Cement & Building Materials - Reliance Securities

Research Analyst

Binod ModiContact: 022 4303 4626/9870009382Email: [email protected]

Research Associate:

Girija Shankar RayEmail : [email protected]

1. Cement industry added capacity to the tune of 19mnT in FY20 and despite current pandemic situation, the industry is set to add 25mnT cement capacity in FY21 and 51mnT in next three years.

2. Last two weeks of March are always crucial, as higher billing is done during this period, which was adversely affected by COVID-led nationwide lockdown. Resultantly, cement demand contracted by 1% in FY20.

3. Cement demand is expected to de-grow by 12% in FY21E and likely to rebound by 11.4% and 7.8% in FY22E and FY23E, respectively.

4. Incremental consumption is seen at 20mnT over FY20-FY23E from the base cement consumption of 329mnT in FY20, whereas incremental supply during the period is pegged at 51mnT.

5. Eastern region is expected to add the highest 21mnT capacity (43% of total) followed by 11.5mnT in Western region (23% of total) and 10.5mnT in Central region, while Northern and Southern regions are expected to witness minimal capacity addition (4mnT each).

6. Lower fuel prices are likely to aid the industry to withstand the adverse impact of lower utilization in near-to-medium-term.

7. Strong pricing scenario across regions is likely to aid the companies to report healthy unitary operating performance in 1HFY21E.

8. New capacity addition is not expected to witness very high growth in next decade unlike last decade owing to limited resources. Hence, the demand growth should outpace supply growth in the next decade, in our view.

Outlook & Valuation

Prolonged slowdown in construction activities due to COVID-led disruptions significantly

impacted the cement demand, which is expected to see recovery only in 2HFY21 led by strong

rural demand and pick-up in infrastructure activities. Unlike pre-COVID, net incremental supply

is expected to be 31mnT in next three years. However, we expect the scenario to improve

substantially from FY22E onwards led by revival in demand scenario. Further, the industry is

likely to add only 24mnT of clinker capacity in next three years and thereafter, there is hardly any

capacity addition plan as of now, which bodes well for the cement industry and indicates that

supply glut is likely to wane, going forward. We continue to prefer Northern and Central region

among others due to favourable demand supply situation. We maintain UltraTech as our Top

Pick in large-cap space, while JK Cement, JK Lakshmi Cement, HeidelbergCement India

are our Top Picks in mid-cap space. We prefer Somany Ceramics in tiles Building Materials

space.

Coverage Summary

Company Rating CMP 2 yr %

(Rs) TP (Rs) chg

ACC Ltd BUY 1,388 1,718 24%

Ambuja Cements BUY 219 252 15%

UltraTech Cement BUY 4,035 4,825 20%

Shree Cement BUY 21,513 24,053 12%

Ramco Cements BUY 670 802 20%

India Cements SELL 115 81 -30%

J.K. Cement BUY 1,500 1,711 14%

JK Lakshmi BUY 270 401 49%

Mangalam Cement BUY 197 295 50%

HeidelbergCement BUY 193 226 17%

Sagar Cement BUY 471 619 31%

Kajaria Ceramics SELL 408 384 -6%

Somany Ceramics BUY 133 173 30%

Price Performance

Mkt. Cap. Absolute

Perfromance

Company (Rsbn) 1 M 3 M 12 M

ACC 261 6.6 22.1 (13.0)

Ambuja Cements 435 14.7 28.2 3.2

UltraTech Cement 1,165 5.1 21.2 (4.7)

Shree Cement 776 (1.3) 18.2 10.2

Ramco Cements 158 4.3 26.3 (7.0)

India Cements 36 (1.9) (3.1) 45.8

J.K. Cement 116 8.2 38.3 48.8

JK Lakshmi 32 (3.7) 43.3 (17.0)

Mangalam Cement 5 (1.1) 28.4 (20.3)

HeidelbergCement 44 11.2 31.0 (3.1)

Sagar Cement 10 19.0 68.7 (19.1)

Kajaria Ceramics 65 3.1 34.1 (16.4)

Somany Ceramics 6 17.8 51.7 (55.2)

Key Sectoral Updates:Cement industry to add 51mmT capacity over three yearsCement demand to contract by 12% in FY21E and to grow by 11% in FY22E and 8.5% in FY23ENorthern and Southern regions to witness minimal cement capacity additionCement prices unlikely to see sharp up-tick hereon Cost deflation to offer cushion in case of low utilization Building materials (tiles) segments unlikely to see recovery in medium-term

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Cement & Building Materials Sector Update | 18 Aug 2020Institutional Equity Research

Growth Prospects Remain Bright despite Near-term Disruptions

We request for your valuable vote and support

We have made changes to our Recommendation and Target Price. Please refer to Page no. 123 at the end of the report.

https://surveys.euromoney.com/s3/Asiamoney-Brokers-Poll-2020

https://youtu.be/VNAbF8FZXu8

Table of Contents

Content Page No.

Executive Summary 1-3

f Channel Check ........................................................................................................................................ 3

f Region-wise Demand Scenario Post COVID-led Lockdown............................................................... 4

f Investment Matrix .................................................................................................................................. 5

f Companies Comparative Analysis ....................................................................................................... 6-7

f Key Charts ............................................................................................................................................... 8

f Change in Ratings & Estimates ............................................................................................................ 9-10

f Key Sectoral Takeaways ........................................................................................................................ 11-14

f Annexure Table ...................................................................................................................................... 15

Company Section 13-79

UltraTech Cement .......................................................................................................................................... 17-24

ACC ................................................................................................................................................................. 25-32

Ambuja Cements .......................................................................................................................................... 33-40

Shree Cement ................................................................................................................................................ 41-48

Ramco Cements ............................................................................................................................................ 49-56

Indian Cements ............................................................................................................................................. 57-64

JK Cement ...................................................................................................................................................... 65-72

JK Lakshmi Cement ....................................................................................................................................... 73-80

HeidelbergCement India .............................................................................................................................. 81-88

Mangalam Cement ....................................................................................................................................... 89-96

Sagar Cement ............................................................................................................................................... 97-104

Kajaria Ceramics ........................................................................................................................................... 105-113

Somany Ceramics ......................................................................................................................................... 114-122

3

Channel Check

f Having seen continued improvement in demand on month-on-month (MoM) basis

in May and June owing to pent-up demand and strong rural traction, the demand

momentum softened in most part of the country in July.

f Notably, demand continued to remain steady in most rural pockets. However, demand

was significantly impacted in urban and semi urban markets due to local lockdown.

Further, workforce availability issues continued to remain a concern despite the

labourers started coming back to several sites. Overall demand still remains at ~60-70%

of normal level. However, non-trade demand continued to suffer with no meaningful

improvement, which resulted in steep price contraction in non-trade segment in Jun’20

and July’20.

f On positive side, the urban demand is expected to recover from current month onwards,

as several real estate developers are trying to finish their near-completion projects,

which were stuck due to COVID-19 pandemic. Further, demand from rural segment is

expected to sustain even in coming months.

f Notably, all Infrastructure projects restarted as of now, but acute shortage of labourers

is impacting the pace of execution. We further note that a large number of infrastructure

projects are seeing just 40-50% of workforce as of now due to exodus of migrant

labourers, who will come back only after monsoon. Hence, the project segment

demand is likely to remain subdued even in 2QFY21.

f With limited availability of drivers/labourers and complete lockdown (shutdown) in

various districts, most cement companies started working on daily plan from logistic

aspects, despite it being an expensive proposition.

f Cement consumption in cities and metros was impacted adversely due to continued

shortage of labourers and its only rural segment demand, which was main demand

driver in 1QFY21.

f Direct transfer of money under Mahatma Gandhi National Rural Employment Guarantee

Act (MGNREGA) and better Rabi yield ensured decent surplus in the hands of rural

population, which is supporting rural economy. Hence, rural demand is expected to

sustain at least for some period of time.

f While proliferation of Work from Home (WFH) trend is a threat for commercial real estate

segment, it can potentially generate better-than-estimated sales volume in residential

space (especially in affordable housing segment), which is likely to arrest any potential

decline in cement demand. As per industry’s sources, urban real estate demand in

India was hovering in the range of ~35-40mnT during pre-COVID. Further, government’s

Pradhan Mantri Awas Yojana (Urban) is expected to get continuous traction, going

ahead.

f Sustainability of steady pricing environment depends upon the demand recovery. In

case, the demand fails to recover, the prices are unlikely to remain at the current levels.

4

Region-wise Demand Scenario Post COVID-led Lockdown

Northern Southern f Pre Unlock 1.0: After allowing the non-essential manufacturing

units to operate from 20th April, the cement industry witnessed very slow progress for want of approval from the local authorities to resume operations at plants. However, demand witnessed recovery in May led by pent-up demand. Non-trade sales, which essentially account for >40%, were significantly impacted due to exodus to migrant labourers from the key states like Delhi, Punjab and Rajasthan.

f Post Unlock 1.0: Demand momentum improved further starting from 1st June mainly supported by increasing movement of inter-state road transport and revival in rural trade demand. Capacity utilization of cement companies reached 60-70% levels in June, which albeit tapered down marginally in July due to monsoon.

f Pre Unlock 1.0: The region, which was already struggling before COVID-19 outbreak, got further hit after lockdown. However, since the beginning of May, the region witnessed decent up-tick in sales volume mainly due to pent-up demand. However, the region witnessed average price improvement to the tune of ~Rs60-70/bag from 20th April to 31st May with which the prices in most pockets surpassed Rs400/bag mark.

f Post Unlock 1.0: Demand scenario improved significantly in June’20 especially in non-metro areas mainly led by sharp up-tick in sales volume for state governments’ funded projects in Andhra Pradesh (AP) and Telangana. Sales volume for select companies reached close to year-ago levels. However, continued lockdown in key cities like Hyderabad, Chennai and Bangalore are still impacting the urban demand. Despite marginal correction, the prices continued to remain steady.

Western Eastern f Pre Unlock 1.0: Demand, which was significantly impacted in

April, witnessed moderate improvement in May. Region witnessed maximum impact of exodus of migrant labourers. A large number of infrastructure projects came to grinding halt with just 10-15% kind of workforce availability in May. As non-trade segment accounts for a large part of cement consumption in the region, it was impacted the most compared to other regions.

f Post Unlock 1.0: While the demand momentum improved on month-on-month comparison in June, shortage of labourers remained a key concern for most projects. Infrastructure projects in cities like Mumbai, Pune and Ahmedabad etc. continued to see just 30-40% workforce availability in June, and the situation worsened in July with heavy downpour. Further, sharp surge in new COVID cases in Maharashtra and lockdown/shutdown imposed by various local authorities also took a toll on demand.

f Pre Unlock 1.0: Demand witnessed a sharp up-tick in May mainly led by pent-up demand and strong recovery in rural segment. The demand in the region is dominated by trade segment. Further, unlike other regions, intensification of COVID-19 was relatively slower in the region, as barring few pockets of West Bengal, most other pockets was under non-containment zone, which also aided the consumption.

f Post Unlock 1.0: Demand continued to remain decent in June, while it got impacted in July due to flood situation in Bihar and other parts of the region. Further, improving cash flows in the hand of farmer and rural population and migrant labourers coming back to their native places resulted in construction/extension of houses, which also aided the demand. Demand in the region is expected to remain firm in ensuing months as well.

