit, was a key overhang. However, in Q3FY18, its volume trajectory recovered significantly. Q3 volumes helped Mangalam recover its six‐year quarterly volume CAGR by ~3%. This momentum, if sustained, would address concerns about the absence of volume growth for Mangalam. It would be fair to say that for the next two years, Mangalam has the potential to surprise positively in terms of volume growth. We factor a volume CAGR of ~7% over FY18‐20. Volatility in cost curve is the biggest concern Our biggest concern is Mangalam’s high opex volatility. In Q3FY18, Mangalam‘s opex grew by +Rs300/tonne qoq, which was the worst in the sector. The key reason is likely to be the interim ban on pet coke usage – usage of pet coke had enabled Mangalam to substantially lower its consumption of high‐grade limestone. Mangalam seemed more badly affected vs. peers because its usage of high‐grade limestone increased as it shifted back to coal. We are yet to see its cost curve stabilising, which is crucial to its re‐rating. Waste Heat Recovery will help cost savings and bring stability to the cost curve Mangalam is now actively considering installing an 11‐MW Waste Heat Recovery System to accelerate cost savings. 11MW would provide nearly one‐third of Mangalam’s power requirement, and would imply a savings of Rs 300‐350mn annually (Rs 80‐100/tonne). This would help bring stability to its cost curve. Brownfield potential is the only way Mangalam can scale up its operations Mangalam has been evaluating adding a clinkerisation unit at its existing site in Morak, Rajasthan – potentially, the only way it can scale up its operations. Greenfield capex is an extremely unlikely possibility for Mangalam. If Mangalam continues to delay capex, it will ultimately lose market share to peers. It needs to expedite its decision for a re‐rating. Outlook Mangalam Cement remains amongst the cheapest stocks in the sector, trading at US$ 35/tonne FY20 earnings. Driven by cheap valuations, we maintain Mangalam Cement as a BUY with our earlier target of Rs 420. Even at this target, the stock will continue to trade at less than US$ 50/tonne. Valuation comfort is the key reason for our BUY rating.


1MTH 3MTH 1YRABS ‐0.4 ‐20.8 ‐8.3REL TO BSE ‐1.9 ‐18.9 ‐22.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20E Net Sales 9,801 11,174 11,777EBIDTA 1,015 1,439 1,667Net Profit 271 548 766EPS, Rs 10.2 20.5 28.7PER, x 31.5 15.6 11.1EV/EBIDTA, x 10.8 6.9 5.4P/BV, x 1.5 1.4 1.3ROE, % 4.9 9.3 11.9Debt/Equity (%) 48.7 28.2 11.6


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MANGALAM CEMENT COMPANY UPDATE

Financials Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 9,086 9,801 11,174 11,777Growth, % 9 8 14 5Total income 9,086 9,801 11,174 11,777Raw material expenses ‐1,650 ‐1,716 ‐1,846 ‐1,858Employee expenses ‐779 ‐873 ‐999 ‐1,141Other Operating expenses ‐5,442 ‐6,197 ‐6,890 ‐7,111EBITDA (Core) 1,214 1,015 1,439 1,667Growth, % 247.0 (16.4) 41.8 15.9Margin, % 13.4 10.4 12.9 14.2Depreciation ‐403 ‐451 ‐564 ‐464EBIT 811 563 875 1,203Growth, % (5,237.0) (30.6) 55.4 37.4Margin, % 8.9 5.7 7.8 10.2Interest paid ‐475 ‐408 ‐308 ‐309Other Non‐Operating Income 146 250 250 250Pre‐tax profit 482 405 817 1,144Tax provided ‐138 ‐134 ‐270 ‐377Profit after tax 344 271 548 766Net Profit 344 271 548 766Growth, % (267.9) (21.0) 101.7 40.0Net Profit (adjusted) 344 271 548 766Unadj. shares (m) 27 27 27 27Wtd avg shares (m) 27 27 27 27 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 251 251 251 251Debtors 343 370 422 445Inventory 1,016 1,016 1,016 1,016Loans & advances 1,305 1,457 1,614 1,676Total current assets 2,915 3,094 3,303 3,388Investments 55 55 55 55Gross fixed assets 13,402 13,989 14,189 14,389Less: Depreciation ‐4,729 ‐5,181 ‐5,744 ‐6,209Add: Capital WIP 488 200 200 200Net fixed assets 9,160 9,008 8,644 8,380Total assets 12,131 12,157 12,002 11,823Current liabilities 3,058 3,299 3,761 3,964Provisions 240 259 296 312Total current liabilities 3,299 3,558 4,057 4,276Non‐current liabilities 3,772 3,064 2,037 1,115Total liabilities 7,071 6,623 6,094 5,391Paid‐up capital 267 267 267 267Reserves & surplus 4,793 5,267 5,641 6,165Shareholders’ equity 5,060 5,534 5,908 6,432Total equity & liabilities 12,131 12,157 12,002 11,823 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 482 405 817 1,144Depreciation 403 451 564 464Chg in working capital 1,880 81 289 134Total tax paid ‐293 ‐134 ‐270 ‐377Cash flow from operating activities 2,473 804 1,400 1,365Capital expenditure ‐1,408 ‐299 ‐200 ‐200Cash flow from investing activities ‐1,389 ‐299 ‐200 ‐200Free cash flow 1,083 505 1,200 1,165Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) ‐816 ‐708 ‐1,027 ‐922Dividend (incl. tax) ‐23 ‐86 ‐173 ‐243Cash flow from financing activities ‐839 ‐793 ‐1,200 ‐1,165Net chg in cash 244 ‐288 0 0 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 12.9 10.2 20.5 28.7Growth, % (267.9) (21.0) 101.7 40.0Book NAV/share (INR) 189.6 207.3 221.3 241.0FDEPS (INR) 12.9 10.2 20.5 28.7CEPS (INR) 28.0 27.1 41.6 46.1CFPS (INR) 87.2 20.7 43.1 41.8DPS (INR) 0.8 2.8 5.6 7.9Return ratios Return on assets (%) 5.3 4.3 6.1 8.0Return on equity (%) 6.8 4.9 9.3 11.9Return on capital employed (%) 6.8 5.8 8.6 11.8Turnover ratios Asset turnover (x) 1.0 1.1 1.4 1.5Sales/Total assets (x) 0.7 0.8 0.9 1.0Sales/Net FA (x) 1.0 1.1 1.3 1.4Working capital/Sales (x) (0.0) (0.0) (0.1) (0.1)Working capital days (15.8) (17.0) (23.2) (25.6)Liquidity ratios Current ratio (x) 1.0 0.9 0.9 0.9Quick ratio (x) 0.6 0.6 0.6 0.6Interest cover (x) 1.7 1.4 2.8 3.9Dividend cover (x) 17.2 3.6 3.6 3.6Total debt/Equity (%) 67.3 48.7 28.2 11.6Net debt/Equity (%) 62.3 44.2 24.0 7.7Valuation PER (x) 24.9 31.5 15.6 11.1Price/Book (x) 1.7 1.5 1.4 1.3EV/Net sales (x) 1.3 1.1 0.9 0.8EV/EBITDA (x) 9.6 10.8 6.9 5.4EV/EBIT (x) 14.4 19.5 11.4 7.5



