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Cement September 03, 2013

Madras CementBloomberg: MC IN EQUITYReuters: MSCM.NS

Accounting: AMBERPredictability: AMBEREarnings Momentum: AMBER

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

BU

INITIATING COVERAGE

Nitin Bhasin

Tel: +91 22 3043 [email protected]

Achint Bhagat

Tel: +91 22 3043 [email protected]

Recommendation

CMP: `157

Target Price (12 month): `200Upside (%) 28

EPS (FY15E): `14.1

Variance from consensus (%) -29

Stock Information

Mkt cap: `37bn/US$565mn

52-wk H/L: `274/135

3M ADV: `63mn/US$1.0mn

Stock Performance (%)

1M 3M 12M YTD

Absolute (21) (44) (24) (44)Rel. to Sensex (12) (33) (26) (37)

Performance (%)

100

150

200

250

300

A

ug-12

O

ct-12

D

ec-12

F

eb-13

A

pr-13

Jun-13

A

ug-13

17,000

18,000

19,000

20,000

21,000

Madras SENSEX

One-year forward EV/EBITDA chart

4

5

6

7

8

Apr-11

Aug-1

1

Dec-1

1

Apr-12

Aug-1

2

Dec-1

2

Apr-13

Aug-1

3

1-yr fwd EV/EBITDA5-year Avg EV/EBITDA

(x)

Source: Bloomberg, Ambit Capital research

Ready to buildMadras Cement (MC) stands out the best on our South Indian competitivematrix, given its premium pricing, lower cost of production (100% captivepower) and high market share (13%). A strong brand and retail dominantclient mix (75%) support premium pricing and regional leadership. Withnear doubling of capacities to 14.5mn tonnes over FY07-13, we expect MCsmarket-leading volume growth to pick up pace with demand momentum.

We assume retail demand momentum to drive 8% volume and 18% unitaryEBITDA CAGR in FY13-16 and value MC at `200/share, implying 7.5x FY15EBITDA. MC presently trades at 6.5X FY15 EBITDA; profitability decline inFY14 and relatively lower RoICs call for valuation discount but we findpresent discount (27% to 5-yr average and 12-37% to peers) relativelyhigh.

Competitive position: STRONG Change to this position: POSITIVE

South India is down but not out: South India is not only the largest cementproducing (30%) and consuming (25%) region in India but also a supplier to largeconsuming states such as Maharashtra and Eastern states. Demand recovery ineither South or Maharashtra can be beneficial for the regions utilisation (presentlyone of the lowest) and profitability. Excepting AP and Karnataka, retail customersdominate the demand and Tamil Nadu stands out as the best cement market in theregion given its large size and stable pricing.

Madras Cementthe best play on uncertain but inevitable South Indiasrecovery: MCs strong brand and well entrenched distribution network in TN,Kerala and Karnataka make it a preferred brand with retail customers in urban andrural markets and thus enables it in selling cement at 7% premium. On our

regional competitive framework, MC stands out the best because of lower cost ofproduction (450bps), high market share and premium pricing. Now with expandedcapacities (14.5mn tonnes in FY13), we believe MC can grow ahead of the industry

with a stability/recovery in south India; MC grew at 9% over last decade whilstSouth region grew at 7%.

Ahead of industry growth to improve profitability and cash generation:Weexpect 6% volume growth in FY15 and then 10% in FY16. Pricing stability andgradual improvement due to dominant share of demand from retail customers willdrive 18% unitary EBITDA CAGR over FY14-16 (FY08-13 CAGR of 7.6%). Stableutilisations (58%) in FY14-15 on higher capacities (16.5mn tonnes) and lowercapex needs vs last five years will improve RoEs to 12.5%/16% in FY15/FY16respectively from 9% in FY14.

Unjustified discount to historical averages and peers; BUY, TP `200: OurDCF-based target price of `200 implies 7.5x FY15E EBITDA. At 5.1x FY15consensus EBITDA, MCs discount to Shree and Ambuja has widened to 12-37%from 0-18% earlier. Whilst inferior capital allocation and large related party CSRpayouts partially explain the discount, we believe such a steep discount isunjustified given MCs strong brand with retail clients in better markets. Key risks:Delayed demand recovery; accentuated tussle for market share gains.

Key financials

Year to March FY12 FY13 FY14E FY15E FY16E

Operating Income (`mn) 32,696 38,454 39,610 45,142 52,194

EBITDA (`mn) 9,517 10,217 7,940 9,958 12,280

EBITDA margin (%) 29.1 26.6 20.0 22.1 23.5

PAT (`mn) 3,851 4,042 2,153 3,369 4,986

EPS (`) 86.2 99.6 106.8 118.9 136.2

RoCE (%) 10.9 11.0 5.8 7.5 9.6

EV / EBITDA (x) 6.6 6.2 8.1 6.4 5.0

Source: Company, Ambit Capital research

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Ambit Capital Pvt Ltd 2

CONTENTS

South Indiaa unique region. 4

Market analysis of the South India states. 7

Tamil Nadu stands out as the best market in south India.9

Madras Cementstrong brand; right market13

Set for a financial recovery 21

Financial assumptions.24

Inexpensive valuations 25

Madras vs Shree and Ambuja...29

Key catalysts..34

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Madras Cement


Company Financial Snapshot

Profit and Loss (` mn unless specified)FY13 FY14E FY15E

Net sales 38,454 39,610 45,142

Optg. Exp(Adj for OI.) 28,237 31,670 35,185

EBIDTA 10,217 7,940 9,958

Depreciation 2,806 3,063 3,264

Interest Expense 1,796 1,815 1,865

PBT 5,887 3,121 4,883

Tax 1,846 967 1,514

Adj. PAT 4,042 2,153 3,369

Profit and Loss Ratios

EBITDA Margin % 26.6 20.0 22.1

Adj Net Margin % 10.5 5.4 7.5

P/E (X) 8.8 16.6 10.6

EV/EBITDA (X) 6.1 7.9 6.3

EV/tonne (US$) 72.5 62.7 59.8

Time-line of events

Year Time line of Event

1962First plant commissioned in Tamil Nadu with a capacity of 200tonnes per day

1987 Set up Jayanthipuram plant near Vijayawada in Andhra Pradesh1994

The company upgraded the capacity of the Jayanthipuram Unitto 1.1 million tonnes

1994The company substantially increased the capacity of windmillsby installing 70 more windmills

1995The company enhanced power generation capacity at theJayanthipuram unit to 15.3MW

199527 more windmills with a total additional installed capacity of10.5MW set up in Tamil Nadu

1997 Set up the Alathiyur capacity in Tamil Nadu

2005-2009

Set up 119MW of wind power

2007 Brownfield expansion at the Jayantipuram plant

2008 Line 1 of the Ariyalur capacity commissioned (2mn tonnes)

2010 Set up grinding capacity in TN, Karnataka and West Bengal2013 Line 2 of the Ariyalur capacity commissioned (2mn tonnes)

Balance Sheet (` mn unless specified)FY13 FY14E FY15E

Total Assets 57,542 60,251 63,630

Net Fixed Assets 49,276 52,179 52,963

Current Assets 14,550 14,205 17,805

Investments 887 887 887

Total Liabilities

Net worth 23,708 25,416 28,295

Dept 26,671 27,671 28,171

Current Liabilities 5,299 7,020 8,025Deferred Tax 7,164 7,164 7,164

Balance Sheet Ratios

ROE % 18.3 8.8 12.5

ROCE % 11.0 5.8 7.5

Net Debt/Equity 1.1 1.1 0.9

Equity/Total Assets 0.41 0.42 0.44

P/BV (X) 1.5 1.4 1.3

Cash Flow (` mn unless specified)FY13 FY14E FY15E

PBT 5,882 3,121 4,883

Depreciation 2,806 3,063 3,264

Tax (1,148) (967) (1,514)

Change in Wkg Cap (2,277) (33) (688)

CF from Operations 7,014 6,940 7,756

Capex (3,993) (4,000) (4,048)

Investments 73 - -

CF from Investing (3,828) (3,941) (3,993)Change in Equity - - -

Debt 40,342 1,000 500

Dividends (692) (444) (491)

CF from Financing (2,885) (1,260) (1,856)

Change in Cash 301 (183) 1,907

Opening Cash Balance 196 497 314

Closing Cash Balance 497 314 2,221

State-wise sales mix of Madras Cement RoCE subdued at present but likely to pick up gradually

States FY12 FY13 GrowthMarket

share

TN 3.5 3.5 1.4% 19.4%

Kerala 1.8 2.0 8.6% 23.0%

Karnataka 0.9 0.9 -0.5% 6.5%

AP 0.7 0.8 21.1% 5.7%

Orissa 0.1 0.2 116.1% 2.9%

Goa 0.0 0.0 7.1% 6.0%

West Bengal 0.5 0.7 52.3% 7.7%

Others 0.1 0.2 117.4% NA

Exports 0.0 0.1 90.9% NA

Total 7.6 8.4 11.0% NA

0.5

0.6

0.7

0.8

0.9

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY14E

FY15E

FY16E

0

15

30

45

60

CE turnover (X) RoCE (%) (RHS)

RoE(%) (RHS)


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South Indiaa unique regionSouth India has large limestone reserves (61bn tonnes; 49% of Indias totalreserves), which makes the region the largest cement producer and exporter inIndia. The region is a large cement market (25% of Indias consumption) with astrong institutional and retail client base, owing to the industrially developed andhigh per capita income states. Over FY08-13, deceleration/decline in cement

demand growth amid significant capacity addition resulted in the utilisation leveldropping to 63% in FY13 from 95% in FY07. Thus, despatches to other regions(mainly, west and east India) have increased to ~20% of production in FY13 from12% in FY07. We believe the region has a strong growth potential with a recoveryin Indias GDP and resolution of region-specific challenges.