Central f Pre Unlock 1.0: Demand in the region has consistently been favourable for last three years. COVID-led lockdown was a temporary blip in

April. However, it improved moderately in May’20 mainly led by pre-monsoon trade demand especially from villages. Further, favourable monsoon, bumper Rabi yields and various government programme to support rural economy led to improvement in rural demand.

f Post Unlock 1.0: Demand in June improved further with the commencement of a number of infrastructure projects. Despite seeing higher COVID cases in select pockets, demand in Uttar Pradesh improved significantly on month-on-month basis in June. However, the demand in Madhya Pradesh is primarily getting support from the rural markets. Notably, the prices continued to remain firm in the region.

5

Parameters UltraTech ACC Ambuja Shree Cem. Ramco Cem. India Cem. JK Cement JK Lakshmi Cem. HiedelbergCem Sagar Cem. Mangalam Cem. Kajaria Ceramics Somany Ceram.

Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk Score Risk

Management Quality 8 Low 7 Low 7 Low 9 Low 8 Low 5 Medium 8 Low 7 Low 8 Low 7 Low 5 Medium 8 Low 6 Low

Promoter's Holding Pledge 10 Low 10 Low 10 Low 10 Low 9 Low 5 Medium 10 Low 10 Low 10 Low 8 Low 9 Low 9 Low 9 Low

Board of Directors Profile 8 Low 8 Low 8 Low 8 Low 8 Low 6 Low 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 7 Low

Industry Growth 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 8 Low 5 Medium 5 Medium

Regulatory Environment / Risk 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium

Entry Barriers / Competition 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 5 Medium 4 High 4 High

New Business/Client Potential 6 Low 5 Medium 5 Medium 8 Low 8 Low 4 High 8 Low 5 Medium 5 Medium 8 Low 5 Medium 7 Low 6 Low

Business Diversification 9 Low 9 Low 8 Low 8 Low 6 Low 4 High 9 Low 8 Low 4 High 7 Low 5 Medium 9 Low 9 Low

Market Share Potential 9 Low 4 High 4 High 9 Low 7 Low 4 High 7 Low 6 Low 5 Medium 8 Low 8 Low 8 Low 7 Low

Margin Expansion Potential 8 Low 7 Low 8 Low 9 Low 7 Low 5 Medium 8 Low 8 Low 8 Low 8 Low 8 Low 5 Medium 5 Medium

Earning Growth 9 Low 3 High 4 High 7 Low 6 Low 3 High 7 Low 6 Low 7 Low 7 Low 7 Low 7 Low 9 Low

Balance Sheet Strength 7 Low 8 Low 8 Low 8 Low 7 Low 4 High 7 Low 7 Low 8 Low 8 Low 6 Low 7 Low 6 Low

Debt Profile 7 Low 8 Low 9 Low 9 Low 7 Low 3 High 7 Low 7 Low 8 Low 6 Low 6 Low 8 Low 6 Low

FCF Generation 8 Low 8 Low 9 Low 9 Low 8 Low 6 Low 7 Low 7 Low 8 Low 6 Low 6 Low 8 Low 4 High

Dividend Policy 7 Low 8 Low 8 Low 8 Low 8 Low 7 Low 8 Low 8 Low 8 Low 8 Low 8 Low 7 Low 7 Low

Total Score Out of 150 114 103 106 120 107 74 112 105 105 107 99 105 95

Total Score (%) 76% Low 69% Low 71% Low 80% Low 71% Low 49% High 75% Low 70% Low 70% Low 71% Low 66% Low 70% Low 63% Low

For < 5 Red High Risk For 5 Blue Medium Risk For > 5 Green Low Risk

Investment Decision Matrix (IDM)

6

Parameters Large Cap Cement Companies Key Mid Cap Cement Companies

UltraTech Shree Cement ACC Ambuja Ramco JK Lakshmi JK Cement Heidelberg

Cement Capacity (mnT in FY20) 114.8 44.4 33.1 29.7 19.7 13.2 14.0 6.3

Captive Power (CPP)- MW 934 742 359 417 157 102 126 12

Regional Presence (%)

North 21% 55% 18% 33% 59% 68%

South 18% 7% 30% 84% 21% 9%

East 14% 25% 26% 23% 16% 27%

West 24% 12% 38% 14%

Central 20% 5% 14% 6% 11% 91%

Overseas 3% 9.0%

Capacity Addition in Last Five Years (mnT) 52.3 20.8 2.0 0.9 3.0 4.7 6.5 1.0

Capacity Addition in Next Three Years (mnT) 5.4 6.0 5.9 3.6 3.1 0.0 0.7 0.0

Capacity Utilisation in FY20 73% 62% 87% 81% 57% 86% 61% 75%

Volume CAGR in Last Five Years 12% 9% 4% 2% 7% 9% 6% 2%

FY20 Key Financials (Rs mn)

Volume (mnT) 82.3 24.9 28.9 24.0 11.2 9.2 9.8 4.7

Revenue 4,21,248 1,19,301 1,53,431 1,13,530 52,854 40,435 54,040 21,576

EBITDA 92,836 36,745 20,959 18,340 10,536 6,724 11,217 5,158

EBITDA/tonne (Rs) 1,128 1,446 672 765 940 725 1,146 1,096

APAT 36,985 15,702 13,589 14,255 6,011 2,552 4,004 2,681

Net Debt 1,80,760 30,360 -45,381 -46,584 29,327 10,016 19,889 -907

Free Cash Flow (FCF) -32,481 24,530 17,549 14,994 -11,800 4,489 -746 4,152

OCF Yield (%) 7.4% 4.9% 8.3% 5.9% 4.5% 15.3% 8.0% 10.9%

EV/tonne (US$) 163 254 92 122 131 57 116 88

EV/EBITDA (x) 14.8 21.0 10.8 13.7 18.4 6.7 12.0 8.0

RoCE (%) 10.2% 13.4% 18.1% 9.4% 12.2% 17.5% 16.6% 27.9%

RoE (%) 11.9% 13.9% 12.3% 7.1% 12.8% 14.5% 13.3% 21.6%Source: Company; RSec Research

Companies Comparative Analysis

7

Parameters Large Cap Buildging Materials Companies

Kajaria Somany

Capacity (msm) 68.0 53.0

Ceramics (msm) 28.1 28.0

PVT (Polished Vitrified Tiles)- msm 22.4 15.0

GVT (Glazed Vitrified Tiles)- msm 17.5 10.0

Market Share (%) 9% 6%

Capacity Addition in Last Five Years (msm) 14.0 1.0

Regional Presence (%)

North 60% 37%

South 4% 7%

East

West 23% 56%

Central 12%

Revenue CAGR (FY15-FY20) 5.9% 2.9%

Ceramics 4.2% -4.0%

PVT 0.3% 0.3%

GVT 9.3% 7.4%

Sanitaryware + Bathware 35.8% 18.0%

FY20 Key Financials (Rs mn)

Volume (msm) 78.1 48.9

Revenue 28,080 16,101

Ceramics 38% 36%

PVT 29% 32%

GVT 26% 21%

Sanitaryware + Bathware 7% 11%

EBITDA 4,159 1,314

EBITDA margin 14.8% 8.2%

APAT 2,553 346

Net Debt -971 4,250

Free Cash Flow (FCF) 810 825

OCF Yield (%) 3% 28%

P/E (x) 25.2 -61

EV/EBITDA (x) 15.2 9.7

RoCE (%) 23.5% 3.4%

RoE (%) 15.5% 8.1%Source: Company; RSec Research

8

Sector At a Glance

Key Charts

Exhibit 1: Cement Capacity Over the Years

Source: Industry; RSec Research

Exhibit 2: Capacity Addition


Exhibit 3: Cement Demand Over the Years


f Cement capacity, which witnessed over 7% CAGR in last 10 years, is likley to register only 3.4% CAGR over next three years. Hence, demand growth is likley to outpace supply growth in the long-run.

f Industry added 243mnT in last ten years with an annual supply rate of 24mnT.

f Industry would be adding 51mnT in next three years with an annual supply of 17mnT.

f Industry demand has clocked ~5% CAGR over last ten years and we expect this to clock over next three years.

f Industry is likley to see demand contraction of 12% in FY21E due to COVID-led disruption. However, demand is likely to register 9.6% CAGR over FY21E-FY23E.

f Eastern region is expected to see maximum capacity addtion in next three years followed by the Western region.

f Northern and Southern regions are likely to see least capacity addtion over next three years, which offer an edge to these regions.

243281

314341

369408 429 443 455 467 486

511 531 538

0

100

200

300

400

500

600

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

E

FY22

E

FY23

E

Cement Capacity

206 216 230247 256 271 283 280

298

337 334

293327

352

0

50

100

150

200

250

300

350

400

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

E

FY22

E

FY23

E

Cement Demand

Exhibit 4: Region-wise capacity addition in next three years

mnT FY21E FY22E FY23E Total

North 1.8 2.0 0.0 3.8

South 1.0 1.8 1.5 4.3

West 5.7 3.9 2.0 11.6

Central 3.5 5.8 1.2 10.5

East 12.0 7.2 2.0 21.2

Total Addition 24.0 20.7 6.7 51.4


3638

33

27 28

39

21

1511 13

19

2421

7

0

5

10

15

20

25

30

35

40

45FY

10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

E

FY22

E

FY23

E

New Capaity Addition

9

Change in Ratings & Estimates

We continue to maintain our long-term positive stance on the sector mainly on following grounds.

f New capacity addition is not expected to witness very high growth unlike last ten years here on owing to limited resources. Hence, the demand growth should outpace supply growth in the next decade, in our view.

f A significant Rs102trilliion investment in infrastructure development in next five years under National Infrastructure Pipeline (NIP) is likely to aid cement consumption in ensuing quarters.

f Steady pricing environment is expected to sustain with possibility of demand recovery.

f Continued traction in rural economy augurs well for the cement industry.

f Cost deflation pertaining to benign fuel prices is likely to remain a key tailwind for the sector.

We believe the companies, which are more exposed to Northern and Central regions, are likely to do relatively better due to strong demand supply equilibrium.