HeidelbergCement (HEIM IN)

Will stay stuck if no growth plans unfold INDIA | CEMENT | Company Update

10 April 2018

Absence of capex will deter its further re‐rating Like Mangalam, HEIM has also not executed any significant incremental capex over the past decade. Because of this, its volume growth prospects are not as exciting as they are for peers. Over FY18‐20, we see HEIM’s volume growth CAGR at less than 3%. Sustainability of cost curve is key for valuation re‐rating Since Q2FY18, HEIM’s cost curve has shifted structurally (improved, much awaited) – while the industry’s opex grew by nearly 5% (yoy and qoq), HEIM’s saw a drop; HEIM’s cost now has a CAGR of less than 1% over last six years vs. near 3% for the industry. Given the vintage of HEIM’s plant, its cost curve has always been higher than the industry, so the positive structural shift led to a 20% re‐rating in its stock price. Therefore, its sustainability will be the key for this re‐rating to continue. In absence of growth plans, HEIM’s potential will remain range‐bound Nearly a decade ago, HEIM indicated an ambitious growth roadmap, but it did not materialise, which has been a weak point and the key reason for its long‐term stock price underperformance vs. peers. To drive a re‐rating, HEIM needs to announce serious growth plans. Merger with Zuari Cement can provide immediate relief A merger with HEIM’s sister concern, Zuari, is probably the best way that it can address capacity issues and fuel immediate growth. Zuari Cement has a capacity of 7mn tonnes p.a. For both HEIM and Zuari, the parent is HeidelbergCement (the global entity), so the merger is workable. HEIM and Zuari largely operate in distinct geographies, and their union will provide multiple reasons for the stock to re‐rate. Though the regions of operations are separate, the synergies can be significant, especially in terms of fixed costs. The consolidation would also provide a ‘capacity re‐rating’ to HEIM’s valuations. In absence of capex, profit margins will only be a function of cement prices The incremental scope of cost optimization for HEIM remains limited. Therefore, improvement in its profit margins will almost depend completely on cement prices. However, if HEIM decides on capex (either organic or inorganic), the scope for improvement in margins can also become a function of the scale of operations. JK Cement is a classic example – it had similar concerns and almost the same scale of operations, which improved significantly through organic capex at existing and new (adjacent) sites. Outlook We maintain our earlier target of Rs 180 for HEIM and maintain BUY. Our target probably factors in the best‐case scenario, because at our target the stock will trade at US$ 115/tonne, which is almost at par with replacement. For any further potential upsides, a growth roadmap from HEIM is essential.





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HEIDELBERGCEMENT INDUSTRIES COMPANY UPDATE


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Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20eNet sales 16,876 19,902 21,094 22,134Growth, % 4 18 6 5Total income 16,876 19,902 21,094 22,134Raw material expenses ‐3,260 ‐3,899 ‐4,060 ‐4,198Employee expenses ‐1,148 ‐2,425 ‐3,068 ‐3,881Other Operating expenses ‐9,979 ‐10,337 ‐10,322 ‐10,214EBITDA (Core) 2,490 3,240 3,644 3,840Growth, % 18.3 30.1 12.5 5.4Margin, % 14.8 16.3 17.3 17.4Depreciation ‐992 ‐1,131 ‐1,149 ‐1,166EBIT 1,499 2,109 2,495 2,674Growth, % 28.6 40.7 18.3 7.2Margin, % 8.9 10.6 11.8 12.1Interest paid ‐898 ‐859 ‐833 ‐834Other Non‐Operating Income 535 491 616 564Pre‐tax profit 1,136 1,741 2,278 2,404Tax provided ‐374 ‐574 ‐752 ‐793Profit after tax 762 1,166 1,527 1,611Net Profit 762 1,166 1,527 1,611Growth, % 97.2 53.0 30.9 5.5Net Profit (adjusted) 762 1,166 1,527 1,611Unadj. shares (m) 227 227 227 227Wtd avg shares (m) 227 227 227 227 Balance Sheet Y/E Mar, Rs mn FY17 FY18e FY19e FY20eCash & bank 142 1,827 3,597 5,434Debtors 126 148 157 165Inventory 1,396 1,647 1,745 1,831Loans & advances 296 349 370 388Other current assets 2,199 2,593 2,749 2,884Total current assets 4,159 6,564 8,618 10,702Gross fixed assets 30,895 32,577 33,077 33,577Less: Depreciation ‐11,040 ‐12,172 ‐13,321 ‐14,487Add: Capital WIP 63 500 500 500Net fixed assets 19,918 20,905 20,256 19,589Total assets 24,076 27,469 28,874 30,292 Current liabilities 5,359 6,246 6,621 6,947Provisions 2,766 3,262 3,457 3,628Total current liabilities 8,125 9,508 10,078 10,575Non‐current liabilities 6,282 7,125 6,433 5,744Total liabilities 14,407 16,633 16,511 16,319Paid‐up capital 2,266 2,266 2,266 2,266Reserves & surplus 7,403 8,570 10,096 11,707Shareholders’ equity 9,670 10,836 12,362 13,973Total equity & liabilities 24,076 27,469 28,874 30,292 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18e FY19e FY20ePre‐tax profit 1,136 1,741 2,278 2,404Depreciation 992 1,131 1,149 1,166Chg in working capital 77 663 286 249Total tax paid ‐593 ‐574 ‐752 ‐793Cash flow from operating activities 1,612 2,961 2,961 3,027Capital expenditure ‐390 ‐2,119 ‐500 ‐500Other investing activities 497 0 0 0Cash flow from investing activities 107 ‐2,119 ‐500 ‐500Free cash flow 1,719 842 2,461 2,527Dividend (incl. tax) ‐546 0 0 0Cash flow from financing activities ‐1,655 843 ‐692 ‐689Net chg in cash 65 1,685 1,770 1,837 Valuation Ratios