Cement consumption growth: Two distinct phases

Phase I (FY01-08): In this phase, south India cement consumption CAGR was at10.6% as against Indias 8.5%. Cement consumption was driven by the followingfactors: (a) development of the IT industry, resulting in strong growth ofcommercial and residential real estate construction, (b) significant investment in

public infrastructure such as irrigation in Andhra Pradesh and urban infrastructure(roads and highways) in Karnataka and Tamil Nadu, and (c) significant investmentby the private sector in IT, automobiles and pharmaceutical industries.

Phase II (FY08-12): Cement demand growth was muted in this phase (CAGR of3.2% as against Indias average of 7.6%). In addition to a general macroeconomicslowdown in India, the region faced unique challenges such as: (a) politicalinstability in AP and Karnataka, (b) the mining ban in Karnataka, (c) significantpower shortage across the region hurting industrial production, and (d) failingmonsoons hurting agricultural output.

Exhibit 1:Cement consumption growth has slowed down materially

-

20

40

60

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13*

(mntonnes)

50%

65%

80%

95%

110%

Consumption Utilisation (RHS)

CAGR (FY08-13): 3.3%CAGR (FY01-08): 10.6%

Source: CMA, Crisil, Ambit Capital research. Note: We aggregate consumption of south Indian states basedon data reported by CMA to ascertain the consumption of the region

Volume movement in FY13: Whilst region-wise demand growth is not availablefor FY13 (as CMA stopped providing the numbers), our channel checks anddiscussions with managements suggest flat volume growth in AP and low-singledigit volume growth in other south Indian states (which implies volume growth of3.5% in south India in FY13).

Region-wise limestonereserves

RegionReserve (bn

tonnes)% oftotal

South 60.8 49%

North 23.8 19%

West 18.3 15%

East 16.9 14%

Central 4.8 4%

Total 124.5 100%

Source: Working Committee of thePlanning Commission

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Madras Cement


Exhibit 2:GDP growth in south India decelerated in FY07-12, after strong growthin FY02-07

0

5,000

10,000

15,000

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(Rsbn)

0%

4%

8%

12%

16%

Andhra Pradesh Karnataka Kerala Tamil Nadu YoY growth (RHS)

Source: CMA, Crisil, Ambit Capital research. Note: We calculate south Indias GDP by aggregating the GSDPof the four states (Andhra Pradesh, Karnataka, Kerala and Tamil Nadu).

Declining utilisation resulting in rising despatchesto other regions

Deceleration in demand growth and significant increase in installed capacity(123mn tonnes in FY13 as against 55mn tonnes in FY07) led to a sharp decline inutilisation and higher despatches to other regions (supported partially by risingdemand in adjoining states). Note that currently ~60% of the total production inKarnataka and 25% in Andhra Pradesh (AP) is despatched to Maharashtra.

Exhibit 3:Capacity addition amid muted demandgrowth leading to sharp decline in utilisation

5053

59

73

93

105

113

40

60

80

100

120

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(mntonnes)

60%

70%

80%

90%

100%

Capacity Utilisation (RHS)

Source: CMA, Ambit Capital research

Exhibit 4: Low demand leading to increasingdespatches outside the region

35

45

55

65

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(mnton

nes)

0%

5%

10%

15%

20%

South-India Production

South-India Consumption

% despatched outside (RHS)

Source: CMA, Ambit Capital research. Note: We aggregate consumption

of south India states based on data reported by the CMA to ascertain theconsumption of the region

South India cement market underpinned by bothinfra and retail clientsSouth India is not only the largest cement-consuming region of India (55mntonnes; 25% of Indias consumption) but also the largest cement-producing region(125mn tonnes; 37% of India). Thus, south India is extremely important in theIndian cement landscape. South Indian states are amongst the most industriallydeveloped with a high per capita income; hence, the growth potential of cementdemand remains significant.

Historically, public infrastructure and real estate construction have been the maindrivers of cement demand growth in south India. Whilst public infrastructureconstruction has been weak for the last 3-4 years (as stalled irrigation projects in

South India forms 25% ofIndias GDP

0.0%

5.0%

10.0%

15.0%

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

24%

25%

25%

26%

26%

South India GDP growth

India GDP growth

South India as a % of India (RHS)

Source: MOSPI

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AP and land acquisition problems in TN and Karnataka resulted in a slowdown inroad construction), real estate construction remains fairly strong (real estate GSDPincreased by 9-14% over FY06-12), with strong growth in tier-II cities of Karnatakaand Tamil Nadu.

Exhibit 5:Construction NSDP growth has decelerated inthe last 3-4 years

0

400

800

1,200

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

0%

5%

10%

15%

20%

AP TN

Kar Ker YoY growth (RHS)

(Rs bn)

Source: RBI database, Ambit Capital research

Exhibit 6: Real estate GSDP growth has been fairlystrong ranging between 9% and 14%

0

400

800

1,200

1,600

2,000

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

0%

5%

10%

15%

20%

AP TN

Kar Ker YoY growth (RHS)

(Rs bn)

Source: RBI database, Ambit Capital research

Supply dynamics of the four states

Within south India, Andhra Pradesh (AP) is the largest cement-producing stategiven its large limestone reserves and proximity to the markets in south and westIndia. The other regions have smaller limestone reserves and hence lowercapacities. Furthermore, AP is a fragmented market with a large number of smallcement plants. Kerala has no capacities but it does have packing units close to

major markets; it is mainly serviced from TN, Karnataka, AP and Gujarat (mainlyAmbuja).

Exhibit 7:State-wise capacity and despatch mixState

Installedcapacity

(FY13)

CapacityUtilisation

(FY13)State-wise despatch mix (%)

(mn tonnes) (%) AP TN Kar Ker Mah& Goa Others

AP 68 60 30 10 20 5 25 10

TN 35 65 - 65 4 29 1 2

Karnataka 25 68 9 0 29 1 59 2

South-India 130 65 22 27 15 13 18 5

Source: CMA, Ambit Capital research

South Indian players influence pricing in other regions: The three majorcement-producing states in south IndiaAP, TN and Karnatakahave differentlimestone clusters and hence have different market exposures. South Indian states(mainly Karnataka and AP) influence prices in other states such as Maharashtraand Orissa. Whilst Karnataka has historically had high exposure to Maharashtra,AP-based players have increased despatches to Maharashtra materially in last 2-3years. Rising supplies from these states amid muted demand growth hasresulted in declining prices in Maharashtra. South India players get an easyentry into Maharashtra by breaking through the existing incumbents channelpartners with higher incentives. Demand growth in west and east India positivelyaffects the players in Karnataka and AP, given the high exposure they have tothese markets.

Prices declined with influxof AP players

250

275

300

325

350

Apr-10

Aug-

10

Dec-

10

Apr-11

Aug-

11

Dec-

11

Apr-12

Aug-

12

Dec-

12

Apr-13

Maharshtra Cement prices

Source: CMA. Crisil, Ambit Capitalresearch

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Fragmentation analysis: We believe that pricing is a function of fragmentationof capacities. Higher fragmentation results in lower bargaining power of the top-3/5 cement groups and hence pricing discipline is challenged during times ofweak demand (a common phenomenon in Andhra Pradesh).

Exhibit 8:AP is highly fragmented

82%71%

28%

0

20

40

60

80

KTK TN AP

0%

20%

40%

60%

80%

100%

Capacity (mn tonnes)

Share of top 3 players (RHS)

Source: Working Committee of Planning Commission, Ambit Capitalresearch

Exhibit 9: with

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Karnatakaless fragmented but largely an institutional marketKarnataka consumes around 13mn tonnes of cement within which Bangalore(54%), Mangalore (7%) and Mysore (7%) are the large demand centres. Weakinfrastructure investment and weak-to-moderate industry growth (due to themining ban) as well as agri growth alongside moderating services have keptdemand growth low; this low level of demand growth was driven by smaller cities,as demand in Bangalore remained stagnant. More importantly, within Bangalore,

retail demand continues to decline and institutional demand is moving towardReady Mix Concrete (RMC), reducing the brand importance and making way forthe entry of new players (Jaypee, BMM, Bharathi, and JSW). Whilst UltraTech (withits brand, Birla Super) remains the largest brand in Bangalore, ACC is the largestbrand outside Bangalore. For a detailed understanding, refer to our cementmonthly dated 5 June 2013, No demand but discipline.

Keralaa small but premium market

Kerala is the smallest cement market in south India (8.5mn tonnes in FY13) withlow single-digit growth over FY08-12. However, it is a lucrative market for cementplayers, given premium realisations. Brand has a significant relevance, as the IHBsegment is the main driver of cement consumption. Dealers highlight that RamcoCement and Coromandel Cement are the top brands in Kerala. The key marketsare Cochin (3.0mn tonnes) and Trivandrum (2.5mn tonnes). Within Kerala, southKerala is dominated by TN-based players (Madras Cement and India Cement),whereas north Kerala has players from other regions including Ambuja, ACC andseveral AP- and Karnataka-based players.