Exhibit 5: Change in TP & Rating

Old 1-Yr TP New 2-Yr TP Old Rating New Rating

ACC Ltd 1,310 1,718 BUY BUY

Ambuja Cements 210 252 BUY BUY

UltraTech Cement 4,400 4,825 BUY BUY

Shree Cement 24,050 24,053 BUY BUY

Ramco Cements 600 802 BUY BUY

India Cements 70 81 SELL SELL

J.K. Cement 1,320 1,711 BUY BUY

JK Lakshmi 380 401 BUY BUY

Mangalam Cement 270 295 BUY BUY

HeidelbergCement India 210 226 BUY BUY

Sagar Cement 350 619 BUY BUY

Kajaria Ceramics 400 370 HOLD SELL

Somany Ceramics 180 173 BUY BUYSource: RSec Research ; Note: RSec Research has migrated from one year based Target Price to two years based

Target Price

Exhibit 6: Valuation Table

CMP Reco. Target Price M.Cap EV/tone (US$) EV/EBIDTA (x) RoE (%)

(Rs) (Rs) (Rs bn) FY22E FY23E FY22E FY23E FY22E FY23E

ACC Ltd 1,388 BUY 1,718 261 71 66 10.4 8.7 10 10.1

Ambuja Cements 219 BUY 252 435 97 93 11.8 10.5 6.8 6.9

UltraTech Cement 4,035 BUY 4,825 1,165 142 135 12.6 10.9 12.1 13

Shree Cement 21,513 BUY 24,053 776 210 202 17.6 14.9 13.6 15.3

Ramco Cements 670 BUY 802 158 108 102 13.1 10.9 14.4 15.3

India Cements 115 SELL 81 36 56 53 9.4 7.8 1.9 4.6

J.K. Cement 1,500 BUY 1,711 116 104 98 10 8.1 17.1 18.2

JK Lakshmi 270 BUY 401 32 40 34 4.8 3.9 17 15.9

Mangalam Cement 197 BUY 295 5 25 21 3.8 2.8 12.4 15.9

HeidelbergCement India 193 BUY 226 44 83 76 7.4 6.6 22.4 21.4

Sagar Cement 471 BUY 619 10 56 52 6.2 5 6.3 7.9

Kajaria Ceramics 408 SELL 384 65 13.8 11.5 13 14.3

Somany Ceramics 133 BUY 173 6 6.4 4.6 5.1 11.5

Source: RSec Research

10

Exhibit 7: Change in Estimates

Y/E Mar Old Revised % Change

(Rsmn) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E

Sales Volume (mnT)

ACC 25.5 27.3 25.0 28.3 30.3 (2.0) 3.7

Ambuja 21.8 24.8 21.8 24.9 25.9 (0.1) 0.4

Shree Cement 22.2 26.7 30.6 23.4 27.7 30.9 5.7 3.8 0.8

Ramco Cements 11.2 13.5 10.4 12 13.5 (7.1) (11.1)

India Cements 10 11.6 8.96 9.97 11.0 (10.4) (14.1)

JK Cement 9 10.1 8 9.6 10.3 (11.1) (5.0)

JK Lakshmi Cem. 8.6 9.9 8.54 9.98 10.37 (0.7) 0.8

HeidelbergCement 4.5 5.1 4.2 4.9 5.2 (6.7) (3.9)

Sagar Cements 3.2 4 2.8 3.4 3.9 (12.2) (16.0)

Mangalam Cement 2.6 2.9 2.3 2.7 3.0 (11.5) (6.9)

Kajaria Ceramics (msm) 77.3 85.8 66.4 79.6 89.2 (14.1) (7.2)

Somany Ceramics (msm) 49.2 54.1 39.1 46.1 51.6 (20.6) (14.8)

Revenue (Rs mn)

ACC 1,36,026 1,46,804 1,35,535 1,52,659 1,65,024 (0.4) 4.0

Ambuja 1,03,520 1,19,844 1,07,547 1,23,382 1,29,739 3.9 3.0

Shree Cement 1,07,785 1,29,572 1,49,106 1,12,594 1,34,036 1,49,884 4.5 3.4 0.5

Ramco Cements 51,654 63,893 52,586 60,759 68,263 1.8 (4.9)

India Cements 48,050 55,987 43,918 48,465 53,578 (8.6) (13.4)

JK Cement 54,885 61,743 51,483 61,589 67,629 (6.2) (0.2)

JK Lakshmi Cem. 38,201 44,435 36,453 43,199 45,375 (4.6) (2.8)

HeidelbergCement 20,520 23,685 19,456 22,752 24,332 (5.2) (3.9)

Sagar Cements 12,155 15,371 12,171 13,776 15,882 0.1 (10.4)

Mangalam Cement 11,702 13,343 10,746 12,797 14,263 (8.2) (4.1)

Kajaria Ceramics 29,437 33,400 24,592 29,865 33,781 (16.5) (10.6)

Somany Ceramics 17,640 19,809 13,236 15,790 17,883 (25.0) (20.3)

EBITDA (Rs mn)

ACC 16,739 18,312 19,359 19,869 22,162 15.7 8.5

Ambuja 16,023 19,688 20,042 22,984 24,384 25.1 16.7

Shree Cement 32,245 40,305 46,970 33,193 41,547 47,086 2.9 3.1 0.2

Ramco Cements 9,632 13,240 12,010 14,123 15,967 24.7 6.7

India Cements 5,995 7,288 6,475 6,884 7,880 8.0 (5.5)

JK Cement 10,887 12,813 10,305 12,851 14,749 (5.3) 0.3

JK Lakshmi Cem. 5,509 6,987 5,614 7,273 7,483 1.9 4.1

HeidelbergCement 4,245 5,152 4,310 5,253 5,394 1.5 2.0

Sagar Cements 1,695 2,357 3,110 2,868 3,301 83.5 21.7

Mangalam Cement 1,510 1,873 1,567 2,028 2,225 3.8 8.3


Somany Ceramics 1,537 1,960 981 1,365 1,829 (36.2) (30.3)

APAT (Rs mn)

ACC 10,558 11,150 13,259 13,159 14,431 25.6 18.0

Ambuja 11,240 13,876 14,246 16,337 17,338 26.7 17.7

Shree Cement 11,352 17,979 24,112 14,883 20,240 25,488 31.1 12.6 5.7

Ramco Cements 3,584 7,944 5,413 8,352 10,150 51.0 5.1

India Cements 475 1,625 546 1,019 2,608 14.9 (37.3)

JK Cement 4,938 6,334 4,672 6,498 8,109 (5.4) 2.6

JK Lakshmi Cem. 1,522 3,070 1,708 3,412 3,710 12.2 11.1

HeidelbergCement 2,432 3,313 2,527 3,306 3,528 3.9 (0.2)

Sagar Cements 197 546 1,131 697 942 474.1 27.6

Mangalam Cement 529 979 451 813 1,198 (14.7) (17.0)


Somany Ceramics 455 766 (36) 260 610 (107.9) (66.0)


11

I. Industry to Add 51mmT Capacity over Next Three YearDespite delay by 3-6 months, capacity expansion plan of companies continues to remain intact. We further note that cement industry added 19mnT capacity in FY20 and despite the current pandemic situation the industry is set to add 25mnT incremental capacity in FY21 and 51mnT in next three years. Hence, the industry will be adding 16-17mnT annual capacity over next three years.

Exhibit 8: A Snapshot of Cement Capacity & Expansion Exhibit 9: Company-wise Capacity Addition

Source: Industry, RSec Research Source: Industry, RSec Research

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Installed Cement Capacity Capaccity Addition

mnT FY21E FY22E FY23EAmbuja Cement 1.8Wonder Cement 2Bharathi Cement 1.5Ramco Cements 2JSW Cements 3

Sanghi industries 2 2

JK Cement 2.2Shree Cement 6Birla Corp 3.9 1.2UltraTech 2 3.4Sagar Cements 2.5ACC 5.9

Dalmia Bharat 6 2Star Cement 2Total 24 21 7

II. Demand to Contract by 12% in FY21EDespite slowdown in government’s spending in infrastructure development and absence of any visible revival in private capex, cement demand witnessed steady growth till 9MFY20. However, impact of COVID-19 and lockdown across the nation in Mar’20 significantly impacted the sales volume. Last two weeks of March are always crucial for the companies, as higher billing is done during this period, which was adversely affected by COVID-led nationwide lockdown. Resultantly, cement demand contracted by 1% in FY20.

Exhibit 10: A Snapshot of Demand Growth over the Years

Source: Industry, RSec Research

(15%)

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Key Sectoral TakeawaysI. Industry to Add 51mmT Capacity over Next Three YearsII. Demand to Contract by 12% in FY21EIII. Northern & Southern Regions to Witness Least Capacity AdditionIV. Pricing Scenario unlikely to see Sharp Up-tickV. Input Cost Deflation to Aid Operating PerformanceVI. We Continue to Prefer Northern & Central RegionsVII. Building Materials (Tiles) Segment is Unlikely to Recover in Medium-term Term

12

Given almost complete plant shutdown in Apr’20 and lower utilization post resumption of operations subsequently, we expect cement demand to de-grow by 12% in FY21E and likely to rebound by 11.4% and 7.8% in FY22E and FY23E, respectively. Incremental consumption is seen at 20mnT over FY20-FY23E from the base cement consumption of 329mnT in FY20, whereas incremental supply during the period is pegged at 51mnT, which does not bode well for the industry from pricing discipline perspective.

(70)(60)(50)(40)(30)(20)(10)

010203040

FY10 FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

E

FY22

E

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Net Incemental Demand (mnT)

Exhibit 11: Net Incremental Demand (Demand-Supply) over the Years


III. Northern & Southern Regions to Witness Least Capacity AdditionOut of the estimated 51mnT cement capacity addition over next three years, Northern and Southern regions are expected to add just 4mnT each. While the minimal capacity addition bodes well for both the regions in terms of pricing discipline, Northern region seems to be the most benefitted, as capacity utilization in the region has already surpassed the-industry’s average capacity utilization of 68% in FY20.

Further, Eastern region is expected to add the highest 21mnT capacity (43% of total capacity addition) followed by 11.5mnT in Western region (23% of total addition) and 10.5mnT in Central region. We believe that strong demand growth in these regions during last couple of years encouraged several companies to expand their base in these regions, which led to high capacity addition pipeline.