FY17 FY18e FY19e FY20ePer Share data EPS (INR) 3.4 5.1 6.7 7.1Book NAV/share (INR) 42.7 47.8 54.6 61.7FDEPS (INR) 3.4 5.1 6.7 7.1CEPS (INR) 7.7 10.1 11.8 12.3CFPS (INR) 4.6 11.2 10.4 10.9DPS (INR) 2.0 ‐ ‐ ‐Return ratios Return on assets (%) 5.3 6.7 7.3 7.2Return on equity (%) 7.9 10.8 12.3 11.5Return on capital employed (%) 7.1 8.6 9.4 9.3Turnover ratios Asset turnover (x) 0.9 1.0 1.1 1.2Sales/Total assets (x) 0.7 0.8 0.7 0.7Sales/Net FA (x) 0.8 1.0 1.0 1.1Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)Working capital days (29.0) (27.7) (27.7) (27.7)Liquidity ratios Current ratio (x) 0.8 1.1 1.3 1.5Quick ratio (x) 0.5 0.8 1.0 1.3Interest cover (x) 1.7 2.5 3.0 3.2Total debt/Equity (%) 60.1 60.9 47.8 37.3Net debt/Equity (%) 58.7 44.0 18.7 (1.6)Valuation PER (x) 46.1 30.1 23.0 21.8Price/Book (x) 3.6 3.2 2.8 2.5EV/Net sales (x) 2.4 2.0 1.8 1.6EV/EBITDA (x) 16.4 12.3 10.3 9.1EV/EBIT (x) 27.2 18.9 15.0 13.1



Sanghi Industries (SNGI IN) Building scale at substantially low capex INDIA | CEMENT | Initiating Coverage

10 April 2018

Another cost leader in the industry; equivalent to cost leaders such as Shree Sanghi’s competitive cost advantage in the mid‐cap cement space remains unique, and it is the only mid‐cap cement manufacturer to match its cost curve to the most cost efficient cement manufacturer – Shree Cement. On an average, Sanghi’s operating cost over the past two years is about 20% lower than the industry, and more or less at par with Shree.

Only mid‐tier manufacturer with 5x scalability at a single location Sanghi’s existing operations (about 4mn tonnes capacity) are in Kutch, Gujarat. In the long term, the company believes that it has the scalability and potential to support clinkerisation of about 5x its current capacity at this site, and expects capex cost to be nearly half of the industry‐replacement costs. This is Sanghi’s unique long‐term competitive advantage.

Second phase of capex underway, capacity to double by end of FY20 Sanghi has already announced its second capex phase, and this is expected to go on stream by the end of FY20. This capex is at less than US$ 50/tonne. Even though this capex excludes the land‐procurement costs (as Sanghi has abundant land at it site in Kutch), it is still amongst the lowest capex/tonne the industry has ever seen.

Driven by low capex, Sanghi’s incremental return ratios can be better than peers As we see it, Sanghi’s capex is less than half of industry’s replacement cost. It will have a competitive advantage vs. peers to generate better incremental return ratios on any new capex. To this extent, Sanghi’s business model will be insulated from cement‐price volatility. This is similar to Shree’s volume‐dependent strategy and capitalising on the benefit of low incremental capex cost.

Sanghi needs to garner better price realisation and improve its sales mix Sanghi’s weakest link is that its realisations are low. The management believes it is mainly because of low cement prices in Gujarat and reasonably consistent high clinker sales. Whatever the reason, the ultimate impact is on blended realisations. Being a reasonable market leader in Gujarat, Sanghi needs to push for better realisations and improve its sales mix. On a positive note, Sanghi has not significantly compromised on brand positioning (compared to industry leaders); hence, it has the potential to improve realisations. Better brand positioning is Sanghi’s differential factor vs. Shree.

Volume growth in FY19 to remain ahead of peers; accessibility to sea route will help Volume growth of Sanghi in FY19 will remain ahead of peers (~10%). As Sanghi’s site is located adjacent to the sea, it also gives it a unique logistics advantage. The sea route provides Sanghi the advantage of exploring the export markets better than peers. The sea advantage is critical to Sanghi’s long‐term strategy – which is to intensify its presence in Mumbai market and explore more markets in the deep south, such as Kerala, through sea.

Risks Its smaller scale of operations than peers means that Sanghi may not contribute equally to the production discipline of the industry in the long term. Building all capacities at a single location with very limited diversification of split grinding units may be a risky proposition.

Outlook We initiate coverage on Sanghi with a BUY rating. Though the FY19 valuations appear rich (>US$ 165), they look reasonable when we account for its second phase of capex (<US$ 85). As its scale increases and profitability improves, the upside potential will be more visible.

BUY CMP RS 122 TARGET RS 150 (+23%) COMPANY DATA O/S SHARES (MN) : 220MARKET CAP (RSBN) : 27MARKET CAP (USDBN) : 0.452 ‐ WK HI/LO (RS) : 144 / 68LIQUIDITY 3M (USDMN) : 0.8PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 75.0 75.0 74.9FII / NRI : 0.8 0.7 0.5FI / MF : 4.1 3.6 3.2NON PRO : 5.5 5.4 4.6PUBLIC & OTHERS : 14.6 15.4 16.8 PRICE PERFORMANCE, %


Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 9,840 11,210 13,050EBIDTA 2,067 2,507 3,227Net Profit 645 483 597EPS, Rs 2.6 1.9 2.4PER, x 47.5 63.3 51.3EV/EBIDTA, x 18.8 17.7 14.1P/BV, x 1.9 1.9 1.8ROE, % 4.1 3.0 3.5Debt/Equity (%) 53.4 85.6 89.6


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About Sanghi Cement • One of the large cement manufacturers in Gujarat (13% capacity share in the

state). • Flagship of the Ravi Sanghi Group. • Existing capacity is 4.1mn tonnes with clinkerisation of 10,000TPD (single kiln). • Sanghi is amongst the lowest cost producer in India. Its cost matrix is very similar

to the most efficient player in the industry – Shree Cement. The low cost of production is mainly due to its close proximity to limestone resources, low cost of mining, and the scale of operations at a single site – similar to Shree’s Ras unit business model (where Shree managed to increase the scale of operations at a single site driven by similar advantages).

Scalability is Sanghi’s unique competitive advantage Sanghi’s biggest and most unique competitive advantage is its scalability of operations at the same site. The potential of the existing site is 5x its current capacity, which is probably the biggest brownfield scalability from any Indian manufacturer. Capex for these capacities is likely to be at a 50% discount to the industry’s replacement cost. To us, it sounds very similar to Shree’s Ras unit and with this scale of operations, Sanghi’s opex curve should rationalise further. Given the potential of scalability at a single location, Sanghi will announce its growth plans in a phased manner. It has already announced its second capex phase: another 10,000 TPD clinkerisation unit and a 4mn‐tonne grinding expansion at a capex of less than US$ 50 per tonne. Of this, 2mn tonnes will be a split‐grinding unit based out of Surat, Gujarat. With this capex, Sanghi’s capacity will double, which will significantly increase its potential to intensify its presence in Maharashtra and hit newer markets in the deep south, such as Kerala. Cost curve: Sanghi, industry, Shree

Source: Company, PhillipCapital India Research Sanghi and Shree remain almost at the same level in terms of opex. For both, cost of operations is at nearly a 20% discount to the industry’s opex. The gap in their valuation is because of scale of operations and profit margins. While Shree is now a near 30mn tonne capacity, Sanghi is at a mere 4mn tonnes. When Sanghi climbs the capacity ladder, it should command better valuations. Improving profit margins will also be the key. Though matching Shree’s valuations appears impossible at this stage, the valuation gap between Sanghi and Shree does have a potential to bridge.