Exhibit 10:Cement consumption in the south Indian statesVolume (mn tonnes) Change YoY (%)

RegionFY07 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12

CAGR (FY07-12)

Andhra Pradesh 13 15 18 18 15 14 16.7% 22.2% -1.0% -16.0% -8.0% 1.7%

Tamil Nadu 13 15 16 18 18 19 13.3% 9.5% 11.0% 4.0% 3.0% 8.1%

Karnataka 11.1 12 12 13 13 13 6.3% -1.3% 8.0% 4.0% 2.0% 3.8%

Kerala 7 7 8 8 8 9 1.4% 11.2% 4.0% -1.0% 5.0% 4.0%

South India 44 48 53 56 54 54 10.6% 11.0% 5.3% -3.1% 0.0% 4.6%

South India- ex AP 31 33 35 38 40 41 8.1% 6.1% 8.5% 2.9% 3.1% 5.7%

India 153 166 181 200 209 223 8.4% 8.8% 10.4% 4.7% 6.8% 7.8%

India- ex South 110 118 128 144 155 169 7.5% 8.0% 12.6% 7.7% 9.1% 9.0%

Source: Industry, Ambit Capital research

Exhibit 11:Major players in south IndiaCapacity (mn tonnes) Market exposure

Company Totalcapacity

AP KarnatakaTamilNadu

Kerala AP Karnataka Tamil Nadu Kerala

UltraTech 15.0 5.6 6.9 2.5 -

India Cement 13.0 7.1 - 5.9 -

Madras Cement 13.5 3.5 0.3 9.6 -

Chettinad Cement 10.5 - - 10.5 -

ACC 9.7 - 8.5 1.2 -

Dalmia Cement 9.0 2.5 - 6.5 -

Penna 6.5 6.5 - - -

Zuari Cement 6.2 5.2 - 1.0 -

Kesoram 5.8 - 5.8 - -

Bharathi Cement 5.0 5.0 - - -

Orient Cement 3.0 3.0 - - -

Total 97.2 38.4 21.5 37.2 -

Source: CMA, Industry participants Ambit Capital research. Note: Number of indicates the extent of market exposure, a indicates very smallor no exposure to the market.
http://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_05Jun2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_05Jun2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_05Jun2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_05Jun2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_05Jun2013.pdf

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Tamil Nadu stands out as the best market insouth India

Our analysis suggests that Tamil Nadu is the best cement market due to its largesize (largest market in south India), relatively stable pricing (higher IHB demandand lesser fragmentation) and superior macroeconomic positioning (high level ofindustrialisation; second most industrialised state in India). Whilst Karnataka has

the best demographics (high level of urbanisation and skilled manpower), thepricing has been volatile with rising mix of institutional demand. Andhra Pradesh isa large market but it is facing growth challenges due to political instability,resulting in declining volumes. Furthermore, high fragmentation of capacitiesleads to fractured pricing. Whilst Kerala is a premium realisation market, it isrelatively a small market and hence cannot be a major volume growth driver. Weuse four broad parameters for our ranking of the states:

1. Cement consumption: Here, we rank a state based on the size of the cementmarket and the growth in the last five years.

2. Pricing: We do a fragmentation analysis of capacities to ascertain the pricingpower. We believe higher consolidation of capacities confers strong pricing

power to the incumbents. We also ascertain the volatility of cement prices inthe states over the last three years to ascertain the pricing movement; we findthat states with the lowest capacity fragmentation also have the least pricingvolatility.

3. Macro economic parameters: We compare state GSDP, construction NSDPand per capita income to understand the growth in the general economy ofthe states and its resultant impact on construction growth.

4. Demographics: We ascertain the size of the housing demand using thepopulation in the large cities and the level of urbanisation.

Exhibit 12:Ranking of south Indian states - Tamil Nadu stands out as the bestmarket for cementRanking

CementConsumption

Pricingstability

Macro economicparameters

DemographicsOverall

Rank

Tamil Nadu 1 2 1 3 1

Karnataka 2 3 3 1 2

Andhra Pradesh 3 4 2 2 3

Kerala 4 1 4 4 4

Source: Company, RBI database, MOSPI, Ambit Capital research

Exhibit 13:Numbers behind our rankingMacro Economic Parameters Demographics Size of the market Pricing

Construction NSDP GDP PCI Cities Population Cement consumption FY12Particulars

FY12(` bn) CAGR(FY05-12) FY12(` bn) CAGR(FY05-12) FY12(`) CAGR(FY05-12) 5mn+ 1mn-5mn 0.5-1mn

FY12

(mntonnes)

CAGR(FY08-12)

Share of

top 5players

Tamil Nadu 347 9.0% 4,281 10.0% 56,461 9.4% - 1 4 18.9 6.9% 94%

Karnataka 235 8.0% 2,980 8.6% 41,545 6.4% 1 2 3 13.3 3.1% 98%

AndhraPradesh

321 12.0% 4,079 8.9% 42,710 7.8% 1 2 3 13.7 -1.8% 41%

Kerala 212 6.0% 2,085 8.3% 53,427 7.7% - - 2 8.5 4.6% NA

Source: Company, RBI database, MOSPI, Ambit Capital research

Limitation to our analysis

The limitations of our ranking of the states are:

a) The state-wise cement consumption and GSDP data is available only up toFY12 and hence we do not include FY13 in our analysis.

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b) Whilst GFCF is a better indicator of construction activities, given that it is notavailable on a state level, we use construction NSDP.

c) We use CMA data for ascertaining the size and the growth of the market. CMAdata does not include ACC and Ambuja after FY09, and hence we adjust thesame for our analysis by adding it back based on their south India sales mix.

d) Pricing is also a function of the sales mix (trade/non-trade); however, no usefulindicator can quantify this at the state level.

Exhibit 14:Porter analysis of south India cement industry

Source: Ambit Capital research

Competitive intensityHIGH

The presence of the three largest limestone clusters has ledto a large number of cement manufacturers in south India.

With many players present in the market, over capacity andweak demand, the competition is intense, as players arevying for a higher market share.

High fragmentation in AP signifies intense competition.

Threat of substitutionLOW

As a raw material for housing andinfrastructure, cement does not have anysignificant threat of substitution.

However, in road construction, cementcan be substituted with bitumen.

Rising Ready Mix Concrete (RMC)penetration will only benefit the players

with cement and RMC capacities.

Barriers to entryMEDIUM

Rising procedural issues and duration for land acquisition, environmentalclearances, licences, raw material/fuel sourcing and high capitalrequirement are slowing down greenfield and brownfield expansion

Whilst there are challenges around capital sourcing and rising projectfinance costs, mid-sized players have aggressively added capacities by re-investing cash flows generated in the last 3-4 years.

Whilst it is tough to enter retail markets due to significant cost and timeinvolved in brand building, it is easier to enter institutional markets.

DeterioratingUnchangedImproving

Bargaining power of suppliersHIGH

Rail accounts for most of cement/coal transport. Railfreight is controlled by the government. Cementcompanies have little control on rail freight rates.

Prices of critical inputs like coal are determined by thegovernment or they follow the global benchmarkprices. Cement companies are largely price takers.

In south India, small companies are dependent on gridpower. Power tariffs are determined by the regulatorycommissions. Cement companies are price takers.

Bargaining power of buyersMEDIUM

Institutional customers buy in bulk and hence have a highbargaining power especially in an over-capacity market likesouth India.

The bargaining power of the retail clients is low as they chasebrands and the prices are mostly controlled by thecompanies.

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Cement price movement over the last three years

Phase I (April 2010 - August 2010): This was the first instance of a sharp pricedecline in south India (to `180/50kg bag from `260/50kg bag), as demandfaltered in large markets like AP amid significant capacity addition. Fragmentationcreated further pricing pressure as mini cement plants started fighting for marketshare.

Phase II (September 2010 - April 2012): Whilst demand improvement waspaltry, pricing discipline helped in maintaining cement prices.

Phase III (May 2012 - June 2013): Cement prices declined significantly in southIndia (especially AP), as cement companies were competing on prices to gainvolumes from brand-agnostic institutional clients (hoping that pre-electionspending/revival in corporate capex would drive institutional demand).Furthermore, new players like JSW Cement reduced prices in a bid to gain marketshare. This phase also saw rising despatches to other regions.

Phase IV (June 2013 onwards): With demand remaining weak amid significantincrease in input costs, the regional players profitability has deteriorated. With

fading volume growth and market share gain expectations, they choose to tagalong with the larger players rather than fight for market share. Thus, thebargaining power of the larger players (with much better balance sheet strength)has increased and hence the prices have increased.

Exhibit 15:Recent pricing discipline driven by weakened bargaining power of small players

180

220

260

300

Apr-10

Jun-1

0

Aug-1

0

Oct-1

0

Dec-10

Feb-

11

Apr-11

Jun-1

1

Aug-1

1

Oct-1

1

Dec-11

Feb-

12

Apr-12

Jun-1

2

Aug-1

2

Oct-1

2

Dec-12

Feb-

13

Apr-13

Jun-1

3

South India (Rs/50kg bag)

Prices declined with

rising over capacity

and slowing demand

Despite weak demand, pricing discipline

helped maintain cement prices

No demand improvement and significant

capacity addition led to price wars

Recent pricing with fading volume growth andmarket share gain expectation of smaller players

Source: Industry, Ambit Capital research

Is the recent pricing discipline sustainable?

We believe that the biggest risk to pricing discipline is either a sharp growth ininstitutional demand or a delay in recovery from IHB customers. With above-average rainfall and hopes of improvement in the political environment, theprobability of a revival in retail demand is high. We believe that price wars couldaccentuate if retail demand fails to improve, as the fight for market share couldintensify. We hear that prices have reduced by 8-15% in south India after thesharp increase in June-July 2013. Whilst this could be a function of seasonality(monsoon season), subsequent price increases would be difficult if demandremains weak.

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How will the competitive landscape change?

South India is operating at paltry utilisation levels of ~60%, which has resulted infrequent price wars and fight for market share. In times when the demandenvironment remains uncertain, a relief for incumbents is low upcoming capacityaddition. (As against 14mn tonnes of annual capacity addition over FY08-13, weexpect 5-6mn tonnes annual addition during FY14 and FY15.)

Whilst competition might increase due to the lack of demand growth, it is not likelyto increase due to incremental supply-side pressure. We believe that competitiveintensity might increase in the other target markets of Madras Cement (especiallyeast India), as we expect significant capacity addition in that region. Severalplayers are targeting these markets to drive volume growth. Whilst UltraTech hasalready added 4.8mn tonnes of capacity in east India, capacities of north-basedplayers, such as Shree Cement and JK Lakshmi, is likely to be commissioned inFY15.

Exhibit 16:Upcoming capacities in south India over FY14 and FY15Company State Region Capacity Year Type Status

UltraTech Karnataka South 4.4 FY14Greenfield integratedand split grinding

The clinkerisation is complete, and thegrinding would be completed by 3QFY14.

