Networth Cement 10Oct07

8/8/2019 Networth Cement 10Oct07

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October 11, 2007 1 Quarterly Preview



CEMENT


Cautious optimism .. .

Analyst:

Rajan Kumar+91 22 [email protected]

Reco*

ACC NeutralCMP: 1180 1100.0

Ambuja Cement NeutralCMP: 148 148.0

Ultratech Cement BuyCMP: 1050 1300.0

Grasim Industries Ltd. AccuCMP: 3615 3968.0

Shree Cement BuyCMP: 1592 1900.0

India Cement AccuCMP: 281 320.0

* Target for FY09E

We maintain a cautiously positive stance on cement sector. Whilecement companies would have some maneuverability to raise pricespost monsoon due to demand supply mismatch and virtualwithdrawal of most of the price control measures against theindustry, possible delays in the execution of the announced projectswould extend the cement cycle to FY09 end. Besides for bulk buyersImports are still not a lucrative proposition on account of logisticconstraints, rising international sea freight, rising internationalcement prices. On the other hand, sharp increase in international

coal prices and sea freight could be a concern for companiesdependent on coal import. Besides the government’s policy of limitingcoal linkages to power and fertilizer sector poses another mediumterm risk to the sector.

For the July-August, All India Cement production and dispatcheswere up by 13.36% and 13.17% to 26.2 and 25.99 million tons.While the domestic consumption was up 16.6% to 25.52 million MTexports were down 29% to 6.4 million tons. Domestic Productionand consumption was led by western zone (21.3% and 37% to 4.07and 4.62 MT), Northern zone (18.5% and 14.7% to 5.7 and 5.2 MT)South (9.1 and 10.3 to 9.02 and 8.2) Central (7.9% and 18.4 to 3.93and 3.83) and East (16.8 and 9.3 to 3.4 and 3.8 MT).

During the quarter the all India prices were up Rs 3-5 per bagacross region except for south where average price rise were to thetune of Rs 9-10 per bag. All India prices are up 10% yoy and 3.3%QoQ, with south India showing highest increase of 17% and 7% onYoY and QoQ basis respectively.

On the cost front the there has been a significant rise in InternationalCoal Price / petcoke price and Sea Freight which is expected to putcost pressure on the India cement (70% dependence on importedcoal), Gujarat Ambuja and Ultratech (30% dependence on importedcoal). Grasim (40% petcoke) and Shree Cement (100% petcoke).

Result Highlights Q2FY08 : Net sales (for six cement companies inour coverage) is expected to grow by 26.3% yoy led by 11.5% yoy

Particulars Net Sales Operating Profit Net Profit Valuation FY08/CY07

Rs. Mn JAS 08 % YoY JAS 08 % YoY JAS 08 % YoY EPS (Rs) PE EV/EBIDTA EV/Ton

ACC 17016.2 23.9 5317.2 45.3 3432.0 52.8 77.4 15.2 9.8 228.9

Ambuja Cement 12776.9 29.8 4598.3 29.3 3158.8 29.1 10.5 14.1 8.6 310.8

Ultratech 11860.0 20.5 3689.5 45.0 2058.3 61.5 83.5 12.5 8.4 219/170.0*

Grassim 38197.6 20.0 11877.0 41.2 6084.6 45.5 278.8 13.0 7.3 230.33/160*

Shree Cement 4522.2 43.1 1817.2 27.4 762.1 -11.0 127.5 12.5 6.4 147.1

India Cement 7685.0 48.8 2915.4 68.9 1814.0 54.6 26.3 10.7 7.7 195.5

* based on expanded capacity

Quarterly Estimates

80

90

100

110

120

130

140

150

2 - J u l

9 - J u l

1 6 - J u l

2 3 - J u l

3 0 - J u l

6 - A u g

1 3 - A u g

2 0 - A u g

2 7 - A u g

3 - S e p

1 0 - S e p

1 7 - S e p

2 4 - S e p

BSE_SENSEX ACC Ambuja Grasim

Ultratech Shree India




increase in average cement realization and 7.49% growth in cementvolume. EBIDTA growth of 41.2% and PAT growth of 39.9% forQ2FY08.

Valuation and View: While there could be positive upsides in theearning from the increase in cement prices post monsoon, the keydetermining factor for valuation of cement sector would be actualcomissioning of new capacities during Q1-Q3 FY09. The cementstocks are trading at an average PE of 12.9X and EV/EBIDTA of 8.33X FY08 earning and looks attractive compared to Sensex.