Exhibit 12: Reigion-Wise Cement Capacity Additon and Outlook

mnT FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E

North 7.0 3.2 4.5 6.5 11.5 6.6 1.1 3.6 0.0 1.0 1.8 2.0 0.0

South 14.6 14.4 10.0 3.5 7.9 4.6 0.5 2.3 6.2 3.6 1.0 1.8 1.5

West 6.0 4.9 2.7 2.0 5.8 2.3 2.6 1.2 2.0 2.4 5.7 3.9 2.0

Central 7.7 4.5 5.3 9.6 3.0 2.0 0.8 0.0 3.5 6.3 3.5 5.8 1.2

East 2.7 6.2 5.0 6.6 10.3 5.5 9.6 4.1 1.2 5.4 12.0 7.2 2.0

Total Addition 38.0 33.2 27.4 28.1 38.5 21.0 14.5 11.2 12.9 18.7 24.0 20.7 6.7


Exhibit 13: Region-wise Clinker Capacity Addition and Outlook

mnT FY18 FY19 FY20 FY21E FY22E FY23E

North 65 65 70 74 76 76

South 116 119 123 127 127 128

West 36 36 36 39 42 42

Central 38 41 41 42 45 45

East 44 44 44 46 46 46

Total Addition 299 303 313 328 336 337


13

IV. Pricing Scenario Unlikely to See Sharp Up-tickWhile demand supply equation does not augur well from the pricing perspective in light of substantial net incremental supply (adjusted with incremental demand) of 31mnT over next three years, we are of the view that the pricing scenario is unlikely to see a sharp up-tick, going forward as sharp increase in supply is mostly limited to Eastern and Central regions. However, we note that recent rebound in the prices, which led all India average prices to historical high in the backdrop of higher fixed cost owing to no operating leverages and logistic bottlenecks, may witness some degree of reversal in subsequent months. Also, onset of monsoon may essentially result in partial roll-back in the prices.

Further, compared to 51mnT of cement capacity addition, the industry will be adding only 24mnT clinker over next three years. Current 313mnT of clinker capacity and 486mnT cement capacity, clearly suggest that there is shortage of clinker in the country. Hence, it will be difficult for several cement companies to operate at 100% utilization level due to clinker constraints. Hence, we believe pricing trend of the industry will not see sharp disruption in case capacity utilization is maintained in the excess of 70% level.

Exhibit 14: All India Average Cement Price Movement Exhibit 15: Average Northern Cement Price Movement

Source: RSec Research Source: RSec Research

Exhibit 16: Average Southern Cement Price Movement Exhibit 17: Average Western Cement Price Movement


Exhibit 18: Average Eastern Cement Price Movement Exhibit 19: Average Central Cement Price Movement


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14

V. Input Costs Likely to Remain Benign Given subdued capacity utilization, which resulted in increase in fixed expenditures in the absence of operating leverage, reduction in fuel prices especially domestic and international petcoke prices already aided the companies to arrest sharp deterioration in operating performance. We note that average domestic petcoke price (Reliance petcoke) declined by ~20% YoY and 4% QoQ to Rs6,235/tonne in 1QFY21 (excluding GST). Similarly, the USA petcoke prices fell by 28% YoY and 3% QoQ to US$67 in 1QFY21. However, we note that petcoke prices have increased in last two months, which may negate low fuel price benefits in the ensuing quarters. However, we continue to believe that fuel prices are unlikely to move-up significantly hereon due to bleak outlook of crude prices. Additionally, the prices of other inputs like fly-ash and slag remained broadly flat on sequential comparison during the quarter.

Exhibit 20: Domestic Petcoke price trend (Reliance Petcoke) Exhibit 21: USA Petcoke price trend


VI. We Continue to Prefer Northern & Central RegionWe prefer Northern and Central region over other regions mainly due to favourable demand supply equation and resultant favourable pricing environment. While Northern region is expected to see the lowest capacity addition at 4mnT over next three year, estimated capacity utilization to the tune of 80%/86% in FY22E/FY23E offers an edge. Further, imminent clinker constraint in the region offers cushion against any deterioration in pricing scenario. Moreover, Central region is expected to witness 10.5mnT (20% of total supply) capacity addition in next three years. We expect steady demand in the region should get a boost due to pre-election spending in Uttar Pradesh, which is likely to keep utilization level at second best level at 67%/71% in FY22E/FY23E.

VII. Building Materials (Tiles) Segment is Unlikely to Recover in Medium-term Term COVID-led business disruptions aggravated the concerns of the tiles segments, which have been witnessing soft demand for some period of time. Most tiles manufacturers witnessed almost zero production in Apr’20 & May’20, which improved to the extent of 30-40% in Jun’20. Industry demand, which witnessed 4-6% de-growth in FY20, is expected to decline by ~15-25% in FY21E. Average utilization of Morbi players now hovers in the range of ~30-35%. Only 500 players are operating now in Morbi, which were impacted due to ban of coal gasifiers. Given poor demand from real estate and slowdown in private capex, demand revival in this segment is unlikely to happen in the medium-term. We expect revival in sales volume to happen only from 2HFY22E with pick-up real estate sales.

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Annexure Table

Exhibit 22: Region wise capacity

(mnT) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

North 50 63 68 73 79 90 97 98 102 102 103 105 107 107

% total 21 22 22 21 21 22 23 22 22 22 21 20 20 20

South 92 107 120 130 133 141 146 146 149 155 158 159 161 163

% total 38 38 38 38 36 35 34 33 33 33 33 31 30 30

West 38 43 47 50 52 57 60 62 64 66 68 74 78 80

% total 16 15 15 15 14 14 14 14 14 14 14 14 15 15

East 34 35 39 44 51 61 66 76 80 81 87 99 107 108

% total 14 12 12 13 14 15 15 17 18 17 18 20 20 20

Central 29 33 40 45 55 58 60 61 61 64 70 74 80 81

% total 12 12 13 13 15 14 14 14 13 14 14 14 15 15

Total Capacity 243 281 314 341 369 408 429 443 455 467 486 510 531 538

Source:

Exhibit 23: Region Wise Demand/Consumption Snapshot

Demand (mnT) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

North 38.0 40.0 44.0 48.1 51.2 54.2 57.3 57.4 62.5 71.8 73.5 65.1 73.5 79.4

% total 19% 19% 20% 20% 20% 20% 20% 21% 21% 21% 22% 22% 23% 22%

South 61.0 61.0 60.0 62.9 62.7 63.7 64.6 63.9 69.1 77.6 70.2 62.7 68.6 73.0

% total 30% 29% 27% 26% 25% 24% 23% 23% 23% 23% 21% 21% 21% 21%

West 38.0 42.0 47.0 50.6 52.5 55.6 57.5 57.4 53.9 59.0 57.5 48.4 53.9 58.1

% total 19% 20% 21% 21% 21% 21% 20% 21% 18% 18% 17% 17% 17% 16%

East 33.0 35.0 37.0 41.9 44.8 49.6 53.9 52.7 58.1 67.4 70.2 63.9 71.9 79.0

% total 16% 17% 17% 17% 18% 18% 19% 19% 20% 20% 21% 22% 22% 22%

Central 31.0 34.0 36.0 38.2 39.7 42.8 45.1 43.7 49.1 56.3 57.5 50.1 54.9 58.8

% total 15% 16% 16% 16% 16% 16% 16% 16% 17% 17% 17% 17% 17% 17%

Total 201.0 212.0 224.0 241.8 250.8 265.9 278.4 275.0 292.7 332.1 328.9 290.2 322.8 348.3

Export 5.3 4.2 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 3.0 4.0 4.0

Total Dispatches 206.3 216.2 229.5 246.8 255.8 270.9 283.4 280.0 297.7 337.1 333.9 293.2 326.8 352.3

Source:

Exhibit 24: Region Wise Capacity Utilisation

Regional Utilization FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

North 94% 81% 82% 84% 83% 76% 75% 74% 78% 82% 83% 72% 80% 86%

South 77% 69% 60% 58% 56% 54% 53% 52% 56% 60% 53% 47% 51% 54%

West 79% 72% 79% 80% 80% 76% 76% 72% 67% 71% 67% 52% 55% 58%

East 85% 86% 79% 80% 74% 68% 68% 58% 61% 70% 68% 54% 57% 61%

Central 103% 97% 88% 82% 70% 72% 73% 70% 79% 85% 79% 66% 67% 71%

Industry Utilization 84.9% 76.9% 73.1% 72.3% 69.2% 66.4% 66.1% 63.1% 65.5% 72.1% 68.7% 57.3% 61.6% 65.5%

Source:

16

COMPANY SECTION

17

Share price (%) 1 mth 3 mth 12 mth

Absolute performance 5.1% 21.2% -4.7%

Relative to Nifty 1% 8% -6%

Shareholding Pattern (%) Mar'20 June'20

Promoter 60 60

Public 40 40

1 Year Stock Price Performance

Note: * CMP as on 17 Aug 2020

Reduction in Debt to Holds the Key

UltraTech CementCement | India

Institutional Equity Research

BUY2 Year Target Price: Rs.4,825

CMP* 4,035

Upside/Downside (%) 20

Bloomberg Ticker UTCEM IN

Market Cap. (Rs bn) 1,165

Free Float (%) 40

Shares O/S (mn) 289Company Update | 18 Aug 2020

1. UltraTech Cement (UTCEM) – which enjoys ~23% market share on pan-India level with dominant presence across regions – is on the firm footing to cash in the secular consumption opportunity for cement due to absence of any meaningful alternatives.

2. With the successful acquisition of Binani’s assets, UTCEM has now got added advantage in terms of new limestone resources in imminent clinker deficit Northern region.

3. While UTCEM has sufficiently built capacity to outpace industry’s growth in next couple of years, it continued to focus on setting up maximum capacity in demand-rich regions. It is likely to commission 0.6mnT each in Dankuni (west bengal) and Pataliputra (Bihar) shortly in FY21 and Phase-II 2mnT cement capacity at Bara is expected to be commissioned in 3QFY21E.

4. Despite acquisition of Century Textile’s cement assets in FY20, UTCEM’s gross debt remained broadly flat on YoY basis at Rs229bn, while net debt to EBITDA and D/E ratio improved from 3x and 0.7x in FY19 to 2x and 0.5x in FY20 led by strong cash flow generation. UTCEM is committed to take it to 1x in FY21.

Impact of COVID-19: Nationwide lockdown resulted in sharp contraction in demand in 1QFY21, which led UTCEM to witness 31% YoY drop sales volume. Going forward, with consistent pick-up in monthly sales volume, we expect 2QFY21 volume to be sequentially better. However, volume momentum is still down by 10-15% compared to pre-COVID period. We expect UTCEM’s sales volume to decline by 12% in FY21E.

Outlook & ValuationConsistent efforts to trim cost along with focus on improvement in RoCE by balance-sheet deleveraging augurs well for UTCEM. Going forward, we expect demand to recover post monsoon followed by pick-up in infrastructure activities led by improved workforce availability. At CMP, the stock trades at attractive levels of 13x/11x EBITDA FY22E/FY23E. Hence, we maintain BUY on UTCEM with a revised 2-Year Target Price of Rs4,825 (13x of EBITDA FY23E).