Madras Cement Andhra Pradesh South 1.0 FY14Grinding capacity at

VishakhapatnamThe management highlights it is on track andexpects completion by the start of FY15.

India Cements Tamil Nadu South 3.0 FY15Brownfield expansion atintegrated plant

This is likely to be delayed as the company iscalibrating adding capacities.

Orient Cement Karnataka South 1.8 FY15Greenfield integratedunit

The company has received environmentalclearance but mining clearance is awaited.The equipment ordering is in progress andconstruction is likely to start soon.Commissioning is likely in FY15.

Dalmia Bharat Karnataka South 2.5 FY14Greenfield integratedunit

According to our discussions withmanagement, execution is on track.

Total 12.7


ConclusionSouth India is down but not out!

Whilst concerns around over-capacity, weak demand and fractured pricing insouth India are legitimate, we believe that the long-term demand drivers areintact. That said, a revival in cement consumption would require certain catalystssuch as: (a) improvement in the political landscape in AP and revival of stalledinfrastructure projects, (b) a recovery in the Indias economic cycle drivingcorporate capex, (c) improvement in IT exports and industrial GSDP driving urbaninfrastructure construction, and (d) recovery in rural housing demand withimprovement in agricultural output driving rural household income.

Recovery in demand to benefit adjoining regions as well

Not only would a recovery in cement demand in south India benefit local playersthrough higher volumes and better realisation, but it would also benefit players inthe adjoining regions, as exports in these regions would reduce. This would lowercompetition and help in maintaining pricing discipline.

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Madras Cementstrong brand; rightmarketMadras Cement stands out as a strong cement player in south India, given: (a) itsestablished premium brand, (b) high retail client base, (c) well-established network

of dealers and distributors, and (d) access to captive power unlike many southplayers. We find it the second best in our competitive matrix amongst the southIndia players, given its superior market mix and efficient cost structure.

Exhibit 17:Business description and revenue shareSegment Description

Revenues(` mn) Revenueshare FY13 RoCEFY13

Cement The companys installed cement capacity of 14.5mn tonnes (2mn tonnes splitgrinding units) is located mainly in TN and AP. Nearly 65% of the overall sales are inhigh-realisation markets like TN and Kerala. Its brand, Ramco Cement is one of theoldest and well-established brands in south India.

37,437 97.1% 16%

Wind Power The company has 159MW of wind power generation capacities located in TamilNadu and AP. This business is a drag on the companys overall profitability, as~25% of the capital is employed in the business with RoCE of 3-4%.

1,096 2.9% 4%

Total 38,533 100% 11%Source: Company, Ambit Capital research

Exhibit 18:Capacity details of Madras CementCapacity State

Grinding Capacity(mn tonnes)

Clinker Capacity(mn tonnes)

Captive Powerplant (MW)

Ramaswamy Raja TN 1.6 1.0 25

Alathiyur TN 3.0 2.2 36

Ariyalur TN 4.0 3.0 60

Mathodu Kar 0.3 0.1 -

Jayanthipuram AP 3.6 2.7 36

Chengalpattu (G) TN 0.5 0.0 -

Salem (G) TN 0.6 0.0 -

West Bengal (G) WB 0.9 0.0 -

Total 14.5 9.0 157

Source: Company, Ambit Capital research; Note: (G) signifies grinding unit.

Exhibit 19:Madras Cement - SWOT analysisStrengths Weaknesses

In south India, Madras Cement has built a very strong brand anddealer/distribution network due to which it commands premiumpricing (`10-15 /50kg; 5-10% higher than peers).

Suitable market mix, with ~65% of sales in profitable marketslike TN and Kerala.

Captive power capacity of 157MW makes it the most cost-efficient cement manufacturer in south India. Due to this, itreported industry leading EBITDA/tonne (of`1,140 in FY13).

Huge reserves of captive limestone mines (850mn tonnes) will aidfuture capacity expansion.

High freight costs due to higher despatches through road (Road:Railmix of 75:25)

Whilst Madras Cements brand is popular in south India, it does nothave a strong brand in other regions. Its realisations in new marketslike West Bengal are 10% lower than the tier-I players.

Weak profitability of wind power business (4% RoCE in FY13) is adrag on overall profitability.

Due to low coal linkage, Madras Cement is dependent on importedcoal (~95% of overall coal use). Imported coal is costlier andsusceptible to currency fluctuations.

Opportunities Threats

Foray into other regions by setting up split grinding units. Thecompany is setting up a 1mn tonne grinding unit in Vizag andcontemplating capacity addition in Maharashtra.

Market share gains with stabilisation of recently added capacitywith demand recovery in south India.

A failure of demand recovery in south India will lead to lowutilisation levels and subdued volume growth. We currently factor in

volume growth of 6% in FY15.

Intensifying fight for market share may distort pricing discipline.Rising costs and low realisations will lead to decline in profitability.

Weakening of the INR will increase landed cost of internationalcoal.


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Madras Cementbest placed amongst southernpeers

We assess Madras Cements competitiveness vis--vis other south-based cementplayers on various financial parameters and find that the company stands out asthe best player, due to scale of operations, premium realisations and low cost of

production. Thus, we believe that the company is well-positioned to be a majorbeneficiary of a demand recovery in south India and surrounding states.

Exhibit 20:Madras Cement ranks the best on our competitive frameworkCapacity

(mn tonnes)Cap. Util

FY13Pricing

Cost ofproduction

Cost ofsales

Marketshare

Overallranking

MadrasCement 13.5 63% 1 1 6 2 1

Chettinad 10.5 51% 6 3 1 1 2IndiaCement 13.0 63% 2 7 5 6 3

UltraTech 15.0 79% 3 2 7 2 5

Dalmia 9.0 51% 3 6 2 4 6

ACC 9.6 80% 5 5 4 8 7Sagar 2.4 70% 8 8 2 4 7

Orient 3.0 80% 7 4 8 6 8

Source: Company, Ambit Capital research. Note: * Chettinad Cements FY13 numbers are not available andhence we use FY12 numbers. We use Dalmias numbers from FY11 onwards. We use only FY13 numbers ofOrient Cement. For UltraTech and ACC, we use India-wide numbers.

Exhibit 21:Numbers behind our rankingRealisation (`/tonne) Cost of production

as a % salesCost of sales as a

% of salesMarket share

FY13CAGR

(FY08-13)FY13

Avg(FY08-13)

FY12Avg

(FY08-13)Capacity (mn

tonnes)volume CAGR

(FY08-13)

Madras Cement 4,467 5.9% 52.5% 52.5% 22.9% 19.4% 13.5 7.6%

Chettinad 3,905 5.1% 56.0% 54.8% 12.0% 11.1% 10.5 15.3%

India Cement 4,354 5.8% 63.8% 63.8% 22.2% 18.3% 13.0 1.8%

UltraTech 4,096 6.0% 53.8% 53.8% 23.6% 22.4% 15.0 6.0%

Dalmia 4,081 6.3% 61.4% 62.1% 16.2% 16.4% 9.0 12.8%

ACC 4,218 5.6% 60.6% 60.6% 21.7% 17.4% 9.6 4.0%

Sagar 3,609 1.0% 71.2% 65.1% 19.4% 14.5% 2.4 15.8%

Orient 3,669 3.8% 57.1% NA 25.6% NA 3.0 11.1%

Average 4,159 5.5% 57.0% 57.3% 22.5% 19.2% 76 10.3%

Source: Company, Ambit Capital research. Note: * Chettinad Cements FY13 numbers are not available and hence we use FY12 numbers. We useDalmias numbers from FY11 onwards. We use only FY13 numbers of Orient Cement. Whilst UltraTechs realisation is only grey cement, cost of

production and cost of sales includes white cement numbers.

Pricing: We use grey cement realisation as a benchmark to judge the pricing

power/market mix of the players. With consistently better-than-industry realisation,Madras Cement and India Cement stand out as the best players on thisparameter. This shows their superior positioning in states like TN and Keralawhere pricing discipline is strong. We hear that the cement prices of MadrasCement and India Cement are at an 8-12% premium to its peers in TN andKerala, given their strong brand name.

Cost of production: We assess the players on the cost of production to gaugetheir cost competitiveness. We ascertain cost as a percentage of sales givendifferent OPC:PPC mix. We find Madras Cement and UltraTech as superiorplayers, with the lowest production cost in the industry. Low production costis driven by access to captive power which is significantly cheaper than grid power.

Cost of sales: Here, we compare the players on selling costs like freight,marketing and distribution. Madras Cement is relatively a weak player onthis metric on two accounts: (1) it has a higher mix of road transportation (75:25

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road:rail) which leads to high freight costs, and (2) advertisement and marketingexpenses of Madras Cement are higher than its peers on account of high dealerincentives and significant marketing expenditure. Note that even India Cementfairs poorly on this metric as both India Cement and Madras Cement spend asignificant amount on brand building and dealer incentives.

Market share:We ascertain market share on the basis of capacity and five-yearvolume CAGR. Madras Cement is the second-largest player in south India

(behind UltraTech). Whilst the companys volume growth is significantly higherthan its closest competitor, India Cements, its volume growth is lower than othersouth-India and pan-India players. We highlight that capacity utilisation ofChettinad Cement is extremely low (51% in FY13), and the higher volume growthcan be explained by significant capacity addition (to 10.5mn tonnes from 1.8mntonnes in FY08).

If, we were to carry out the above exercise on a unitary cost basis, the outcomewould broadly remain the same; however, Orient Cement appears the best on thecost of production.

Limitations to our analysis

a) UltraTechs and ACCs numbers include the performance for all Indiaoperations and cannot be segregated for south India.

b) Chettinad Cements numbers are available only up to FY12 given that thecompany was de-listed during FY13.

c) We use Dalmia Cements numbers from FY11 onwards, given that cementcosts were not determinable separately earlier. Similarly we use OrientCements numbers only for FY13.

d) Our competitive mapping exercise considers ~60% of the capacities in southIndia, as requisite details are not publicly available for the others.

e) We include miscellaneous expenditure as a part of cost of production sincethe nature of the cost item is not determinable.