We prefer Grasim and Ultratech Cements among frontline and Indiacements and Shree Cements among Mid caps.

Performance of Sensex Vs Cement Sector during Q2FY08






Ambuja Cement Ltd. - Neutral (CMP Rs.148)Highlights for the quarter

À Ambuja Cement has shown a muted volume growth of 6.4% yoy in Q3CY07. The company saw adisruption in production at it Gujarat plant during September.

À We estimate Ambuja Cement sales to grow by 29% y-o-y on the back of 19% volume growth and 8.8%realization growth. EBIDTA is expected to grow by 29.3% to Rs.4.59 billion with margin maintained at36%. The figures are not comparable as it includes the impact of consolidation of ACEL.

À We estimate PBT to grow by 35.8% to Rs.4.39 billion while higher provisioning of tax would lead to netprofit growth being curtailed at 29 % to 3.15 billion.

À Rise in price of imported coal prices to put further cost pressure going ahead but Rs appreciation tohave neutral impact on account of natural hedge of cement export.

À Holcim further acquired 3.94% stake in Ambuja Cements from the original promoter group at Rs154/share, crossing 5% limit for creeping acquisition which triggered a mandatory open offer for 20% stake.Consequently, Holcim is making an open offer for 20% stake at Rs154/share

Valuation

At Rs.148, the stock is trading at P/E of 14.2X and 14.8X its CY07 and CY08 earnings and EV/EBIDTA of 8.6x and8.9x for CY07 and CY08. On EV per ton basis it trades at $300 per ton and $219 per tons of CY07 and CY08 endcapacity. We believe the stock is richly valued and maintain “NEUTRAL” view on the stock with one year pricetarget of 148. At our price target the stock would be valued at 14.8 times CY08E earnings and 8.9X CY08 EV/EBIDTA.

Financials (Rs.mn)

Q3CY07E Q5FY06 Q2CY07 CY06A CY07E CY08ECement Sale 3.8 3.2 4.4 22.6 17.1 18.6Revenue 12776.9 9841.4 14643.6 62682.9 56993.9 61882.8% Change (YoY) 29.8 140.6 -9.1 8.6Realization 3336.0 3065.9 3335.7 2775.5 3340.0 3336.0Operating Expenses 8178.6 6285.2 9190.5 41352.0 34463.2 39908.7EBIDTA 4598.3 3556.2 5453.1 21330.9 22530.7 21974.1% Change (YoY) 29.3 194.6 5.6 -2.5EBIDTA Margin (%) 36.0 36.1 37.2 34.0 39.5 35.5EBIDTA/Ton 1200.6 1107.9 1242.2 944.5 1320.4 1184.6Interest -100.6 85.1 -210.6 790.3 -442.4 -738.8Depreciation 64.0 50.0 58.3 326.1 248.3 284.7

Other Income 328.3 258.0 486.7 1136.6 1352.3 850.0PBT 4387.2 3229.6 5567.4 18416.0 21842.4 20716.0% Change (YoY) 35.8Tax 1228.4 783.0 1522.7 3383.5 5930.5 5593.3EO 0 420.18 714.68R PAT 3158.81 4455.88 16626.63Adj Net Profit 3158.8 2446.6 4035.7 15032.5 15912.0 15122.7% Change (YoY) 29.1 5.9 -5.0% Change (QoQ) -21.7Equity 3033.0 2708.8 3033.0 3033.0 3033.0 3033.0E P S 2.3 1.8 3.0 9.9 10.5 10.0P/E 14.7 14.1 14.8EV/EBIDTA 9.7 8.6 8.9EV/Ton 298.5 283.2 205.5ROCE 25.4 31.9 25.8ROE 28.7 30.8 24.0






Grasim Industries Ltd. - Accumulate (CMP Rs 3615)Highlights for the quarter

À Grasim Industries is expected to show strong performance on back of continued momentum in its cement andVSF Business. We expect Grasim Industries to post a 20% Y-o-Y growth in revenue and 41.1% Y-o-Y growth inEBIDTA with margins improving by 467 basis point to 31.1% on a consolidated basis.

À On the back of 7.5% growth in cement dispatches (Standalone) and 11% growth in realization, we expectGrasim’s cement division to post a 19% y-o-y growth in revenue to 11.37 billion. PBIDT is likely to be up by 140 basis points to 34.5%.