Key Triggers:Strong market share (23%) in Indian cement industry with dominant presence across

regions

Adequate limestone reserve in imminent clinker deficit region offers an edge

New capacities in high consumption region to result in sustained volume growth

RoCE is set to improve from 11.8% in FY20 to 12.7% FY23E, while free cash flow (FCF) is seen at ~Rs204bn over FY20-FY23E.

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23E Sales 416,088 421,248 383,534 440,316 487,235EBITDA 73,469 92,836 87,478 99,621 109,249APAT 24,767 36,985 34,603 46,020 53,899EPS (Rs) 90.2 128.1 119.9 159.4 186.7DPS (Rs) 10.5 13.0 13.0 15.0 15.0P/E (x) 44.7 31.5 33.7 25.3 21.6P/B (x) 3.3 3.0 2.8 2.5 2.3

EV/EBITDA (x) 18.2 14.5 14.9 12.6 10.9

RoE (%) 10.0 11.9 10.2 12.1 13.0Divi. Yield (%) 0.3 0.3 0.3 0.4 0.4

Source: Company, RSec Research

TOP PICK in Large-cap

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18

Key Criteria Score Risk Comments

Management Quality 8 Low The management has displayed remarkable quality over the years in terms of maintaining industry leadership

Promoter’s Holding Pledge 10 Low Zero pledged shares, despite the promoter group has varied interest in other businesses as well

Board of Directors Profile 8 Low A perfect blend of experience, expertise and professionalism with sound track record offers comfort

Industry Growth 8 Low Demand clocked ~7% demand CAGR over last 15 years; expected to be maintained in coming fiscals

Regulatory Environment / Risk 5 Medium Regulatory risk in terms of hike in duties was quite visible historically

Entry Barriers / Competition 5 Medium Any new player with strong capital base can enter into business and competition has been high in the industry

New Business/Client Potential 6 Low Strong brand equity always helps to get more customers

Business Diversification 9 Low It has presence across all geographies in India and has presence overseas also

Market Share Potential 9 Low Necessary resources are in place to maintain market share

Margin Expansion Potential 8 Low Working on various measures to contain opex further

Earnings Growth (10 Years) 9 Low Earnings clocked 18% CAGR in 10 year; expected to clock 13% CAGR in next three years

Balance Sheet Strength 7 Low Despite doing back-to-back acquisition, its balance sheet remains resilient and strong

Debt Profile 7 Low Net Debt to EBITDA ratio stood at 2x in FY20, which is likely to witness further improvement in FY21

FCF Generation 8 Low It generated FCF of Rs218bn in last ten years (which is the best) despite doing huge capex

Dividend Policy 7 Low Average dividend payout ratio stood at 9%

Total Score Out of 150 114 Low

Percentage Score 76%



19

Exhibit 1: Scenario Analysis

FY20 FY21E FY22E FY23E CAGR (FY20-FY23E)

Base Case

Volume (mnT) 82.3 72.4 83.6 91.9 8.3%

Realization/tonne (Rs) 4,721 4,877 4,871 4,920 0.3%

Revenue 421,248 383,534 440,316 487,235 8.3%

EBITDA 92,836 87,478 99,621 109,249 7.7%

EBITDA/tonne 1,128 1,209 1,192 1,189

EBITDA margin (%) 22.0 22.8 22.6 22.4

APAT 36,985 34,603 46,020 53,899 15.9%

Target EV/EBITDA multiple (x) 13.0

Target Price 4,825

Bull Case

Volume (mnT) 82.3 76.2 91.6 105.2 11.3%


Revenue 421,248 397,286 473,523 567,622 12.6%

EBITDA 92,836 87,851 104,178 143,661 17.8%

EBITDA/tonne 1,128 1,153 1,138 1,366

EBITDA margin (%) 22.0 22.1 22.0 25.3

APAT 36,985 36,059 49,430 79,650 30.2%


Target Price 6,464

Bear Case

Volume (mnT) 82.3 70.2 77.8 81.7 5.2%

Realization/tonne (Rs) 4,721 4,726 4,721 4,674 -0.4%

Revenue 421,248 368,230 406,676 411,274 3.8%

EBITDA 92,836 81,176 88,722 75,185 -2.5%

EBITDA/tonne 1,128 1,157 1,141 921

EBITDA margin (%) 22.0 22.0 21.8 18.3

APAT 36,985 31,064 37,864 28,409 -2.9%


Target Price 3,178


Scenario AnalysisBase Case: In base case scenario, we assume 8.3% volume CAGR in FY21E-FY23E with 0.3% growth in realization. Revenue, EBITDA and APAT are expected to clock 8.3%, 7.7% and 16% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 11.3% volume CAGR in FY21E-FY23E with 0.6% growth in realization. Revenue, EBITDA and APAT CAGR are expected to clock 12.6%, 17.8% and 30% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 11.3% volume CAGR in FY21E-FY23E with 0.6% growth in realization. Revenue, EBITDA and APAT CAGR are estimated at 3.8%, -2.5% and -2.9%, respectively over the same period.

20

I. Leadership Status Bodes WellUTCEM – which enjoys ~23% market share on pan-India level with dominant presence across regions – is on the firm footing to cash in the secular consumption opportunity for cement due to absence of any meaningful alternatives. With the acquisition of Century Cement’s assets, UTCEM has crossed the 100mnT-mark in domestic cement industry, which is unmatched. Surprisingly, capacity utilization of Century’s assets improved to 83% in 4QFY20 (from 55% in 3QFY20) despite COVID-led disruptions. Its EBITDA/tonne is expected to improve to Rs800-900/tonne in FY21E from Rs575 in 4QFY20 with 100% brand conversion. Going forward, we expect UTCEM’s volume to clock 4% CAGR through FY20-FY23E and 13% over FY21E-FY23E.

II. Abundant Limestone Resource – AdvantageIn a scenario of looming higher limestone cost due to exorbitant higher price in new auction of mines, the companies having rich limestone resources are considered to be the winners in future. Notably, with the successful acquisition of Binani’s assets, UTCEM has now got added advantage in terms of new limestone resources in imminent clinker deficit Northern region.

III. Capacity Expansion in High Consumption RegionsWhile UTCEM has sufficiently built capacity to outpace industry’s growth in next couple of years, it continued to focus on putting maximum capacity in demand-rich regions. It is likely to commission 0.6mnT each in Dankuni (west bengal) and Pataliputra (Bihar) shortly in FY21 and Phase-II 2mnT cement capacity at Bara is expected to be commissioned in 3QFY21E. Further, clinker unit (2.3mnT) at Dalla (Uttar Pradesh) is expected to be commissioned in Mar’21. However, 2.2mnT Split Grinding Unit (SGU) in Cuttack (Odisha) is expected to come on stream in FY22E.

IV. Acquisitions Well-Absorbed in Balance-sheet; Now Focus on Improving RoCEDespite acquisition of Century Textile’s cement assets in FY20, UTCEM’s gross debt remained broadly flat on YoY basis at Rs229bn in FY20, while net debt to EBITDA and D/E ratio improved from 3x and 0.7x in FY19 to 2x and 0.5x in FY20 led by strong cash flow generation. UTCEM is committed to take it to 1x in FY21. We foresee its RoCE to improve from 11.8% in FY20 to 12.7% FY23E, while free cash flow (FCF) is seen at ~Rs204bn over FY20-FY23E.

Exhibit 2: Cost per tonne Analysis and Assumptions (Rs)

Rs/tonne FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Raw Materials 802 836 762 767 797 805 805

Employees 282 286 240 305 349 332 332

Power & Fuel 782 1,001 984 1,029 987 1,007 1,017

Freight 1,165 1,155 1,033 1,181 1,205 1,193 1,193

Other Exps. 740 646 552 708 736 721 721

Realisation 4,186 3,965 4,465 4,721 4,790 4,796 4,843


Investment RationaleOur investment thesis is based on the following premises:I. Leadership Status Bodes WellII. Abundant Limestone Resource – AdvantageIII. Capacity Expansion in High Consumption RegionsIV. Acquisitions Well-Absorbed in Balance-sheet; Now Focus on Improving RoCE

21

Exhibit 3: EBITDA & Target Price Exhibit 4: EV/EBITDA 1yr Fwd


Exhibit 5: Price Sensitivity Analysis EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 11 12 13 14 15FY17 (-3) 46.3 29.8 1,812 1,972 2,133 2,292 2,453

FY18 (-2) 61.5 32.8 22.4 1,812 2,024 2,238 2,450 2,663

FY19 (-1) 73.5 19.6 18.7 2,000 2,255 2,510 2,764 3,019

FY20 (Base year) 92.8 26.4 14.8 2,910 3,232 3,555 3,875 4,197

FY21E (year 1) 87.5 -5.8 15.7 2,853 3,156 3,460 3,762 4,065

FY22E (Year 2) 99.6 13.9 13.8 3,488 3,833 4,180 4,524 4,869

FY23E (Year 3) 109.2 9.7 12.6 4,067 4,445 4,825 5,202 5,581


Key Risks f Further slowdown in demand scenario.

f A steep contraction in prices.

f A sharp increase in input and fuel cost.

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Mar

-13

Jul-1

3

Nov

-13

Mar

-14

Jul-1

4

Nov

-14

Mar

-15

Jul-1

5

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Mar

-17

Jul-1

7

Nov

-17

Mar

-18

Jul-1

8

Nov

-18

Mar

-19

Jul-1

9

Nov

-19

Mar

-20

Jul-2

0

12x

13x

14x

15x

16x

2,133 2,2382,510

3,555 3,460

4,825

46.3

61.5

73.5

92.887.5

109.2

0

20

40

60

80

100

120

0

1,000

2,000

3,000

4,000

5,000

6,000

FY17 (-3) FY18 (-2) FY19 (-1) FY20 (Base year)

FY21E (year 1)

FY23E (Year 3)

Target Price (Rs) EBITDA (Rs bn)

22

Exhibit 7: Revenue Trend Exhibit 8: EBITDA Trend

Source: Company, RSec Research Source: Company, RSec Research

Exhibit 9: PAT Trend Exhibit 10: ROCE vs. RoE


Exhibit 6: Volume (mt)


Outlook & Valuations

Consistent efforts to trim cost along with focus on improvement in RoCE by balance-sheet deleveraging augurs well for UTCEM. Going forward, we expect demand to recover post monsoon followed by pick-up in infrastructure activities led by improved workforce availability. At CMP, the stock trades at attractive levels of 13x/11x EBITDA FY22E/FY23E. Hence, we maintain BUY on UTCEM with a revised 2-Year Target Price of Rs4,825 (13x of EBITDA FY23E).