Captive powera key competitive advantage

A key competitive advantage that Madras Cement enjoys over its south India peersis access to captive power (157MW in FY13; refer to Exhibit 18), whereas mostsouth India players (barring Madras Cement and Chettinad Cement) largelydepend on grid power. The plants are fungible and can run on both coal andpetcoke, which aids the company to calibrate the fuel use. Note that MadrasCement meets ~85% of its power requirement from CPP as against 16% for IndiaCement and 1% for Sagar Cement (see Exhibit 22). Hence, Madras Cementspower and fuel costs are 10-15% lower than such peers. The company has recentlyannounced further addition of 60MW of captive power capacity.

Exhibit 22:Madras Cements unitary power cost is among the lowest in the industry% of power from CPP Power and fuel cost (`/tonne)Particulars

FY13 FY10 FY11 FY12 FY13Average(FY10-13)

Madras Cement 85% 750 911 973 966 900

ACC 72% 717 758 927 970 850

UltraTech 80% 707 898 1,056 1,057 964

Chettinad Cement 98% 776 934 1,096 1,080 949

Sagar Cement 1% 1,039 1,076 1,143 1,151 1,107

India Cement 16% 917 1,007 1,149 1,218 1,069


Company-wise captive powercapacity

Cost per KWHParticulars

CPPGrid

Power% diff

MadrasCement

4.7 6.7 -30%

UltraTech 4.2 6.6 -37%

ACC 4.3 5.4 -20%

Ambuja 3.8 5.2 -26%IndiaCement

2.6 5.4 -51%

Chettinad 5.4 7.7 -30%

Source: Company; Ambit Capitalresearch

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Cement superbrand of the south

Madras Cement has positioned itself as a premium brand in south India. Thecompany has continuously invested in brand building through advertisements andin expanding the dealer network. Madras Cement has built a strong relationshipwith the dealers through incentives and discounts which motivate them to refer itsbrand over other brands. Whilst the companys brand, Ramco Cement is a

premium brand in its main markets, such as Tamil Nadu, Kerala and Karnataka, itfalls in the tier-II bracket in AP and West Bengal.

Exhibit 23: Ramco Cement positioned as a premium brand in its main marketsBrands Price (`/50 kg bag)

StatesRamco

Sales mix Tier I Tier II Tier I Tier II

Tamil Nadu 42%India Cement, Madras Cement,UltraTech, Chettinad

Zuari, Penna, Maha cement 320 290

Kerala 23% Madras Cement, India Cement Ambuja, UltraTech 335 310

Karnataka 11%UltraTech, Zuari, ACC, MadrasCement

Chettinad, Dalmia, Priya 300 270

AP 10% UltraTech, ACC, Dalmia Madras Cement, Penna, Priya 290 250

WB 8% Ambuja, UltraTech, Lafarge Madras Cement, OCL India 350 300

Source: Ambit Capital research, Industry

Favourable market mix

Madras Cement has a favourable market exposure, with ~65% of sales in high-realisation markets such as Tamil Nadu and Kerala. Whilst AP has seen a sharpdecline in volumes and fractured pricing, TN and Kerala have reported mid single-digit volume growth and stable prices. Entry into the new markets like West Bengalhas been unfruitful, as despite gaining volumes, the ex-freight realisation isextremely low. The management believes that with the establishment of the brandand better logistics management (post the Vizag expansion), the ex-freightrealisation and hence profitability should improve in West Bengal.

Exhibit 24:Favourable market mix with limitedexposure to AP

FY12 FY13 Growth Market share

TN 3.5 3.5 1.4% 19.4%

Kerala 1.8 2.0 8.6% 23.0%

Karnataka 0.9 0.9 -0.5% 6.5%

AP 0.7 0.8 21.1% 5.7%

Orissa 0.1 0.2 116.1% 2.9%

Goa 0.0 0.0 7.1% 6.0%

West Bengal 0.5 0.7 52.3% 7.7%

Others 0.1 0.2 117.4% NA

Exports 0.0 0.1 90.9% NA

Total 7.6 8.4 11.0% NA


Exhibit 25:Nearly 65% of the sales are in TN and Kerala

,

Others ,

3%

WB, 8%

Goa, 1%

Orrisa, 3%

AP, 10%

Kar, 11%

Ker, 23%

TN, 42%


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Dealers recommend the Ramco brand

Dealers in Tamil Nadu, AP and Kerala clearly highlight Madras Cements brandRamco Cement as a premium high-quality brand in south India. The dealers havea strong loyalty towards the company and hence they recommend the companysbrand over other cement brands. A few notable points are:

Madras Cement has the highest exclusive dealerships in Tamil Nadu andKerala. Dealers highlight that Madras Cement has by far the best dealer incentive

structure. They say that the company organises several dealer programmesand offers holidays and gold coins for high-volume dealers.

Dealers highlight that the company is prompt in re-stocking unlike otherplayers like Chettinad and India Cement whose deliveries are delayed.

A large Chennai-based dealer (associated with Madras Cement for over 15years) highlights that the product quality of Madras Cement is superior topeers and the company is always the first in technology upgradation.

Dealers highlight that IHB customers willingly pay a premium to buy RamcoCement given the superior quality cement. Whilst Chettinad Cement is a strong player, dealers believe they have a stingy

incentive structure.

Fully loaded

Madras Cement made significant capacity additions over the last six years.Installed capacity has reached from 6mn tonnes in FY06 to 14.5mn tonnes inFY13, including 2mn tonnes of split grinding units in FY13. In addition to the 2mntonne brown-field expansion in AP and a 4mn tonne green-field expansion inTamil Nadu (Ariyalur), the company added grinding units in TN, Karnataka and

West Bengal. Furthermore, the company added two packing plants in Tamil Naduand Hyderabad to ensure timely deliveries in target markets. Whilst utilisationlevels are subdued currently, the company has positioned itself to gain volumeswhen the demand recovers. The company is adding a 1mn tonne grinding unit inVishakhapatnam (likely commissioning in 1HFY15) to improve its proximity to theeastern market, The company also plans to add a grinding unit in Maharashtra.

Exhibit 26:Phase-wise capacity expansion

6

8

10

12.5 12.5 12.5

14.5 14.515.5

4.66.1

7.5 7.5 7.5 7.59.0 9.0 9.0

2

6

10

14

18

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E

Cement Capacity Clinker Capacity

(mn tonnes)

Brownfield

Expansion inJayantipuram Ariyalur Unit I

Grinding units in TN,

Karanataka, WB and

upgradation of RR Nagar

Ariyalur Unit IIVizag Grinding unit


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.and gunning for new markets

Historically, Madras Cement has added small and fragmented capacities unlike itspeers, such as UltraTech and Shree Cement, which add large capacities at a singlelocation. From our discussion with the management, it appears that the companywould continue to add capacities in a fragmented manner. The managementhighlights that it has huge limestone reserves in AP (~850mn tonnes) and future

capacity addition would largely be grinding units at several locations (possiblyMaharashtra and Orissa) with the main clinker unit in AP. The focus of thecompany is to expand beyond south India and cultivate other regions(mainly east) to maintain the volume growth momentum. Until now, thecompany has set up a 0.9mn tonne grinding unit in West Bengal and is setting upa 1mn tonne grinding unit in Vishakhapatnam (AP).

West BengalSo far not so good

Madras Cement set up a 0.9mn tonne clinker grinding unit in West Bengal in FY10(which sources clinker from its integrated plant in Andhra Pradesh). Whilst WestBengal contributes 8% of Madras Cements overall despatches (up from6% in FY12), we hear that the company is struggling to establish its brandin east India. Dealers highlight that Ramco Cement is the lowest-priced cementbrand in east India (`30-40/50kg bag discount to the tier-I peers) and does nothave the dealer network to gain prominence in the market. Note that the distancebetween the clinker and grinding unit is the highest in India (~1,300kms) whicheats into a large part of the profitability of its operations in West Bengal. Hence, inour view, if the company does not manage to reduce the pricing differential in theregion, its foray in West Bengal will not be lucrative.

Vishakhapatnam expansion for Orissa market; but RoCE uncertain

Madras Cement is setting up a 1mn tonne capacity in Vishakhapatnam with acapital outlay of`3,500mn. The management argues that this is a strategic move

with efficiencies such as: (a) proximity to the target markets like Orissa, (b) betteravailability of fly ash, and (c) savings in logistics cost as clinker transportation ischeaper than cement transportation. We do a sensitivity analysis to understand thecost savings required to generate RoCEs of 10-16% at various levels of capacityutilisation.

Exhibit 27:RoCE of 16% will require `560/tonne savings at 100% capacityutilisation

Quantity sold (mn tonnes)Target RoCE

Return (` mn)0.5 0.6 0.7 0.8 0.9 1.0

16% 560 1,120 933 800 700 622 560

14% 490 980 817 700 613 544 490

12% 420 840 700 600 525 467 420

10% 350 700 583 500 438 389 350


The savings from Vishakhapatnam would largely be due to better logisticsmanagement with proximity to the target markets. Currently, Madras Cementtransports cement to Orissa at a distance of 1,100kms; despatches from Vizagwould reduce the lead distance by 500kms.We expect `350/tonne of savingsat best, factoring in `250/tonne from lower transportation costs and `100/tonnefrom additional fly ash use. If the savings reach `500/tonne at 70% utilisation, theRoCE would be 10%, still lower than the average RoCE of the cement business(16% over FY02-13). The management highlights that the savings could be

lower due to the increase in diesel prices.

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Orissa: Institutional segment is the only hope

Orissa is a mid-sized cement market (9mn tonnes in FY13) which expanded at 8-16% in the last 3-4 years. However, the market is dominated by four players (OCLIndia, UltraTech, ACC and Lafarge) which account for 80% of the cementdespatches. The state is serviced from internal capacities and also from capacitiesin Chhattisgarh and Madhya Pradesh.