À VSF business is expected to show a 22% growth in revenues to Rs 6.83 Bn on the back of 6% growth in volumeand 16% higher realization. EBIDTA is expected to be higher by 44.8% to 2.52 bn with margins improving by580 basis points to 36.9%.

À Chemical Business is expected to show improved performance (46% volume growth and a margin improvementof 20PP to 32%) on account of low base effect as production was impacted last year due to breakdown incaptive power plant, Firm Scrap price to translate into improved performance for Sponge Iron business with(45% revenue growth and PBIDT increasing 5 times to Rs.284 million as against Rs.54 million last year.

À Backed by strong Ultratech performance, Grasim Industries is expected to report a 45.5% yoy growth in netprofit to Rs.6.62 billion.

Valuation

At Rs.3615, Grasim Industries trades at a P/E of 13 and 12.1 X FY08E and FY09 E earning and EV of 7.4X and 6.2 XFY08E and FY09 E EBIDTA and at EV/Ton of $230($159 on Expanded Capacity) and $147/Ton on FY 08 and FY09 endcapacity of 31 and 45 million MT . Compared to other cement majors, Grasim is trading at an attractive valuationon all parameters. We remain bullish on the stock and we recommend “ACCUMULATE” with one year price target

of Rs.3968 based on sum of parts valuation.

Financials (Rs.mn)

Q2FY08E Q2FY07 Q1FY08 FY07A FY08E FY09ERevenues 38197.6 31838.0 40628.5 141737.9 168570.8 201268.1% Change (YoY) 20.0Operating Expenses 26320.6 23424.0 27951.1 101294.2 116765.8 142455.9EBIDTA 11877.0 8414.0 12677.4 40443.7 51805.0 58812.2% Change (YoY) 41.2 28.1 13.5EBIDTA Margin 31.1 26.4 31.2 28.5 30.7 29.2Interest 597.5 551.0 559.6 2286.4 2780.0 3480 .0Depreciation 1594.6 1484.0 1586.5 6099.7 6564.2 9717 .8Other Income 622.0 534.0 1014.2 2456.4 2456.4 2456 .4PBT excluding ext. items 10306.9 6913.0 11545.5 34514.0 44917.2 48070.8Extraordinary

PBT after Extraordinary 34514.0 44917.2 48070.8Tax 3213.7 2069.0 3557.0 10920.7 14238.7 15238.4Net Profit 7093.2 4844.0 7988.5 23593.3 30678.4 32832.4Minority share 1008.6 661.0 1296.1 3919.0 5091.1 5534 .6less: Pre Acquisition Pro/(Loss) 0 .0 0 .0 0 .0RPAT 6084.6 4183.0 6692.4 19674.3 25587.3 27297.8% Change (YoY) 45.5 30.1 6 .7APAT 6084.6 4183.0 6692.4 19674.3 25587.3 27297.8% change YoY 45.5 30.1 6 .7Net Profit margin 15.9 13.1 16.5 13.9 15.2 13.6Equity 918.9 918.9 917.9 917.9 917.9 916.9EPS (Rs) 66.2 45.5 72.9 214.3 278.8 297.7P E 16.8 13.0 12.1EV/EBIDTA 8.7 7 .3 6 .2ROCE 31.8 29.3 29.5ROE 29.6 28.8 24.2








Networth Research: E-mail- [email protected]

Research Sector E-mail id Telephone nos.

Huzaifa Suratwala Auto / Banks / Shipping / Logistics [email protected] 022-30286389Rishi Maheshwari Information Technology [email protected] 022-30286389Rajan Kumar Cement / Pharmaceuticals [email protected] 022-30286389Rati Pandit Hotels / Aviation [email protected] 022-30286389Brijesh Rajvanshi Telecom / Media [email protected] 022-30286389Vishal Sanghavi Textiles [email protected] 022-30286389Surya N. Nayak Mid Caps [email protected] 022-30286389Ashwani Sharma Power / Power Equipments [email protected] 022-30286389Deepak Kumar KS Associate [email protected] 022-30286389Rabindra Basu Associate [email protected] 022-30286389Shruti Bhargava Associate [email protected] 022-30286389Shashin Shah Mid Caps [email protected]

Amar More Production [email protected] 022-30286389

Networth Institutional Sales: E-mail- [email protected]

Raj Bhandari / Rameshwar Singh 022-22633020/1/2

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Networth Cement 10Oct07