46.1 49.3 50.2

63.3

85.7 82.3

72.4

83.6

91.9

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Volume(mt)

227 237 239

310

416 421 381

439 485

-

100

200

300

400

500

600


Revenue (Rs bn)

39 46 50

61

73

93 87

100 109

-

20

40

60

80

100

120


EBITDA (Rs bn)

20 24

26 25 25

37 35

46

54

-

10

20

30

40

50

60


PAT (Rs bn)

14.1 13.6

14.5

12.2

8.2

10.2

8.5

10.4

11.0

11.2 11.7 11.5

8.9

10.0

11.9

10.2

12.1

13.0

7

8

9

10

11

12

13

14

15


RoCE (%) RoE (%)

23

Profit & Loss StatementY/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E

Net Sales 4,16,088 4,21,248 3,83,534 4,40,316 4,87,235 Total Cost 3,42,619 3,28,413 2,96,056 3,40,695 3,77,986

Cost of Materials 69,831 63,131 57,712 67,339 74,763

Employee 22,911 25,094 25,596 28,156 30,971

Power & Fuel 94,361 84,679 71,456 84,200 93,484

Freight & Forwarding 1,03,145 97,254 88,051 1,00,704 1,11,807

Others 52,371 58,255 53,242 60,296 66,960

EBIDTA 73,469 92,836 87,478 99,621 1,09,249 EBIDTA Margin (%) 17.7% 22.0% 22.8% 22.6% 22.4%

Depreciation and Amortisation 24,507 27,022 28,124 28,978 29,716

Interest 17,779 19,857 17,478 15,798 14,560

Other Income 4,634 6,478 5,959 6,675 7,075

Excrptional items (1,139) - (1,574) - -

PBT 34,679 52,435 46,262 61,519 72,048 Tax 10,681 (5,682) 11,639 15,479 18,130

% Tax 31% -11% 25% 25% 25%

Net Profit 23,998 58,117 34,623 46,040 53,919 APAT 24,767 36,985 34,603 46,020 53,899

Net Profit Margin (%) 6% 9% 9% 10% 11%

Balance SheetY/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E

Share Capital 2,746 2,886 2,886 2,886 2,886

Reserves & Surplus 3,34,760 3,88,268 4,19,120 4,60,810 5,10,379

Total Shareholder's funds 3,37,506 3,91,155 4,22,006 4,63,696 5,13,266

Long Term Borrowings 2,06,504 1,73,675 1,53,675 1,33,675 1,13,675

Deferred Tax Liabilities (net) 64,114 49,120 49,120 49,120 49,120

Other LT Liabilities and Prov. 1,917 13,114 11,947 13,704 15,156

Total NC Liabilities 2,72,535 2,35,909 2,14,742 1,96,499 1,77,951

Short Term Borrowings 36,684 39,851 38,851 37,851 36,851

Trade Payables 31,597 35,014 31,880 36,599 40,499

Other Curren Liabilities and Prov. 87,052 91,442 85,615 94,388 1,01,638

Total Current Liabilities 1,55,333 1,66,308 1,56,345 1,68,839 1,78,988

TOTAL LIABILITIES 7,65,374 7,93,371 7,93,092 8,29,034 8,70,205

Gross Block 5,71,584 5,99,345 6,19,345 6,36,345 6,51,345

Less: Accumulated Depreciation 67,371 92,046 1,20,170 1,49,148 1,78,864

Net Block 5,04,213 5,07,299 4,99,175 4,87,198 4,72,481

CWIP 11,486 9,095 4,095 4,095 4,095

Goodwill 62,233 62,525 62,525 62,525 62,525

Intangible Assets under development

47 101 101 101 101

Non Current Investment 14,048 16,850 17,050 17,250 17,450

Other NC Assets 43,804 47,428 46,991 53,525 58,923

Total Non-Current Assets 6,35,832 6,43,298 6,29,937 6,24,693 6,15,576

Inventories 40,990 41,483 37,769 43,361 47,981

Investments 15,165 42,437 52,437 67,437 92,437

Trade Receivables 27,870 22,383 20,379 23,396 25,889

Cash and Bank 7,397 5,392 16,665 30,518 45,617

Other Current Assets 38,121 38,379 35,906 39,629 42,705

Total Current Assets 1,29,542 1,50,074 1,63,156 2,04,341 2,54,629

Total Assets 7,65,374 7,93,371 7,93,092 8,29,034 8,70,205

Key Financials

24

Cash Flow StatementY/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E

PBT 34,685 52,423 46,242 61,499 72,028

Adjustments for: Depreciation and Obsolescence 24,507 27,022 28,124 28,978 29,716

Interest & Dividend Income (1,188) (1,422) - - -

Interest Expense 17,779 19,857 17,478 15,798 14,560

Others (2,168) (4,447) - - -

Operating Profit Before WC Changes 73,615 93,432 91,844 1,06,275 1,16,304

Net change in WC (6,957) 4,503 (1,502) (3,615) (2,987)

Tax Paid (7,101) (8,914) (11,639) (15,479) (18,130)

Net Cash from Operating activities 59,557 89,020 78,703 87,181 95,187

Purchase of fixed assets (net) (15,959) (16,272) (15,000) (17,000) (15,000)

(Purchase)/Proceeds of Investment 27,667 (26,907) (10,200) (15,200) (25,200)

Others (570) 1,086 - - -

Net Cash from Investing activities 11,138 (42,094) (25,200) (32,200) (40,200) Proceeds from Issue of Share Capital 52 27 - - -

Purchase of Treasury Shares(net) (812) (31) - - -

Proceeds / (Repayment) of Loans (Net) (46,482) (27,164) (21,000) (21,000) (21,000)

Others (20,312) (22,744) (21,230) (20,128) (18,889)

Net Cash from Financing activities (67,553) (49,911) (42,230) (41,128) (39,889) Opening Cash & Bank Balance 771.9 4,412.4 1,465.3 12,737.9 26,591.4

Net Increase or decrease in Cash 3,142 (2,985) 11,273 13,854 15,099

Cash & Cash Equiv. transferred from UNCL 385.2 - - - -

Cash and Cash Equivalents transferred from Century Cement Division

123.9 - - - -

Effect of Exchange rate fluctuation on Cash and Cash Equivalents

4.5 37.5 - - -

Closing Cash & Bank 4,427 1,465 12,738 26,591 41,690

Key RatiosY/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E

P/E 44.7 31.5 33.7 25.3 21.6

P/CEPS 22.8 13.7 18.6 15.5 13.9

P/BV 3.3 3.0 2.8 2.5 2.3

EV/EBIDTA 18.2 14.5 14.9 12.6 10.9

EV/Sales 3.2 3.2 3.4 2.8 2.4

EV/tonne (USD) 186 160 152 142 135

Dividend Payout (%) 11.6 10.1 10.8 9.4 8.0

Dividend Yield (%) 0.3 0.3 0.3 0.4 0.4

Per Share Data (Rs)EPS (Basic) 90.2 128.1 119.9 159.4 186.7

CEPS 176.6 295.0 217.4 259.9 289.8

DPS 10.5 13.0 13.0 15.0 15.0

Book Value 1,229 1,355 1,462 1,607 1,778

EBIDTA/tone 857.6 1,127.6 1,208.8 1,191.6 1,188.7

Returns (%)RoCE 8.2 10.2 8.5 10.4 11.0

RoE 10.0 11.9 10.2 12.1 13.0

Turnover ratios (x) Asset Turnover 0.7 0.7 0.6 0.7 0.7

Inventory (days) 36 36 36 36 36

Receivables (days) 24 19 19 19 19

Payables (days) 28 30 30 30 30

WCC (days) 33 25 25 25 25

25



Relative to Nifty 2.5% 9.3% -14.1%


Promoter 54.5 54.5

Public 45.5 45.5



Upcoming Capacities to Ensure Growth Sustainability

Key Financials (Rs mn) CY18 CY19 CY20E CY21E CY22ESales 144,775 153,431 135,535 152,659 165,024EBITDA 17,208 20,959 19,359 19,869 22,162APAT 10,060 13,589 13,259 13,159 14,431EPS (Rs) 53.5 72.3 70.5 70.0 76.8DPS (Rs) 15.0 14.0 10.0 12.0 14.0P/E (x) 25.9 19.2 19.7 19.8 18.1P/B (x) 2.5 2.3 2.1 1.9 1.7

EV/EBIDTA (x) 13.4 10.3 11.1 10.4 8.7

RoE (%) 15.1 12.3 11.0 10.0 10.1Div. Yield (%) 1.1 1.0 0.7 0.9 1.0


ACCCement | India



CMP* 1,388


Bloomberg Ticker ACC IN

Market Cap. (Rs bn) 261

Free Float (%) 46


1. ACC continues to enjoy strong brand equity especially in the trade segment with sound distribution reach in rural India. Pan-India distribution network comprising of >50,000 dealers/distributors has been the prime growth driver for the company.

2. It continues to remain placed amongst the Top-5 cement companies across regions barring the Northern markets.

3. With ongoing capacity expansion of 5.9mnT in strong demand potential markets, the concern over capacity constraint appears to have subsided. Further, we understand ACC's all units in Uttar Pradesh and Jharkhand enjoy fiscal incentives.

4. Its revenue from value-added products and services (VAPS) grew by 36% YoY and 52% YoY in CY18 and CY19, respectively. Further, premium products (~5 brands) volume now accounts for ~15-20% of its total volume. Moreover, foray into adhesive business with different range of products has already started aiding its margin.

Impact of COVID-19: ACC’s volume was impacted significantly in June quarter mainly led by

sharp contraction in construction activities post lockdown. In line with the industry, ACC has also

witnessed improvement on MoM sales volume in May’20 and Jun’20. It is likely to see better

sequential volume in 3QCY20. However, we estimate its volume to drop by ~13% in CY20.

Outlook & ValuationWhile ACC has been a laggard due to higher cost of production, it has been continuously

undertaking measures to reduce its operating cost. Going forward, we believe a healthy demand

outlook in the Eastern and Central regions will aid the company to get traction in volume and

profitability in post COVID-19 scenario. The stock has been trading at a discount to other pan-

India peers due to higher cost of production, which we expect to shrink in the ensuing period.

Increasing EBITDA estimate by 4% each for CY20E and CY21E to factor in lower fuel prices and recent improvement in realization, we maintain BUY on ACC with a revised 2-Year Target Price of Rs1,718 (11.5x of CY22 EBITDA).