Infrastructure construction (both public and private) has been strong and is likely toremain so, as the state still requires substantial investment in industries and publicinfrastructure. This is the only hope for new entrants like Madras Cement, asinstitutional clients prefer lower prices over brand. Thus, the pricing of MadrasCement will have to be lower than other established brands for it to gain marketshare in the institutional segment. Since housing is driven primarily by the IHBsegment, we believe the company will require substantial investment in brandingand dealer reach if it has to establish its presence in the high-realisation retailsegment.

Exhibit 28:Market dynamics of OrissaState

Size

(FY12)

CAGR

(FY07-12)

Competitive

intensity

Existing

players

Expansion

typeComments

Orissa 7.8 13% ModerateOCL,UltraTech,

ACC, LafargeGrinding

A mid-sized fast-growing market with a sizable growth ofinfrastructure construction. Housing is mainly driven by IHB(brand conscious). Strong infrastructure construction will supportnear-term volume growth for new entrants.


Slow start in Maharashtra

In the last few years, Madras Cement has started despatches in northMaharashtra; however, it sells at a significant discount as compared to theestablished brands. We believe that it might gain volumes after setting up agrinding unit but pricing will be a challenge as it will have to compete with several

established players.

Maharashtra is the largest cement market in India (30mn tonnes in FY13) whereintwo major cities (Mumbai and Pune) account for most of the demand. It is also themost institutional market in India and hence brand names have little relevance.South India players focus on large demand centres like Mumbai (~30% ofMaharashtra) by breaking into the incumbents channel partners through 2-3xhigher incentives; currently, more than 30 brands operate here. For detailedexplanation on Maharashtra as a cement market, refer to our cement monthlydated 3 May 2013, FY14 begins on a weak note.

Exhibit 29:Market dynamics of MaharashtraState

Size(FY12)

CAGR(FY07-12)

Competitiveintensity

Existingplayers

Expansiontype Comments

Maharashtra

30 7.3% Vey HighMultipleplayers

GrindingThe largest market in India with a substantial institutional clientbase. Several brands are available in the market, and hencecompetitive intensity in high.


Business standing good (but not corporategovernance)

Recently, the companys allocation towards corporate social responsibility (`328mnin FY13; 8% of PAT), to promoter-run trust in times of declining profitability hasraised investor concerns. The management argues that the expenditure is towards

setting up an engineering college (Ramco Institute of Technology) as the companyneeds engineers for its business operations. We do not find this to be a convincingexplanation, as the promoters can fund this through their dividend earnings and
http://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_03May2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_03May2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_03May2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_03May2013.pdfhttp://webambit.ambit.co/reports/Ambit_CementSentiment_MonthlyUpdate_03May2013.pdf

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remuneration. We highlight that UltraTech had a CSR spend of ~2.2% ofPAT in FY13 and Ambuja had a CSR and donation spend of 6.2% of PAT inCY12. A while back a few concerns were raised on the high remuneration paid tothe companys promoters (5.3% of PBT). Whilst this is in line/lower than other mid-cap names like JK Lakshmi, it is slightly higher than its large-cap peers.

Exhibit 30:Madras Cements CSR and managerial remunerationParticulars(` mn) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 1QFY13Corporate Social Responsibility

CSR 13 10 8 11 13 11 17 44 45 43 94 328 72

PAT 256 129 334 559 790 3,080 4,083 3,635 3,537 2,110 3,850 4,037 688

CSR as a % ofPAT

5.2% 7.4% 2.5% 2.0% 1.7% 0.4% 0.4% 1.2% 1.3% 2.0% 2.4% 8.1% 10.5%

Managerial Remuneration

MR 13 7 19 18 62 248 324 287 279 156 293 310 NA

PBT 405 247 543 612 1,160 4,688 6,168 5,458 5,303 2,972 5,574 5,887 NA

MR as a % of PBT 3.1% 2.9% 3.5% 2.9% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% NA


Inter-corporate deposits in related companies like Ramco Systems, is not materialand has remained stagnant for the last few years. Moreover, the company receivesmarket rate of interest on those deposits.

Exhibit 31:Inter-corporate deposits form a small portion of loans and advancesParticulars (` mn) FY08 FY09 FY10 FY11 FY12 FY13Ramco Systems 200 200 85 120 130 138

Sandhya spinning mills 22 22 - - - -

Ramaraju surgical cotton 70 79 - - - -

Inter-corporate deposits (A) 292 300 85 120 130 138

Total loans and advances (B) 4,520 4,565 5,320 4,838 3,994 5,035

Networth (C) 9,539 12,602 15,582 17,345 20,503 23,708

A as a % B 6.4% 6.6% 1.6% 2.5% 3.3% 2.7%

A as a % C 3.1% 2.4% 0.5% 0.7% 0.6% 0.6%


AuditorsNo rotation for over ten years: The companys accounts are auditedby M.S. Jagannathan & N. Krishnaswami, a CA firm based in Chennai. Whilstremuneration to auditors is not significant, we highlight that the auditors have notbeen changed in over ten years which is not the best practice. However, note thatseveral marquee Indian companies do not rotate independent directors andauditors for many years.

Exhibit 32:Explanation of our flags on the cover pageSegment Score Comments

Accounting AMBER

In our forensic accounting analysis, amongst the seven cement companies, Madras Cement ranks 5thprimarily due to its low gross block turnover and high contingent liabilities as a percentage of net worth. Thecompany has almost always reported high CFO/EBITDA and low volatility in other income andmiscellaneous expenditure as a percentage of sales.

Predictability AMBER

Madras Cement has always made timely announcements of its capacity expansions, plans/intentions andhas rarely surprised in a significantly positive or negative manner. The company does not holdconcalls/meetings with analysts on a regular basis or provide additional inputs apart from the statutoryrequirement. Furthermore, the companys sudden allocation towards CSR raises concerns.

EarningsMomentum

AMBERFY14 and FY15 EBITDA estimates have seen marginal downgrades over the past three months which are nota cause for concern.


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Set for a financial recoveryWe expect FY14 to be challenging year for Madras Cement, given poor volumeand realisation growth visibility amid rising costs (resulting in a 24% decline inunitary EBITDA). Whilst we expect mid single-digit volume growth in FY15, webelieve a major jump in volumes in FY16 (10% YoY growth) with recovery in southIndia cement demand and some pick in volumes from other regions (Orissa and

Maharashtra). With most of the capex completed, higher volume growth andrecovery in unitary EBITDA will improve capital efficiency driving profitability.

Volume growth hinges on improvement of macro environment

Our discussions with industry participants make us less enthused about the near-term demand growth in south India (with no signs of demand picking up fromeither the IHB or institutional segment). Not only do the public infrastructureprojects remain stalled, but a slowdown in the domestic economy and high interestrates have also resulted in delays in corporate capex and housing demand.Against this backdrop, we expect a volume growth of 3.7% in FY14 and 6.0% inFY15 for Madras Cement. We expect a substantial improvement in cementdemand, with a recovery in Indias GDP and revival of the capex cycle. South Indiacement volumes could likely expand ahead of Indias average as and when theregion overcomes the unique challenges mentioned earlier.

We believe that Madras Cement is well placed to expand ahead of the industry,with market share gains from new capacities, given its strong brand in largemarkets like Tamil Nadu and Karnataka; but, we build in a conservative volumegrowth of 8% in FY16.

Exhibit 33:Stable volume and realisation growth

4

6

8

10

12

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

1,500

3,000

4,500

6,000

Volume

Realisation (RHS)

Realisation-ex freight (RHS)

(mn tonnes) (Rs/tonne)


Exhibit 34:...will lead to a pick up in revenue growth

10

20

30

40

50

60

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

-10%

0%

10%

20%

30%

Revenue YoY growth (RHS)

(Rs bn)


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Gradual improvement in profitability

We believe that FY14 will be a tough year for Madras Cement, as paltry realisationgrowth amid rising costs will result in a sharp decline in unitary EBITDA (we expecta decline of 27%). Furthermore, with no material demand growth, capacityutilisation would remain subdued at 65-67%. Thus, we expect RoCE to decline to5.8% in FY14 as against 11% in FY13. Whilst we expect capacity utilisation to

remain at 65-72%, we believe RoCE will improve gradually starting FY15, drivenby improvement in unitary EBITDA with higher realisation and stable costs.

Exhibit 35:Unitary EBITDA improvement to be driven byhigher realisation and stable costs

600

800

1,000

1,200

1,400

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

15%

20%

25%

30%

35%

40%

EBITDA EBITDA margin (RHS)

(Rs/tonne)


Exhibit 36:RoCE to improve gradually with risingcapital employed turnover

0.5

0.6

0.7

0.8

0.9

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY14E

FY15E

FY16E

0

15

30

45

60

CE turnover (X) RoCE (%) (RHS)

RoE(%) (RHS)


Debt is not a concern

Madras Cements debt increased to `28bn in FY11 from `6bn in FY08, as thecompany doubled capacity over the last five years. We do not see major concernsfrom an increase in debt as: (a) most of the capacity expansion is complete andthe debt repayment would likely start in FY14 (note that historically the companyhas repaid debt from operating cash flows, post the completion of capex), (b) netdebt:equity is at a comfortable 1.1x from 2.0x in FY09, and (c) the company wouldlikely generate sufficient EBITDA to cover interest costs and near-term capexneeds.

Exhibit 37:Declining capex and rising CFO.

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

-

5,000

10,000

15,000

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

-

1.0

2.0

3.0

4.0

5.0

6.0

CFO FCF Capex/CFO (x) (RHS)

(Rs mn)


Exhibit 38:would aid debt repayment

1.2

0.8

1.61.9

1.6 1.5

1.31.1 1.1

1.00.7

0.6

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

FY17E

Net debt/equity (X)


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No respite from rising costs

We see no savings in costs as two major cost componentspower and fuel andfreight cost (accounting for ~55% of overall costs)would continue to inch up. Inaddition, unitary EBITDA would significantly decline, owing to an increase in othercost components, such as: (a) employee cost (due to wage revisions), (b) rawmaterial cost (due to higher inward freight for clinker and higher gypsum and

aggregate costs), and (c) selling costs (due to higher discounts, and dealercommissions).