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When Sanghi climbs the capacity ladder, it should command better valuations



Realisations: Sanghi, industry, Shree

Source: Company, PhillipCapital India Research Though Sanghi and Shree have a similar cost matrix, the average gap in their EBITDA/tonne is almost 25% – a key reason for the valuation discount vs. Shree. As their opex is quite similar, the gap in margins could mainly be because of lower net realisations. To us, this suggests that Sanghi has not been able to capitalise fully on its low cost curve. If it can improve its net realisations, its profit margins and absolute profitability can improve substantially. The management believes that low realisations are mainly because of low prices in Gujarat (where Sanghi sells +80% of its production) and its consistency on reasonable quantity of clinker sales, where the realisations are much lower. Overall, due to low realisations, its margins have eroded and it has been unable to get the full advantage of its low cost curve. We believe being a reasonable market leader, Sanghi should proactively work towards better realisations and better pricing. Dalmia Bharat is a classic example – it has taken advantage of its low costs and consistently worked for better realisations by improving its brand premium, which resulted in better and sustained profit margins. We believe that if Sanghi can replicate this strategy, it can significantly bridge its profit‐margin gap and hence its valuation gap with peers. The good part is that Sanghi’s management believes that the positioning of Sanghi Cement as a brand is not very severely compromised vs. the industry leaders (like in the case of Shree – where the positioning is in low tier‐2 or tier‐3. Sanghi claims to be low tier‐1 or at worse the upper end of tier‐2 in most markets) and therefore, it has the capability to improve its net realisations. Volume growth may help but improvising realisations is critical to its re‐rating Though Sanghi’s volume growth is likely to remain ahead of the industry in FY19, the more important factor for a re‐rating will be an improvement in realisation. Like we said above, Sanghi’s potential can be like Dalmia Bharat’s, if it is able to effectively work on realisations and improve them. Dalmia Bharat’s valuations have risen nearly 4x in terms of EV/tonne over the past few years, driven by its strategy to improve both costs and realisations. Driven by this strategy, Dalmia Bharat is also among the current cost leaders of the industry (barring Shree) but more importantly, it is also a price leader. As Sanghi has not compromised on its brand positioning vs. other industry brand leaders, it has a unique competitive advantage over Shree. It can bridge the EBITDA/tonne by marginally working towards its net realisations and improving it by Rs 10‐20 per bag, which will take Sanghi’s EBITDA/tonne matrix to among the best in the industry. When this happens, its valuation gap vs. peers will also significantly bridge. However, larger peers will continue to trade at better valuations because of

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their scale of operations and their multi‐region presence – this is a disadvantage, which we do not see Sanghi overcoming anytime soon. Good margins take away the management’s focus from pricing Sanghi vs. industry and Shree on operating profit

Source: Company, PhillipCapital India Research Though Sanghi’s EBITDA/tonne is lower than Shree’s, the company has not significantly underperformed in terms of EBITDA/tonne to the industry. In fact, over Q1‐Q3 FY18, Sanghi’s EBITDA/tonne has been better than the industry’s, driven by its better opex and efficiency. However, in our view, these in line margins take away the attention of the Sanghi management from realisations – and a possible reason why they have not yet made a dedicated effort to improvise realisations. We expect this to change in the future. What do we logically expect from Sanghi until its new capex commissions? Sanghi’s volume growth can potentially remain ahead of peers over the next 24 months driven by its aggression to push volumes (in order to establish market share before its fresh capex commissions). However, we believe that in this period we could see a realignment in its business strategy to focus on realisations as well, because: • Its second capex phase is slated to commission in FY21, after which its immediate

challenge will be only to ramp up utilisations and stabilise the new capex – focus on pricing cannot be established then.

• These 24 months is the only window available to Sanghi to improve realisations. As demand is also rising, it can participate in the industry’s better price scenario from Q1FY19. However, over FY18‐20, we have factored in a realisation improvement of only 4% for now.

• The risk: If Sanghi fails to improve realisations in this period, its profit margins will stagnate and it will miss out on a rerating.

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Key business risks for Sanghi Building scale with single kiln model has its own limitations Building sizeable capex (such that a 10,000 TPD kiln) helps to rationalise costs, but this advantage plays out to the full extent in a peak utilisation scenario or rather a peak demand scenario, when there is a need to run all capacities at full utilisations. In such a scenario, Sanghi would be at the best level of the cost curve and unbeatable by any peer, in our view. However, this appears to be a distant dream going by current market realities – the industry will continue to work with production discipline as overcapacity is unlikely to be fully absorbed even for the next five years, even at the best demand‐growth assumptions. Sanghi’s business model of setting up 10,000 TPD kilns will remain its key risk unless utilisations for Gujarat (or rather west India) recover materially. Why? The kiln is the heart of a cement plant; its efficiency decides the plant’s opex ‘edge’ – the best efficiency is achieved when the kiln is at more than 100%. When a company says utilisations are 50%, it is not for the kiln, but for grinding. The kiln is always operated at full capacity for best efficiencies. A shutdown and restart of kiln operations involves significant cost overruns. When Sanghi will commission its 10,000 tpd clinker production, it will produce additional 10,000 tpd from day one itself. It will have to evacuate this inventory, or will need to have adequate demand support in place to absorb this clinker production. The inherent pressure on Sanghi will be to keep operations running smoothly once it commissions its second phase of capex. The only option it will have is to either to operate one kiln or two, which means either it produces 10,000 or 20,000 TPD of clinker as both kilns will be of same size. Hence this model will make Sanghi inflexible to market conditions and will limit its opportunity to work on cement pricing. Though, our interactions with the management indicate that it is confident of evacuating inventory because the export window for clinker is also open. The management expects to easily export a minimum 1mn tonnes of clinker annually – but it may not be that easy. Post commissioning of its second phase of capex, we believe Sanghi may not have enough bandwidth to work on cement prices as the pressure to evacuate volumes will be huge. Flexibility of operations of any cement plant ultimately depends on the size of its kilns. An optimum‐sized kiln is the key for price stability. A 10,000 TPD clinker production line is about 40% larger than the average capex size that is currently being set‐up even by the largest of cement majors such as UltraTech, JK Cement, and Wonder Cement (6,000‐7,500 TPD). Large size kilns adds to the inflexibility of operations. Large sized kiln is the only reason why Sanghi is similar but not ‘identical’ to Shree Though we have been saying that Sanghi’s cost curve is similar to Shree, its business model is not identical yet. Shree has added capacity in small sizes and has eventually grown in line with market demand trends. Shree’s model at Ras unit is to have much smaller kilns (3000‐6000 TPD). With smaller kilns, it remains under no pressure to operate all kilns at the same time, and its operations are more adaptable to its business strategies and demand conditions. Notably, all players who have added large‐sized kilns recently (such as Reliance Cement and Vadraj Cement (formerly ABG Cement)) have faced severe challenges such as working capital requirements and absence of adequate demand. The only successful large‐size kiln, to our knowledge, is ACC’s Wadi unit – but then ACC is a pan‐India major and it can justify its size because of its scale of operations. Though Sanghi is much better off than some peers, because it has considerable experience in



running a large kiln, its flexibility will remain limited in our opinion. Hence, improving price realisations for Sanghi is a must to de‐risk its business model. Our investment thesis and outlook for Sanghi • The only option for Sanghi is to move up on the realisation curve over the next

two years. We remain optimistic that Sanghi will start participating in cement prices over the next two years, especially when demand support for the industry is visible.