Key Triggers:Strong brand equity in trade segment with sound distribution reach in rural India

Capacity expansion of 5.9mnT in strong demand potential markets

Value-added products and services to witness strong traction

Healthy demand outlook in Eastern and Central regions to drive volume and profitability

Research Analyst


Research Associate:


800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jul-

19

Aug

-19

Sep-

19

Oct

-19

Nov

-19

Dec

-19

Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-

20

26


Management Quality 7 Low The management has shown maturity over the years in terms of operations; however, erosion of market share over the years is an overhang

Promoter’s Holding Pledge 10 Low Zero pledged shares by the promoters


Industry Growth 8 Low Demand clocked ~7% demand over last 15 years; expected to be maintained in coming fiscals



New Business/Client Potential 5 Medium Lack of capacity addition over the years impacted business growth

Business Diversification 9 Low It has presence across all geographies and also enjoys strong presence in rural India

Market Share Potential 4 High Given limited limestone resources, regaining lost market share would be challenging task

Margin Expansion Potential 7 Low Working on various measures to further contain opex and improve margin

Earnings Growth (10 Years) 3 High Earnings clocked 2% negative CAGR over last ten years led by absence of capacity addition; expected to clock 2% CAGR in next three years

Balance Sheet Strength 8 Low It is a net cash company

Debt Profile 8 Low Net Debt to EBITDA ratio was at -2.2x and Net Debt to Equity ratio stood at -0.4x in CY19

FCF Generation 8 Low It generated FCF of Rs78bn in last ten years, which is decent

Dividend Policy 8 Low Average dividend payout ratio stood at strong 41%





27


CY19 CY20E CY21E CY22E CAGR (CY20E-CY22E)

Base Case

Volume (mnT) 28.9 25.0 28.3 30.3 10.1%


Revenue 153,431 135,535 152,659 165,024 10.3%

EBITDA 20,959 19,359 19,869 22,162 7.0%

EBITDA/tonne 672 722 652 683

EBITDA margin (%) 13.7 14.3 13.0 13.4

APAT 13,589 13,259 13,159 14,431 4.3%


Target Price 1,718

Bull Case

Volume (mnT) 28.9 25.6 29.9 33.2 14.0%


Revenue 153,431 139,210 165,888 187,256 16.0%

EBITDA 20,959 20,523 25,481 30,823 22.6%

EBITDA/tonne 672 751 804 884

EBITDA margin (%) 13.7 14.7 15.4 16.5

APAT 13,589 14,115 17,305 20,822 21.5%


Target Price 2,291

Bear Case

Volume (mnT) 28.9 24.6 27.2 27.7 6.0%


Revenue 153,431 132,937 143,088 145,428 4.6%

EBITDA 20,959 18,400 15,851 14,685 -10.7%

EBITDA/tonne 672 694 532 478

EBITDA margin (%) 13.7 13.8 11.1 10.1

APAT 13,589 12,552 10,191 8,916 -15.7%


Target Price 1,227


Scenario AnalysisBase Case: In base case scenario, we assume 10% volume CAGR over CY20E-CY22E with 0.9% growth in realization. Revenue, EBITDA and APAT are expected to clock 10%, 7% and 4% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 14% volume CAGR over CY20E-CY22E with 2.7% growth in realization. Revenue, EBITDA and APAT are expected to clock 16%, 23% and 22% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 6% volume CAGR over CY20E-CY22E with 1.4% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 5%, -11% and -16% CAGR, respectively over the same period.

28

I. Strong Brand Equity & Healthy Rural PresenceACC – being one of the oldest cement manufacturers in India – enjoys strong brand equity especially in the trade segment with sound distribution reach in rural India. While the company has been losing its market share with no meaningful capacity addition, its strong distribution network comprising of >50,000 dealers/distributors has been the prime growth driver. Notably, ACC continues to remain placed amongst the Top-5 cement companies across regions barring the Northern markets.

II. Capacity Expansion Moving SatisfactorilyCapacity constraints have been the major cause of concern for ACC for last couple of years despite healthy balance sheet. With ongoing capacity expansion of 5.9mnT in strong demand potential markets, the said concern appears to have subsided. Further, we understand that all units in Uttar Pradesh and Jharkhand enjoy fiscal incentives, as per the policy of respective state governments. Though ACC has not secured any limestone mine in last four years, we believe it is still having abundant limestone reserves in Southern and Eastern units for next leg of expansion.

III. Value-added Premium Products & Services Augur WellACC’s blended realization growth has been surpassing industry’s average for last couple of quarters on the back of focus on VAPS. Its VAPS revenue grew by 36% YoY and 52% YoY in CY18 and CY19, respectively. Further, premium products volume now accounts for ~15-20% of its total volume. Currently, ACC has ~5 different premium brands. Further, foray into adhesive business with different range of products has already started aiding its margin. We believe continued traction in premium products segment is likely to enable ACC to enjoy better pricing at blended level, going ahead.


Y/E Mar CY20E CY21E CY22E

(Rsmn) Old Revised % change Old Revised % change Introduction

Volume (mnT) 25.5 25.0 (2.0) 27.3 28.3 3.9 30.3

Realization (Rs/tonne) 4,822 4,904 1.7 4,888 4,900 0.3 4,974

Sales (Rs mn) 1,36,026 1,35,535 (0.4) 1,46,804 1,52,659 4.0 1,65,024

EBITDA (Rs mn) 16,739 19,359 15.7 18,312 19,869 8.5 22,162

EBITDA/tonne (Rs) 604 722 19.4 621 652 4.9 683

APAT (Rs mn) 10,558 13,259 25.6 11,150 13,159 18.0 14,431

EPS (Rs) 56.2 70.5 25.6 59.3 70.0 18.0 76.8



Rs/tonne CY16 CY17 CY18 CY19 CY20E CY21E CY22E

Raw Materials 1,006 1,040 1,080 1,087 1,086 1,123 1,131

Employees 328 312 311 299 320 310 319

Power & Fuel 938 1,036 1,057 1,084 1,067 1,078 1,089

Freight 1,155 1,317 1,414 1,401 1,415 1,430 1,444

Other Exps. 712 635 635 713 758 744 729

Realisation 4,379 4,565 4,672 4,862 4,904 4,900 4,974


Investment RationaleOur investment thesis is based on the following premises:

f Strong Brand Equity & Healthy Rural Presence

f Capacity Expansion Moving Satisfactorily

f Value-added Premium Products & Services Augur Well

29

Exhibit 6: Price Sensitivity Analysis EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 10 11 11.5 12.5 13.5CY16 (-3) 12.5 6.7 16.3 767 833 867 933 1,000

CY17 (-2) 15.6 24.3 13.1 968 1,050 1,092 1,175 1,257

CY18 (-1) 17.2 10.6 11.8 1,075 1,166 1,212 1,304 1,395

CY19 (Base year) 21.0 21.8 9.7 1,356 1,468 1,524 1,635 1,747

CY20E (year 1) 19.4 -7.6 10.5 1,279 1,382 1,434 1,537 1,640

CY21E (Year 2) 19.9 2.6 10.3 1,343 1,449 1,502 1,608 1,713

CY22E (Year 3) 22.2 11.5 9.2 1,541 1,659 1,718 1,836 1,954







867

1,092 1,212

1,524 1,434 1,502

1,718

12.5

15.617.2

21.019.4 19.9

22.2

0.0

5.0

10.0

15.0

20.0

25.0

-

400

800

1,200

1,600

2,000

CY16 (-3) CY17 (-2) CY18 (-1) CY19 (Base year)

CY20E (year 1)

CY21E (Year 2)

CY22E (Year 3)


-

500

1,000

1,500

2,000

2,500

3,000

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

May

-17

Sep-

17

Jan-

18

May

-18

Sep-

18

Jan-

19

May

-19

Sep-

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Jan-

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May

-20

10x11x12x13x14x

30





Exhibit 7: Volume(mt)


24.2 23.6 23.0

26.2 28.4 28.9

25.0

28.3 30.3

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

CY14 CY15 CY16 CY17 CY18 CY19 CY20E CY21E CY22E

Volume(mt)

115 114 108

129 145

153

136

153 165

-

20

40

60

80

100

120

140

160

180


Revenue (Rs bn)

13 12 13

16 17

21 19 20

22

-

5

10

15

20

25


EBITDA (Rs bn)

8.6

6.0 6.8

9.2 10.1

13.6 13.3 13.2 14.4

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


PAT (Rs bn)

14.2

9.6 10.4

14.5 15.0

18.1

14.6 13.4 13.6

14.6

7.1 7.5

10.0

15.1

12.3 11.0

10.0 10.1

0

2

4

6

8

10

12

14

16

18

20


RoCE (%) RoE (%)


While ACC has been a laggard due to higher cost of production, it has been continuously undertaking measures to reduce its operating cost. Going forward, we believe a healthy demand outlook in the Eastern and Central regions will aid the company to get traction in volume and profitability in post COVID-19 scenario. The stock has been trading at a discount to other pan-India peers due to higher cost of production, which we expect to shrink in the ensuing period. Increasing EBITDA estimate by 4% each for CY20E and CY21E to factor in lower fuel prices and recent improvement in realization, we maintain BUY on ACC with a revised 2-Year Target Price of Rs1,718 (11.5x of CY22 EBITDA).

31

Profit & Loss Statement Y/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

Net Sales 1,44,775 1,53,431 1,35,535 1,52,659 1,65,024

% yoy growth 12.0 6.0 (11.7) 12.6 8.1

Total Cost 1,27,567 1,32,472 1,16,176 1,32,790 1,42,862

Raw Materials Cost 30,639 31,405 27,147 31,840 34,289

Employee Costs 8,811 8,640 7,990 8,799 9,662

Power & Fuel 29,981 31,313 26,690 30,556 33,022

Freight and Forwardings 40,114 40,501 35,393 40,519 43,789

Other Expenditures 18,023 20,613 18,956 21,077 22,101

EBITDA 17,208 20,959 19,359 19,869 22,162

EBIDTA Margin (%) 11.9 13.7 14.3 13.0 13.4


Interest 892 862 934 1,027 1,094

Other Income 4,624 6,248 5,581 6,038 6,535

PBT 14,943 20,315 17,719 17,585 19,285

Tax (123) 6,726 4,460 4,426 4,854

% Tax (0.8) 33.1 25.2 25.2 25.2

Net Profit 15,066 13,589 13,259 13,159 14,431

YoY Growth (%) 64.6 (9.8) (2.4) (0.8) 9.7

Net Profit Margin (%) 10.4 8.9 9.8 8.6 8.7

Adjusted Profit 10,060 13,589 13,259 13,159 14,431

Key Financials

Balance Sheet Y/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

Share Capital 1,880 1,880 1,880 1,880 1,880

Reserves & Surplus 1,03,396 1,13,333 1,24,712 1,35,615 1,47,414

Total Shareholder's funds 1,05,276 1,15,213 1,26,591 1,37,495 1,49,293

Deferred Tax Liability 6,631 6,422 6,422 6,422 6,422


Gross Block 88,774 93,972 99,472 1,24,972 1,30,972

Less: Accumulated Depre. 18,280 24,059 30,346 37,640 45,958

Net Block 70,494 69,914 69,127 87,332 85,014

CWIP 3,922 4,353 18,353 3,353 2,353

Investments 2,302 2,302 2,802 3,302 3,802

Other Non Current Assets 17,829 18,765 16,576 18,670 20,183

Inventories 16,786 11,410 11,140 12,547 13,564

Sundry Debtors 8,683 6,284 5,551 6,253 6,759

Cash & Bank 30,003 45,381 46,910 53,866 68,154


Loans & Advances 3,099 4,064 4,564 5,064 5,564

Total Current Assets 65,704 75,173 75,263 85,724 1,02,682

Current Liablities 46,675 46,296 46,848 51,884 55,540

Provisions 1,668 2,575 2,258 2,581 2,777

Net Current Assets 17,361 26,301 26,156 31,259 44,364

Total Assets 1,11,907 1,21,635 1,33,014 1,43,917 1,55,716

32

Key RatiosY/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

P/E 25.9 19.2 19.7 19.8 18.1

P/CEPS 12.4 13.3 13.3 12.8 11.5

P/BV 2.5 2.3 2.1 1.9 1.7

EV/EBITDA 13.4 10.3 11.1 10.4 8.7

EV/Sales 1.6 1.4 1.6 1.4 1.2

EV/tonne (USD) 94 88 87 71 66

Dividend Payout (%) 18.7 19.3 14.2 17.1 18.2

Dividend Yield (%) 1.1 1.0 0.7 0.9 1.0

OCF Yield (%) 4.3 8.6 8.5 8.9 9.6

Per Share Data (Rs)