INR depreciation offsets benefits of low international coal prices

Whilst the decline in international coal costs supported Madras Cementsprofitability in the last 4-6 quarters, the recent INR depreciation would eat into thebenefits of low international coal/pet coke prices.

Exhibit 39:INR depreciation to offset the decline ininternational coal prices

50

54

58

62

66

Apr-12

Jun-1

2

Aug-1

2

Oct-12

Dec-1

2

Feb-1

3

Apr-13

Jun-1

3

Aug-1

3

60

75

90

105

120

USD-INR Richards bay coal cost (RHS)

(Rs) (US$/tonne)

Source: Company, Bloomberg, Ambit Capital research

Exhibit 40:and hence power and fuel cost wouldlikely inch up

Power and fuel cost (Rs/tonne)

921

750

911

973

1,0331,105

1,161

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E


Freight cost continues to move up

Whilst rail freight has increased by ~32% over the last 18 months, road freightcould inch up going ahead with the increase in diesel prices. Our Oil and Gasanalyst, Dayanand Mittal, expects a `1 increase in diesel costs for retail buyers onaccount of a monthly increase in diesel prices after deregulation in January 2013.Furthermore, with the sharp INR depreciation recently (leading to rising costs ofimporting crude in India), the increase could eventually be higher.

Exhibit 41:Steep rise in diesel costs

35

40

45

50

1QFY11

3QFY11

1QFY12

3QFY12

1QFY13

3QFY13

1QFY14

-10%

0%

10%

20%

30%

Diesel Price (Rs/litre) YoY growth (RHS)


Exhibit 42:Freight cost continue to inch up with risingroad and rail freight costs

Freight cost (Rs/tonne)

567 589640

748

918955

1,0031,053

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E


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Financial assumptions

Exhibit 43:Detailed financial assumptions (` mn unless mentioned otherwise)Assumptions Change (%)

ParticularsFY13E FY14E FY15E FY14E FY15E

Comments

Cement sales 8.4 8.7 9.2 3.7% 6.0%

Capacity utilisation (%) 62.8 58.0 57.6-482

bps-36 bps

Continuation of weak demand in south India will result in mutedvolume growth in FY14. We expect improvement in FY15 andFY16 with improvement/stabilisation in macro environment,election dole-outs and market share gains in TN and Kerala.

Power sales (kwh) 507 429 418 -15.5% -2.4%

Per tonne analysis

Cement Realisation 4,467 4,353 4,701 -2.6% 8.0%We expect realisation improvement in FY15 and FY16. However,our expectation hinges on a recovery in retail demand andsustaining pricing discipline.

Operating costs 3,345 3,624 3,799 8.3% 4.9%Operating costs will continue to rise led by higher power and fueland freight cost. RM cost is likely to increase with higher cost ofadditives and higher inward transportation cost.

EBITDA 1,140 835 1,005 -26.7% 20.3%

Unitary EBITDA will decline materially in FY14, as realisationwould likely decline amid significant cost escalation. We expect

improvement in FY15 driven by higher realisation and stablecosts.Financials (` mn unlessspecified)

Net Revenues 38,454 39,610 45,142 3.0% 14.0%

EBITDA 10,217 7,940 9,958 -22.3% 25.4%

EBITDA margin (%) 26.6 20.0 22.1-652

bps201 bps

Increase in cost pressure amid decline in realisation, will lead toa sharp decline in margins in FY14.

Interest expense 1,796 1,815 1,865 1.1% 2.8%We do not expect a material increase in interest costs as debt willnot increase given low capex needs.

Adjusted PBT 5887 3121 4879 -47.0% 56.3%Decline in EBITDA margin and higher depreciation will result in asignificant decline in PBT.

Tax 1,846 967 1,512 -47.6% 56.3%

Adjusted PAT 4,037 2,153 3,366 -46.7% 56.3%

Adjusted PAT margin (%) 10.5 5.4 7.5-507

bps202 bps

After a decline in FY14, we expect a sharp recovery in FY15 ledby volume growth and margin improvement.

EPS (`) 17.0 9.0 14.1 -46.7% 56.3%

Capex 3,993 4,000 5,048 0.2% 26.2%

WC Turnover (x) 6.8 5.8 6.3 -98 bps 48 bps

FCF 3,021 2,940 2,709 -2.7% -7.8%

We assume capex for Vishakhapatnam expansion (`3600mn),60MW of additional captive power capacity (`550mn) andassuming acquisition of land and mining lease. Working capitalturnover to improve in FY15 with sharp increase in revenuegrowth.


Exhibit 44:Our estimates differ mainly at the EBITDA level and also we have factored in higher depreciation vsconsensus

Consensus Ambit Divergence Comments

Revenue (` mn)FY2014 40,738 39,610 -3%

FY2015 46,087 45,142 -2%

Our estimates are broadly in line with consensus. We factor in a1% decline in realisation and 4% volume growth in FY14.

EBITDA (` mn)

FY2014 9,660 7,940 -18%

FY2015 11,060 9,958 -10%

Our EBITDA estimates are significantly lower than the industry,since we expect realisations to decline by 1% in FY14 and costpressures to escalate.

PAT (` mn)FY2014 3,759 2,153 -43%

FY2015 4,708 3,369 -29%

Lower-than-consensus EBITDA and higher depreciation leads toa significant divergence at the PAT level.


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Madras Cement


Inexpensive valuationsOur DCF-based target price of `200 implies Rs4,460 FY15 EV/tonne and 7.5xFY15E EBITDA. After the recently sharp correction in cement stocks, MadrasCement trades at 5.1x FY15 consensus EBITDA,which implies a discount of 27%over the last six-year average and 12-37% discount to Shree Cement and Ambuja

Cement (as against historical discount of 18% to Ambuja Cement and inline/premium to Shree Cement) . We believe current valuations are inexpensive fora player like Madras Cement with a history of strong operational performance andan ability to monetise its brand and market positioning to improve profitability in agood economic environment.

DCF valuation`200/shareWe value Madras Cement using a DCF methodology wherein EBITDA margin,working capital turnover and capital expenditure are the key variables controllingthe valuation. We undertake a combined valuation for the cement and thewindmill business given combined costs and inter-segmental transactions. Wevalue the stock at `200/share which implies 7.5x FY15 EV/EBITDA. Theassumptions underlying our valuation are:

1) Volume growth estimates: We estimate a volume growth of 4% in FY14, 6%in FY15 and 10% in FY16, with a recovery in Indias GDP driving the capexcycle and propelling housing demand. We model 7.4% volume CAGR overFY16-24E, marginally lower than our long-term industry growth expectation.

2) Margin and operating cash flows: We expect unitary EBITDA to decline by27% in FY14, post which we expect a recovery in unitary EBITDA led byrealisation growth and stable costs. From FY16 onwards, we expect unitaryEBITDA to increase at 8% and we taper it down to 4.0% by FY24. We assumerealisation and cost to increase in line with inflation. Factoring in theseassumptions, our estimated CFO CAGR is 13% over FY16-24E. High unitary

EBITDA CAGR over FY14-24 is driven by the low base of FY14.

3) Capex and FCF: With most of the capacity expansion completed, we modellimited capex requirement until FY15E. (Capex will be mainly on theVishakhapatnam grinding unit and acquisition of land and mining leases). Weexpect a 5.6% capacity CAGR over FY14-24E assuming a 61% long-term re-investment rate. Our FY24 exit capacity utilisation is 76%.

4) 14% WACC and 4% terminal growth: We assume a WACC of 14.0% asagainst 13.5% for large-cap companies on account of higher cost of equity(15% as against 13.5% for large-caps), given its history of lower capitalefficiency and given that the company has not displayed the best corporategovernance practices. Our terminal growth rate is 4% for Madras Cement, in

line with the estimate for the other cement companies in our coverage.

Long-term operational

assumptions moderate vis--vislast ten years

CAGRParticulars

FY03-13 FY14-24

Madras Cement

Volume(mn tonnes)

9.0% 7.4%

EBITDA(`/tonne)

11.8% 8.7%

Realisation(`/tonne)

11.7% 6.1%

India

Volume(mn tonnes)

7.9% -

Realisation(`/ 50kg bag)

8.4% -

South India

Volume(mn tonnes)

6.8% -

Realisation(`/ 50kg bag)

6.9%

Source: Company, CMA, AmbitCapital research

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Madras Cement


Exhibit 45:FCF generation to pick up with risingprofitability and declining capex needs

-

1,000

2,000

3,000

4,000

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

FY24E

(Rsmn)

5%

8%

11%

14%

17%

20%

PV of FCFF (LHS) RoIC WACC


Exhibit 46:DCF-based value of `200/share

PV of the forecasting period up to FY24 (` bn) 30

Terminal Value (`bn) 45

Enterprise value (`bn) 75

Less: net debt at Mar-14 (`bn) 27

Implied equity value (`bn) 48

Implied equity value (` per share) 200


Sensitivity analysis

Our base-case valuation factors in volume growth of 3.7% and 1% declinein realisation in FY14. Whilst the sensitivity table below shows the changes tothe base (FY14) estimates, we highlight that the change in base estimates leads toa change in forward estimates.