• The new production line of Sanghi will be more of a price taker with limited say in the price curve.

• Given its edge in terms of costs, we expect Sanghi’s operating performance to improve driven by price improvement – by ~Rs 200/tonne over the next two years.

• Because of the valuation gap between Sanghi and its cost‐efficient comparable peer Shree, we initiate coverage on Sanghi with a BUY view. Though the valuations appear rich on FY19 numbers (>US$ 165/tonne), they look reasonable on FY20 numbers (<US$ 85/tonne) driven by the doubling of Sanghi’s capacity.

• Also, Sanghi’s ability to derive better returns on incremental capex (because of its low‐cost capex model and capability to deliver better‐than‐industry volume growth) adds to our key investment arguments for Sanghi.




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Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20eNet sales 9,942 9,840 11,210 13,050Growth, % 31 ‐1 14 16Total income 9,942 9,840 11,210 13,050Raw material expenses ‐789 ‐689 ‐763 ‐854Employee expenses ‐525 ‐495 ‐531 ‐577Other Operating expenses ‐6,679 ‐6,589 ‐7,409 ‐8,391EBITDA (Core) 1,949 2,067 2,507 3,227Growth, % 30.2 6.1 21.3 28.7Margin, % 19.6 21.0 22.4 24.7Depreciation ‐731 ‐749 ‐799 ‐1,148EBIT 1,218 1,318 1,709 2,080Growth, % 27.3 8.2 29.6 21.7Margin, % 12.3 13.4 15.2 15.9Interest paid ‐642 ‐728 ‐1,279 ‐1,388Other Non‐Operating Income 54 54 54 54Pre‐tax profit 630 645 483 746Tax provided 0 0 0 ‐149Profit after tax 630 645 483 597Net Profit 630 645 483 597Growth, % (18.0) 2.4 (25.0) 23.4Net Profit (adjusted) 630 645 483 597Unadj. shares (m) 220 251 251 251Wtd avg shares (m) 220 251 251 251 Balance Sheet Y/E Mar, Rs mn FY17 FY18e FY19e FY20eCash & bank 163 163 163 163Debtors 239 237 270 314Inventory 1,866 1,847 2,104 2,449Other current assets 80 80 80 80Total current assets 2,348 2,326 2,616 3,006Gross fixed assets 14,519 15,519 16,519 29,519Add: Capital WIP 1,671 6,671 11,671 500Net fixed assets 16,190 22,190 28,190 30,019Total assets 20,656 26,619 32,909 35,127 Current liabilities 3,204 3,171 3,613 4,206Provisions 584 578 658 766Total current liabilities 3,788 3,749 4,271 4,972Non‐current liabilities 5,728 7,084 12,368 13,289Total liabilities 9,516 10,833 16,639 18,261Paid‐up capital 2,200 2,510 2,510 2,510Reserves & surplus 8,940 13,276 13,760 14,356Shareholders’ equity 11,140 15,786 16,270 16,866Total equity & liabilities 20,656 26,619 32,909 35,127 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18e FY19e FY20ePre‐tax profit 630 645 483 746Depreciation 731 749 799 1,148Chg in working capital ‐86 ‐17 232 311Total tax paid ‐1,058 16 0 ‐149Cash flow from operating activities 217 1,392 1,514 2,056Capital expenditure ‐1,314 ‐6,749 ‐6,799 ‐2,977Other investing activities 0 3,691 0 0Cash flow from investing activities ‐1,314 ‐3,058 ‐6,799 ‐2,977Free cash flow ‐1,097 ‐1,666 ‐5,285 ‐921Equity raised/(repaid) 0 310 0 0Debt raised/(repaid) 430 1,355 5,285 921Cash flow from financing activities 430 1,665 5,285 921Net chg in cash ‐668 0 0 0 Valuation Ratios

FY17 FY18e FY19e FY20ePer Share data EPS (INR) 2.9 2.6 1.9 2.4Growth, % (18.0) (10.3) (25.0) 23.4Book NAV/share (INR) 50.6 62.9 64.8 67.2FDEPS (INR) 2.9 2.6 1.9 2.4CEPS (INR) 6.2 5.6 5.1 6.9CFPS (INR) (0.6) 5.4 5.0 6.9Return ratios Return on assets (%) 5.1 4.6 4.2 4.2Return on equity (%) 5.7 4.1 3.0 3.5Return on capital employed (%) 6.0 5.4 4.8 4.7Turnover ratios Asset turnover (x) 0.6 0.5 0.4 0.4Sales/Total assets (x) 0.5 0.4 0.4 0.4Sales/Net FA (x) 0.6 0.5 0.4 0.4Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)Receivable days 8.8 8.8 8.8 8.8Inventory days 68.5 68.5 68.5 68.5Payable days 64.9 66.1 67.2 69.3Working capital days (37.4) (37.4) (37.8) (38.1)Liquidity ratios Current ratio (x) 0.7 0.7 0.7 0.7Quick ratio (x) 0.2 0.2 0.1 0.1Interest cover (x) 1.9 1.8 1.3 1.5Total debt/Equity (%) 63.7 53.4 85.6 89.6Net debt/Equity (%) 62.2 52.4 84.6 88.7Valuation PER (x) 42.6 47.5 63.3 51.3PEG (x) ‐ y‐o‐y growth (2.4) (4.6) (2.5) 2.2Price/Book (x) 2.4 1.9 1.9 1.8EV/Net sales (x) 3.4 4.0 4.0 3.5EV/EBITDA (x) 17.3 18.8 17.7 14.1EV/EBIT (x) 27.7 29.5 26.0 21.9



Star Cement (STRCEM IN)

Not a subsidy‐driven business model any more INDIA | CEMENT | Initiating Coverage

10 April 2018

A leading NE‐based manufacturer with ambitions to move east Star Cement is among the leading manufacturers in the northeast region with long‐term ambitions to be a holistic east‐India manufacturer. It may take time for Star to move deep into the east, but its niche positioning in the NE region will be its long‐term advantage. Its agenda is to sell a brand (not a commodity) Star’s branding expenses are steep, given that its key business strategy is to focus on branding and garner better brand premium. It has the highest relative spends (among all cement manufacturers) on advertisement, publicity and branding, even vs. pan‐India majors (Star’s expenses are 4‐5x higher while its scale is just about 10‐15% of these majors) who tend to have a high focus on branding given their scale of operations. Branding has helped Star differentiate its realisation matrix Since FY14, Star’s average realisations are way ahead of the industry. They are 50% higher than the industry’s realisations and over 35% higher than the blended realisations of its only comparable listed peer Dalmia Bharat – who also has a similar scale in NE. Though the realisations premium can be due to the fact that entry is difficult for newer manufacturers in NE, it is also a clear indication that Star has been able to reap the benefits of its significantly high branding expenses. Driven by realisations, Star’s EBITDA/tonne is the highest in the industry Driven by the gap in realisations premiums, and even after adjusting for subsidy benefits, which Star has enjoyed, over the past five years, Star’s average EBITDA/tonne is at a premium of over 25% to the industry’s. Its positioning in the ‘most premium’ category is the only differentiating factor. Subsidy‐oriented business model now collapsed, business dynamics are now competitive Historically, the cement businesses in NE regions were driven by subsidy and incentives offered by central/state governments. We understand that Star Cement was no different in its initial formation stages. We estimate that the average subsidy available to Star was Rs 700/tonne, which has now collapsed. Despite this, it has maintained its EBITDA/tonne way ahead of the industry – upwards of Rs 1,600/tonne. Star’s consistent and concentrated focus on branding helped it develop a niche – difficult for competitors to overcome. Ambitious to grow in scale, but will limit its presence to the east Star has already announced a capex of about 2mn tonnes in east India, likely to be commissioned by FY20, which would support its future volume growth and help it to explore new geographies. However, this is unlikely to aid profit margins. Risks Limited scalability options and excessive dependence on a single region. Outlook We initiate on Star with a BUY and target of Rs140. Its uniqueness and its ability to maintain very high profitability vis‐à‐vis industry peers, despite adjusting for subsidy benefits, is its unique strength. Hence, Star’s valuation premium remains justified. At our target, Star will trade at an EV/tonne of about US$ 160 vs. US$ 137 currently (FY20 earnings).

BUY CMP RS 127 TARGET RS 150 (+18%) COMPANY DATA O/S SHARES (MN) : 419MARKET CAP (RSBN) : 53MARKET CAP (USDBN) : 0.852 ‐ WK HI/LO (RS) : 351 / 68LIQUIDITY 3M (USDMN) : 1.4PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17PROMOTERS : 73.3 74.6 74.9FII / NRI : 2.0 0.4 0.1FI / MF : 2.6 1.6 1.2NON PRO : 14.8 15.6 15.8PUBLIC & OTHERS : 7.3 7.7 8.0 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 7.4 ‐12.9 NaREL TO BSE 6.0 ‐11.0 Na PRICE VS. SENSEX



70

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130

Jun‐17 Sep‐17 Dec‐17 Mar‐18

Star Cement BSE Sensex


STAR CEMENT INITIATING COVERAGE

About Star Cement • Leading cement manufacturer in the NE region • Current capacity: About 4.4mn tonnes • Capacity has increased +10x since it commissioned its operations in FY05. • Most of its current capacities are in the NE region, but its long‐term business

plan is to be an east‐India regional leader. • ‘Branding’ is a key focus area. The management’s mantra is to never compromise

on the brand value and remain a market leader in terms of pricing. We believe Star’s management is logical in protecting its brand premiums.

Star’s branding expenses are way ahead of peers… Even though Star’s capacity is only 4mn tonnes, a fraction of the capacity of most pan‐India majors, its brand expenses (per tonne) is nearly 4x their expenses. While pan‐India majors tend to spend Rs 40‐60/tonne on branding and advertising, Star Cement’s spend remains as high as Rs 160‐200/tonne. …but translate into better ‘sustainable’ realisations, which is the key Star’s brand spends, to us, appears rational, as its brand realisations are way ahead of industry peers. This is not just about the brand spends, but also its approach – to keep its channel happy. On an average, Star’s average realisations are at a premium of more than 50% to the industry and over 35% to its only regional comparable and listed peer, Dalmia Bharat. Star vs. industry and Dalmia Bharat on blended realisations

Source: Company, PhillipCapital India Research Though a part of this brand premium could come from entry barriers into the NE region and tough operating conditions (which keeps costs high too), it will be unfair to say that there is no competition in the NE. In our visits to NE India, which incidentally constitute less than 4% of the all‐India capacity, we found as many as 25 different brands! Gap in opex for Star is now substantially bridged NE is a very difficult terrain to operate in – a tough region. Here, securing local support is very important for successful and smooth operations. When Star Cement was very small and only a pure NE‐based manufacturer, the gap in its opex vs. the industry used to be almost double. However, with larger scale of operations, better volumes, and its foray into other parts of east India, we can see that this gap has narrowed greatly. Maintaining the stability of this cost curve will be crucial and an advantage, which will play in favour of Star – if it is able to simultaneously maintain brand premiums.

3,000

4,000

5,000

6,000

7,000

8,000

Q1FY14

Q2FY14

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Star Cement Industry Dalmia

Star Cement enjoys the highest realisations in the industry and this is the key reason for its significantly better EBITDA/tonne – this proves that brand premiums are real and can help differentiate the profit margins



Star vs. industry on opex

Source: Company, PhillipCapital India Research Star’s EBITDA/tonne will continue to be way ahead of the industry Driven by significantly better realisations and rationalisation of opex (in line with industry parameters), we expect Star Cement’s EBITDA at upwards of Rs 1,600 – almost double the EBITDA we expect for the industry. Star’s subsidy driven business model has collapsed NE is a peculiar region, where numerous state and central government subsidies drove the spree of cement capacity additions. The cement demand of this market is less than 10mn tonnes, and we observed during our ground visits that more than 25 brands are present here. New businesses in this region used to enjoy numerous subsidies such as capital subsidies, interest‐rate subsides, excise exemptions, freight subsidies, and income‐tax rebates. The revenue subsidy for most players used to vary between Rs 600‐800/tonne. Driven by these incentives and availability of limestone reserves in Meghalaya, many cement manufacturers and brands were established. As per our understanding, Star Cement was also established for a similar reason, but since then, its promoters have envisaged making Star the leading cement manufacturer and a brand in the NE region. Today, the subsidy‐driven business model has collapsed for Star. Subsidy benefits are no longer the same as before, and a major chunk of these benefits have already lapsed. Going forward, Star will be just like any other cement manufacturer. Though about Rs 7bn, the balance of subsidy receivable, will flow in for Star, it will no longer be a driving force. Initiate with BUY: We remain impressed by Star’s to command significantly better EBITDA premiums, the only key reason for its rich valuations. We initiate with a BUY and with a potential upside of 18%. We have valued the company at 14x EV/EBITDA. We have valued the subsidy receivables at book value.