Exhibit 47:Base-case valuation of `200/shareParticulars Volume growth (FY14)

200 1.7% 2.7% 3.7% 4.7% 5.7%

-3% 107 130 153 176 199

-2% 131 154 177 201 224

-1% 155 179 200 225 249

0% 179 203 226 250 273

Realisat

iongrowth

(F

Y14)

1% 203 227 251 275 298


Cross-cycle valuation

At the current market price, the stock trades at `3,630 EV/tonne, implying a 16%discount to the five-year average. (Given the volatility in the USD-INR rates,calculation of EV/tonne on a USD basis does not make sense; hence, we do across-cycle comparison on an INR basis.) If we adjust the EV of the wind powerassets at 1.0x FY13 outstanding debt of`6bn (given that the entire equity invested

in the business is wiped out due to losses), the EV/tonne drops to `3,215. Thestock trades at 5.1x FY15 consensus EBITDA, which implies a discount of 27% to itsfive-year average. Post the re-rating during FY07 and FY08 (driven by a significantimprovement in EBITDA margin and RoCEs), the drop in valuations during FY09was driven by a decline in profitability (due to low utilisations, declining EBITDAmargins and significant expenditure on capacity addition). The recent decline instock prices can be explained by the general de-rating of mid-cap cement names,given concerns on declining profitability and fading market share gainexpectations and rising investor concerns around Madras Cements corporategovernance practices.

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Exhibit 48:One-year forward EV/EBITDA is at a 27%discount to five-year historical average

2

4

6

8

10

Apr-08

Aug-0

8

Dec-0

8

Apr-09

Aug-0

9

Dec-0

9

Apr-10

Aug-1

0

Dec-1

0

Apr-11

Aug-1

1

Dec-1

1

Apr-12

Aug-1

2

Dec-1

2

Apr-13

Aug-1

3

1-yr fwd EV/EBITDA 5-year Avg EV/EBITDA

(x)

Source: Company, Bloomberg, Ambit Capital research; Note: We useconsensus EBITDA estimates for forward EV/EBITDA

Exhibit 49:MC is trading at a one-year forwardEV/tonne of `3,630, a 16% discount to 5-year average

3,000

4,000

5,000

6,000

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

1-yr fwd EV/tonne 5-year Avg EV/tonne

(Rs)

Source: Company, Bloomberg, Ambit Capital research. Note: OurEV/tonne calculation does not adjust for the 157MW of wind powerassets. We use USD-INR rate of Rs68 for EV calculation.

Exhibit 50:One-year forward P/B is at a 41% discountto the last 5-year average

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Apr-08

Aug-0

8

Dec-0

8

Apr-09

Aug-0

9

Dec-0

9

Apr-10

Aug-1

0

Dec-1

0

Apr-11

Aug-1

1

Dec-1

1

Apr-12

Aug-1

2

Dec-1

2

Apr-13

Aug-1

3

1-yr fwd P/B 5-year Avg P/B

Source: Company, Bloomberg, Ambit Capital research. Note: We useconsensus EBITDA estimates for forward P/B

Exhibit 51:Profitability will improve gradually with pickup in utilisation level and EBITDA growth

5

15

25

35

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

RoCE RoE

FY08-13 Avg RoCE FY08-13 Avg RoE


Relative valuation - discount; but for how long?

Madras Cement currently trades at a discount of 50% to Shree Cement (SRCM)and Ambuja Cement (ACEM) on EV/tonne (as against six-year average discount of10-30%). On EV/EBITDA basis, Madras Cement has historically traded at an 18%discount to ACEM and at a premium/in line to SRCM; currently it is trading at a12-37% discount to SRCM and ACEM. Admittedly, a discount is justified givenMadras Cements poor capital efficiency (explained in detail in the followingsection) as compared to SRCM and ACEM. However, we believe the currentdiscount is high and not justified for a player like Madras Cement with a history ofstrong operational performance and the ability to monetise its brand and marketpositioning to improve profitability in a good economic environment.

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Exhibit 52:Madras Cement is trading at a 50% discountto SRCM and ACEM on an EV/tonne basis

1,000

3,500

6,000

8,500

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

EV/Tonne(Rs)

Madras Cement Shree Cement

Ambuja Cement

Source: Company, Bloomberg, Ambit Capital research. Note: Forcalculation of EV/tonne we do not adjust the thermal power assets of

SRCM and wind power assets of Madras Cement.

Exhibit 53:Madras Cement is trading at a 12-27%discount to SRCM and ACEM on EV/EBITDA

0

4

8

12

16

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

EV/EBIT

DA(X)

Madras Cement Shree Cement

Ambuja Cement


Exhibit 1: Relative valuation summary

Capacity(mn

tonnes)CMP Mcap EV/EBITDA (x) P/E (x) EV/tonne (`) CAGR

(FY13-15)RoE (%)

FY14 FY15 ` ` bn FY14 FY15 FY14 FY15 FY14 FY15 EBITDA EPS FY14 FY15Large cap

UltraTech 58.5 58.5 1,498 411 9.0 7.5 14.6 12.4 7,565 7,565 12.6 11.6 17.0 17.1

Grasim^ 2,280 209 5.2 4.3 7.9 6.7 11.1 7.5 13.0 13.0

Ambuja* 28.2 30.0 170 263 10.2 8.5 18.7 15.9 7,990 7,511 -2.5 12.5 15.2 16.5

ACC* 30.1 32.1 952 179 8.0 6.5 14.3 11.6 5,164 4,843 4.1 20.6 16.0 17.8

JPA # 35.9 35.9 36 81 20.9 19.4 16.3 12.3 20,381 20,381 6.0 12.6 4.5 6.2

Shree Cement ** 16.0 17.0 3,558 124 7.7 7.1 13.7 12.6 7,674 7,223 5.3 -1.0 27.7 22.7

Mid cap

Madras Cements ** 14.5 15.5 157 37 6.6 5.8 10.0 8.0 4,527 4,527 3.7 20.2 14.9 16.4

Century Tex# 12.8 12.8 226 21 9.4 7.0 47.8 18.0 5,007 5,007 22.9 NA 2.2 5.5

India Cements 15.5 18.5 48 15 5.3 4.7 8.2 5.8 2,893 2,424 6.6 25.5 4.6 6.0

Prism Cement # 5.6 10.4 24 12 6.8 5.4 11.3 7.7 5,471 2,946 46.1 NA 7.2 14.1

JK Cement 7.5 10.5 176 12 3.9 3.0 5.6 4.7 2,483 2,010 7.1 11.2 12.9 13.8

Birla Corp # 10.8 10.8 205 16 5.7 4.3 6.4 4.8 1,941 1,941 -3.6 10.3 9.7 11.8

JK Lakshmi Cement 6.3 9.0 59 7 3.3 2.6 4.1 3.2 2,288 1,601 12.8 27.0 13.6 14.4

Small Cap

Dalmia Bharat #@ 11.8 13.7 110 9 6.2 4.8 4.9 3.1 3,417 2,943 9.1 21.1 5.8 8.2Heidelberg* 6.0 6.0 29 7 10.3 6.3 64.9 7.9 3,060 3,060 86.5 NA 1.2 8.8

OCL India 5.4 6.7 127 7 2.1 NA 3.9 NA 1,880 1,515 NA 140.5 16.2 Na

Mangalam Cement 3.5 3.5 95 3 2.5 NA 3.3 NA 1,062 1,062 NA 17.8 15.0 NA

Sagar Cement 2.5 2.5 238 4 7.2 5.6 15.2 8.3 2,661 2,661 67.6 -21.3 9.8 16.1

Source: Bloomberg consensus, company data, industry, Ambit Capital research; Note: We use Bloomberg reported EV as of today for calculation ofEV/tonne. We take EV/EBITDA as reported by Bloomberg; * indicates December ending (CY13=FY14). ^ Grasim owns 61% in UltraTech. # We havenot adjusted the numbers of these companies for the value of the non-cement business. ** Shree Cements: We value power assets of 280MW (of the560MW) at Rs40mn/MW and adjust the same in the EV. ** Madras Cements: We value windmill assets of 160MW at Rs35mn/MW and adjust the samein the EV.

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Madras vs Shree and Ambuja in-lineoperational performance

We compare the income statements of Madras Cement, Shree Cement andAmbuja Cement on a common-size basis to understand the cost structure of thecompanies. Whilst the EBITDA margins of the three companies are broadly thesame, their cost structures are different. We note that: (a)raw material cost of

Shree Cement is the lowest in the industry given the significantly lower costof limestone (`150/tonne against `240/tonne for Madras); industry participantshighlight that Shree Cement has large limestone reserves at a single location vis--vis scattered limestone mines and large distances between the clinker unit andthe grinding capacity for its peers, which explains the difference in the rawmaterial cost; (b) Ambuja does not include captive limestone cost in rawmaterial costs and hence we add back royalty on limestone and excise duty onclinker; (c) power and fuel cost of Madras Cement is the lowest amongst thethree companies, (c) freight expense of Madras Cement is higher thanShree Cement and Ambuja Cement given its higher lead distances due tointer-regional despatches, (d) other expenses of Madras Cement are the lowestgiven the lower administration and selling costs, and (e) other expenses of Ambuja

are the highest due to high miscellaneous expenditure and possibly due to somepart of raw material costs booked in other expenses.

Exhibit 54: Common-size financial analysis of Madras Cement, SRCM and ACEMMC SRCM ACEM MC SRCM ACEM

ParticularsFY12 FY12 CY11 FY13 FY13 CY12

Sales (`mn) 32,696 58,981 85,907 38,454 56,948 97,303

Raw material cost 13.4% 10.1% 9.5% 13.8% 9.2% 6.8%

Employee costs 5.2% 5.4% 5.0% 5.1% 5.5% 4.9%

Power and fuel 22.3% 25.4% 23.4% 21.1% 26.6% 23.9%

Transport and handling 17.2% 12.2% 16.9% 20.0% 16.1% 17.4%

Other expenses 12.8% 19.0% 22.1% 13.5% 14.7% 21.5%

Admin and other manfg. 10.4% 13.2% 15.4% 10.8% NA 15.3%

Selling expenses 1.9% 4.9% 2.5% 2.3% NA 1.8%

Other expenses 0.5% 0.9% 4.1% 0.3% NA 4.5%

Total Expenditure 70.9% 72.1% 76

Documents

AMC_090313_65526