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7,000 Q1FY14

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Star Cement IndustryStar’s gap in opex/tonne to industry has significantly bridged over the past few years driven by its larger and more efficient scale of operations



Financials

Consolidated Income Statement Y/E Mar, Rs mn FY17 FY18E FY19E FY20ENet sales 17,280 15,945 17,978 20,270Growth, % 1 ‐8 13 13Total income 17,280 15,945 17,978 20,270Raw material expenses ‐4,144 ‐2,900 ‐3,306 ‐3,770Employee expenses ‐1,185 ‐1,094 ‐1,239 ‐1,404Other Operating expenses ‐7,863 ‐7,115 ‐8,452 ‐9,762EBITDA (Core) 4,088 4,837 4,980 5,333Growth, % 2.4 18.3 3.0 7.1Margin, % 23.7 30.3 27.7 26.3Depreciation ‐1,412 ‐1,368 ‐1,487 ‐1,486EBIT 2,676 3,469 3,493 3,847Growth, % 17.4 29.6 0.7 10.1Margin, % 15.5 21.8 19.4 19.0Interest paid ‐780 ‐641 ‐188 ‐302Other Non‐Operating Income 22 24 26 29Pre‐tax profit 1,918 2,851 3,332 3,575Tax provided ‐143 ‐228 ‐267 ‐357Profit after tax 1,775 2,623 3,065 3,217Others (Minorities, Associates) ‐59 ‐87 ‐102 ‐107Net Profit 1,716 2,536 2,963 3,111Growth, % 27.5 47.8 16.8 5.0Net Profit (adjusted) 1,716 2,536 2,963 3,111Unadj. shares (m) 419 419 419 419Wtd avg shares (m) 419 419 419 419 Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20ECash & bank 201 201 201 201Debtors 3,995 4,092 5,072 6,287Inventory 1,612 1,726 2,140 2,653Loans & advances 9,735 7,843 9,412 11,318Other current assets 3 3 3 3Total current assets 15,546 13,865 16,828 20,462Investments 17 17 17 17Gross fixed assets 8,632 9,183 10,183 12,683Add: Capital WIP 549 1,000 1,500 500Net fixed assets 9,181 10,183 11,683 13,183Total assets 24,744 24,064 28,527 33,661 Current liabilities 4,091 3,809 4,292 4,837Provisions 49 46 52 59Total current liabilities 4,140 3,855 4,344 4,895Non‐current liabilities 7,734 4,716 5,625 6,991Total liabilities 11,874 8,571 9,970 11,886Paid‐up capital 419 419 419 419Reserves & surplus 11,861 14,397 17,360 20,471Shareholders’ equity 12,869 15,493 18,558 21,775Total equity & liabilities 24,744 24,064 28,527 33,661 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18E FY19E FY20EPre‐tax profit 1,918 2,851 3,332 3,575Depreciation 1,412 1,368 1,487 1,486Chg in working capital ‐1,516 1,396 ‐2,474 ‐3,083Total tax paid ‐97 ‐228 ‐267 ‐357Cash flow from operating activities 1,718 5,387 2,078 1,621Capital expenditure ‐912 ‐2,369 ‐2,987 ‐2,986Chg in investments ‐1 0 0 0Other investing activities 10 0 0 0Cash flow from investing activities ‐903 ‐2,369 ‐2,987 ‐2,986Free cash flow 814 3,018 ‐909 ‐1,365Debt raised/(repaid) ‐851 ‐3,018 909 1,365Cash flow from financing activities ‐851 ‐3,018 909 1,365Net chg in cash ‐37 0 0 0Pre‐tax profit 1,918 2,851 3,332 3,575 Valuation Ratios

FY17 FY18E FY19E FY20EPer Share data EPS (INR) 4.1 6.0 7.1 7.4Growth, % 27.5 47.8 16.8 5.0Book NAV/share (INR) 29.3 35.3 42.4 49.8FDEPS (INR) 4.1 6.0 7.1 7.4CEPS (INR) 7.5 9.3 10.6 11.0CFPS (INR) 4.0 12.8 4.9 3.8Return ratios Return on assets (%) 10.3 13.4 12.4 11.3Return on equity (%) 14.0 17.1 16.7 14.9Return on capital employed (%) 12.7 16.0 14.6 13.3Turnover ratios Asset turnover (x) 0.9 0.8 0.8 0.8Sales/Total assets (x) 0.7 0.7 0.7 0.7Sales/Net FA (x) 1.8 1.6 1.6 1.6Working capital/Sales (x) 0.7 0.6 0.7 0.8Receivable days 84.4 93.7 103.0 113.2Inventory days 34.1 39.5 43.4 47.8Payable days 25.9 28.7 27.6 27.1Working capital days 237.7 225.6 250.4 277.7Liquidity ratios Current ratio (x) 3.8 3.6 3.9 4.2Quick ratio (x) 3.4 3.2 3.4 3.7Interest cover (x) 3.4 5.4 18.5 12.8Total debt/Equity (%) 61.7 30.7 30.7 32.7Net debt/Equity (%) 60.0 29.4 29.6 31.7Valuation PER (x) 31.0 21.0 18.0 17.1PEG (x) ‐ y‐o‐y growth 1.1 0.4 1.1 3.4Price/Book (x) 4.3 3.6 3.0 2.5EV/Net sales (x) 3.5 3.6 3.3 3.0EV/EBITDA (x) 14.8 11.9 11.7 11.2EV/EBIT (x) 22.7 16.6 16.7 15.6



Stock Price, Price Target and Rating History (ACC)

Stock Price, Price Target and Rating History (Ambuja Cement)

Stock Price, Price Target and Rating History (UltraTech Cement)

N (TP 1658)

N (TP 1460)

S (TP 1060)

S (TP 1230)

S (TP 1430)

S (TP 1430)N (TP 1580)

N (TP 1725)N (TP 1950)

N (TP 1830)

800

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1200

1400

1600

1800

2000

M‐15A‐15 J‐15 J‐15 A‐15 O‐15 D‐15 J‐16 F‐16 A‐16M‐16 J‐16 A‐16 O‐16N‐16 J‐17 F‐17M‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 F‐18

B (TP 271)

B (TP 250)B (TP 230)

N (TP 230)

N (TP 300)

N (TP 260) B (TP 290)

N (TP 300)

80

130

180

230

280

330

M‐15A‐15 J‐15 J‐15 A‐15 O‐15 D‐15 J‐16 F‐16 A‐16M‐16 J‐16 A‐16 O‐16 N‐16 J‐17 F‐17M‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 F‐18

B (TP 3582)

B (TP 3887)

B (TP 3532)B (TP 3400)

B (TP 3700)

B (TP 3700)B (TP 3700)

B (TP 4600)

B (TP 4400)

B (TP 5000)B (TP 4800)

N (TP 4800)

1000

1500

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4000

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5000

F‐15M‐15M‐15 J‐15 A‐15 S‐15 N‐15 D‐15 F‐16M‐16M‐16 J‐16 A‐16 S‐16 N‐16 D‐16 F‐17M‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 F‐18



Stock Price, Price Target and Rating History (Shree Cement)

Stock Price, Price Target and Rating History (Dalmia Bharat)

Stock Price, Price Target and Rating History (India Cements)

N (TP 110000)N (TP 11000)

N (TP 11000)

N (TP 13900)

N (TP 17000)N (TP 17000)

N (P 17500)N (TP 17500)

N (TP 18000)

1000

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9000

11000

13000

15000

17000

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M‐15A‐15 J‐15 J‐15 S‐15 O‐15D‐15 J‐16 M‐16A‐16 J‐16 J‐16 A‐16 O‐16N‐16 J‐17 F‐17 A‐17M‐17 J‐17 A‐17 S‐17 N‐17D‐17 F‐18

B (TP 1010)

B (TP 1010)

B (TP 1100)B (TP 1100)B (TP 1300)

B (TP 2100)

B (TP 2300)B (TP 2500) B (TP 2500)

B (TP 3200)

B (TP 3500)B (TP 3500)

0

500

1000

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M‐15M‐15 J‐15 A‐15 S‐15 N‐15 D‐15 F‐16 M‐16M‐16 J‐16 A‐16 S‐16 N‐16 D‐16 F‐17 M‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 F‐18

B (TP 150)B (TP 125)

B (TP 125)

B (TP 200)B (TP 200)

B (TP 320)B (TP 320)

B (TP 290)

B (TP 260)B (TP 260)

0

50

100

150

200

250

M‐15A‐15 J‐15 J‐15 S‐15 O‐15 D‐15 J‐16 M‐16A‐16 J‐16 J‐16 A‐16 O‐16 N‐16 J‐17 F‐17 A‐17M‐17 J‐17 A‐17 S‐17B (TP 260)D‐17 F‐18



Stock Price, Price Target and Rating History (JK Lakshmi Cement)

Stock Price, Price Target and Rating History (JK Cement)

Stock Price, Price Target and Rating History (HeidelbergCement)

S (TP 305)

N (TP 280)

N (TP 380)

B (TP 500)

B (TP 620)

B (TP 560)

B (TP 600)B (TP 600)B (TP 600)

B (TP 600)

0

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200

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400

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600

M‐15M‐15 J‐15 J‐15 S‐15 N‐15 D‐15 F‐16 M‐16M‐16 J‐16 B (TP 500)

O‐16 N‐16 J‐17 F‐17 A‐17 M‐17 J‐17 A‐17 O‐17 N‐17 J‐18 M‐18

B (TP 836) B (TP 800)

B (TP 800)

B (TP 810)

B (TP 1010)

B (TP 1200)B (TP 1200)

B (TP 1400)B (TP 1400)B (TP 1400)

0

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M‐15M‐15 J‐15 J‐15 S‐15 B (TP 800)

D‐15 F‐16 M‐16M‐16 J‐16 A‐16 O‐16 N‐16 J‐17 F‐17 A‐17 M‐17 J‐17 A‐17 O‐17 N‐17 J‐18 M‐18

B (TP 103) B (TP 90)B (TP 90)

B (TP 130)

B (TP 150)B (TP 150)

B (TP 180)

0

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140

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M‐15A‐15 J‐15 J‐15 S‐15 O‐15 D‐15 J‐16 M‐16A‐16 J‐16 J‐16 A‐16 O‐16 N‐16 J‐17 F‐17 A‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 F‐18



Stock Price, Price Target and Rating History (Mangalam Cement)

B (TP 282)

S (TP 170)N (TP 190)

N (TP 250)

N (TP 360)B (TP 360)

B (TP 420)B (TP 420)

6090120150180210240270300330360390420450480

M‐15A‐15 J‐15 J‐15 S‐15 O‐15 D‐15 J‐16 M‐16A‐16 J‐16 J‐16 A‐16 O‐16 N‐16 J‐17 F‐17 A‐17M‐17 J‐17 A‐17 S‐17 N‐17 D‐17 F‐18



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919 Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6246 4101 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735 Research Automobiles Engineering, Capital Goods Pharma & Specialty Chem Dhawal Doshi (9122) 6246 4128 Jonas Bhutta (9122) 6246 4119 Surya Patra (9122) 6246 4121 Nitesh Sharma, CFA (9122) 6246 4126 Vikram Rawat (9122) 6246 4120 Mehul Sheth (9122) 6246 4123 Agro Chemicals IT Services Raag Haria (9122) 6667 9943 Varun Vijayan (9122) 6246 4117 Vibhor Singhal (9122) 6246 4109 Strategy Banking, NBFCs Shyamal Dhruve (9122) 6246 4110 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Manish Agarwalla (9122) 6246 4125 Infrastructure Neeraj Chadawar (9122) 6246 4116 Pradeep Agrawal (9122) 6246 4113 Vibhor Singhal (9122) 6246 4109 Telecom Paresh Jain (9122) 6246 4114 Logistics, Transportation & Midcap Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Consumer & Retail Vikram Suryavanshi (9122) 6246 4111 Technicals Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Media Subodh Gupta, CMT (9122) 6246 4136 Preeyam Tolia (9122) 6246 4129 Naveen Kulkarni, CFA, FRM (9122) 6246 4122 Production Manager Vishal Gutka (9122) 6246 4118 Vishal Gutka (9122) 6246 4118 Ganesh Deorukhkar (9122) 6667 9966 Akshay Mokashe (9122) 6246 4130 Metals Editor Cement Dhawal Doshi (9122) 6246 4128 Roshan Sony 98199 72726 Vaibhav Agarwal (9122) 6246 4124 Vipul Agrawal (9122) 6246 4127 Sr. Manager – Equities Support Economics Mid-Caps Rosie Ferns (9122) 6667 9971 Anjali Verma (9122) 6246 4115 Deepak Agarwal (9122) 6246 4112 Sales & Distribution Corporate Communications Ashvin Patil (9122) 6246 4105 Asia Sales Zarine Damania (9122) 6667 9976 Kishor Binwal (9122) 6246 4106 Dhawal Shah 8522 277 6747 Bhavin Shah (9122) 6246 4102 Sales Trader Ashka Mehta Gulati (9122) 6246 4108 Dilesh Doshi (9122) 6667 9747 Execution Archan Vyas (9122) 6246 4107 Suniil Pandit (9122) 6667 9745 Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn THAILAND: Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com UNITED STATES: Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street

Melbourne, VIC 3000, Australia Tel: (61) 3 8633 9800 Fax: (61) 3 8633 9899

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm INDIA

PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2483 1919 Fax: (9122) 6667 9955 www.phillipcapital.in



Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer. If Distribution is to Australian Investors This report is produced by PhillipCapital (India) Pvt Ltd and is being distributed in Australia by Phillip Capital Limited (Australian Financial Services Licence No. 246827). This report contains general securities advice and does not take into account your personal objectives, situation and needs. Please read the Disclosures and Disclaimers set out above. By receiving or reading this report, you agree to be bound by the terms and limitations set out above. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately. PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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