EPS (Basic) 53.5 72.3 70.5 70.0 76.8

EPS (Diluted) 53.5 72.3 70.5 70.0 76.8

CEPS 112.0 104.4 104.0 108.8 121.0

DPS 15.0 14.0 10.0 12.0 14.0

Book Value 560 613 673 731 794

EBITDA/tonne 559 672 722 652 683

Returns (%)

RoCE 15.0 18.1 14.6 13.4 13.6

RoE 15.1 12.3 11.0 10.0 10.1

Turnover ratios (x)

Asset Turnover (Gross block) 1.6 1.6 1.4 1.2 1.3

Inventory (days) 42.3 27.1 30.0 30.0 30.0

Receivables (days) 21.9 14.9 14.9 14.9 14.9

Payables (days) 83.2 73.7 82.0 82.0 82.0

WCC (days) (19.0) (31.7) (37.1) (37.1) (37.1)

Cash Flow Statement Y/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

PBT 14,943 20,315 17,719 17,585 19,285

Depreciation 5,996 6,030 6,287 7,294 8,318

Interest Paid 892 862 934 1,027 1,094

Others (1,505) (2,922) - - -

Operating CF before WC changes 20,327 24,285 24,940 25,907 28,697

Change in Working Capital (3,881) 2,661 1,675 1,853 1,183

Cash Generated from Operation 16,446 26,946 26,615 27,759 29,880

Direct Tax (net) (5,265) (4,462) (4,460) (4,426) (4,854)

Net Cash from Operating Acti. 11,181 22,484 22,155 23,333 25,026

Purch. / Sale of Fixed Assets (net) (4,951) (4,935) (19,500) (10,500) (5,000)

Purchase of Investment (1,220) (25,097) (500) (500) (500)

Others 2,493 26,748 2,189 (2,094) (1,512)

Net Cash in Investment activities (3,678) (3,283) (17,811) (13,094) (7,012)

Interest Paid (409) (572) (934) (1,027) (1,094)

Others (3,993) (3,165) (1,880) (2,256) (2,632)

Net cash in Financing activities (4,402) (3,737) (2,814) (3,283) (3,726)

Net increase / (decrease) in cash and cash equivalents

3,101 15,463 1,529 6,956 14,287

33


Absolute performance 14.7% 28.2% 3.2%

Relative to Nifty 10.6% 15.5% 2.1%


Promoter 63.3 63.3

Public 36.7 36.7



New Capacity to Drive Growth

Key Financials (Rs mn) CY18 CY19 CY20E CY21E CY22ESales 109,770 113,530 107,547 123,382 129,739EBITDA 15,107 18,340 20,042 22,984 24,384APAT 12,017 14,255 14,246 16,337 17,338EPS (Rs) 6.1 7.2 7.2 8.2 8.7DPS (Rs) 2.3 1.5 1.5 2.0 2.5P/E (x) 36.2 30.5 30.5 26.6 25.1P/B (x) 2.1 2.0 1.9 1.8 1.7

EV/EBITDA (x) 17.0 13.5 13.7 11.8 10.5

RoE (%) 7.3 7.1 6.3 6.8 6.9Divi. Yield (%) 1.0 0.8 0.7 0.9 1.1


Ambuja CementsCement | India


BUY2 Year Target Price: Rs.252

CMP* 219


Bloomberg Ticker ACEM IN


Free Float (%) 37


1. Ambuja Cements (ACEM) continues to be among Top-5 players in Northern and Western regions. State-of-the-art plants and well-maintained machineries help ACEM in lowering power and maintenance cost.

2. Further, the company has also secured a limestone mine in Nagaur (Rajasthan) with estimated reserve of 199mnT so as to front-load resources to capitalize on the demand recovery in the region.

3. ACEM’s capacity expansion programme is moving as per the schedule. Its 3.2mnT clinker unit and 1.8mnT grinding unit (GU) at Marwar (Rajasthan) is expected to be commissioned by the end of CY20E.

4. Likely up-tick in cement consumption led by significant pick-up in infrastructure activities in J&K and line of control areas after recent stand-off with China will benefit ACEM the most, as its Northern plants are located in Punjab and Himachal Pradesh belt.

Impact of COVID-19: ACEM’s volume was impacted significantly in June quarter mainly led by sharp contraction in construction activities post lockdown. In line with the industry, the company has also witnessed improvement on MoM sales volume in May’20 and Jun’20 despite poor recovery in Western region. Its 3QCY20 sales volume is expected to be better on QoQ basis. We estimate its volume to drop by ~9% in CY20.

Outlook & ValuationAmbiguity over parent’s strategy to drive domestic business has been the prime concern for the investors, which has also resulted in de-rating in valuation multiples. Going forward, we believe timely capacity expansion and improvement in operating synergies will be the key catalysts for the stock. Broadly maintaining our EBITDA estimate for CY21E and rolling over our estimate to CY22E, we maintain BUY on ACEM with a revised 2-Year Target Price of Rs252 (12.5x of CY22E).

Key Triggers:One of the Top-5 players in Northern region (~11.5mnT capacity) and Western region

(12mnT capacity)

Likely up-tick in cement consumption led by significant pick-up in infrastructure activities in J&K and line of control areas after recent stand-off with China will benefit ACEM the most

Improved trade segment sales (>80%) along with higher premium products will continue to aid its blended realization

Research Analyst


Research Associate:


120

140

160

180

200

220

240

Jul-

19

Aug

-19

Sep-

19

Oct

-19

Nov

-19

Dec

-19

Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-

20

34


Management Quality 7 Low The management has shown maturity over the years in terms of operations; however, erosion of market share over the years is an overhang






New Business/Client Potential 5 Medium Lack of capacity addition over the years impacted business growth

Business Diversification 8 Low It has presence across all geographies barring Southern region and maintains strong brand equity

Market Share Potential 4 High It has already lost market share over last couple of years; difficult to regain

Margin Expansion Potential 8 Low Working on various measures to further contain opex and improve margin

Earnings Growth (10 Years) 4 High Earnings clocked just 2% earnings CAGR over last ten years led by absence of capacity addition; expected to clock 7% CAGR in next three years

Balance Sheet Strength 8 Low It is a net cash company

Debt Profile 9 Low Net Debt to EBITDA ratio was at -2.5x and Net Debt to Equity ratio stood at -0.2x in CY19

FCF Generation 9 Low It generated FCF of Rs98bn in last ten years, which is decent given muted profit growth






35


CY19 CY20E CY21E CY22E CAGR (CY20E-CY22E)

Base Case

Volume (mnT) 24.0 21.8 24.9 25.9 9.1%


Revenue 113,530 107,547 123,382 129,739 9.8%

EBITDA 18,340 20,042 22,984 24,384 10.3%

EBITDA/tonne 765 920 923 940

EBITDA margin (%) 16.2 18.6 18.6 18.8

APAT 14,255 14,246 16,337 17,338 10.3%

Target EV to EBITDA multiple (x) 12.5

Target Price 252

Bull Case

Volume (mnT) 24.0 22.1 25.9 26.9 10.3%


Revenue 113,530 111,217 136,249 145,695 14.5%

EBITDA 18,340 22,411 32,021 36,621 27.8%

EBITDA/tonne 765 1,012 1,234 1,360

EBITDA margin (%) 16.2 20.2 23.5 25.1

APAT 14,255 16,043 23,163 26,533 28.6%


Target Price 337

Bear Case

Volume (mnT) 24.0 21.4 23.9 24.6 7.1%


Revenue 113,530 103,320 108,150 110,444 3.4%

EBITDA 18,340 17,117 11,681 10,048 -23.4%

EBITDA/tonne 765 799 490 408

EBITDA margin (%) 16.2 16.6 10.8 9.1

APAT 14,255 12,031 7,817 6,553 -26.2%


Target Price 152


Scenario Analysis

Base Case: In base case scenario, we assume 9% volume CAGR in CY20E-CY22E with 0.7% growth in realization. Revenue, EBITDA and APAT are expected to clock 9.8%, 10.3% and 10.3% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 10.3% volume CAGR in CY20E-CY22E with 3.8% growth in realization. Revenue, EBITDA and APAT are expected to clock 15%, 28% and 29% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 7% volume CAGR in CY20E-CY22E with 3.5% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 3%, -23% and -26% CAGR, respectively over the same period.

36

I. Healthy Exposure to Northern & Western RegionsWith ~11.5mnT of capacity in the Northern region and 12mnT in Western region, Ambuja Cements (ACEM) continues to be among Top-5 players in these regions. State-of-the-art plants and well-maintained machineries help ACEM in lowering power and maintenance cost. Further, the company has also secured a limestone mine in Nagaur (Rajasthan) with estimated reserve of 199mnT so as to front-load resources to capitalize on the demand recovery in the region.

II. Capacity Expansion Programme on ScheduleACEM’s capacity expansion programme is moving as per the schedule. Its 3.2mnT clinker unit and 1.8mnT grinding unit (GU) at Marwar (Rajasthan) is expected to be commissioned by the end of CY20E. Notably, industry’s ~4mnT capacity addition in the next three years in the Northern region includes ACEM’s 1.8mnT capacity in Marwar. Further, commissioning of clinker line will ease the concern over clinker constraints, which has been the key worry for the stock for couple of years.

III. Key Beneficiary of Demand Up-tick in J&K and LAC AreasLikely up-tick in cement consumption led by significant pick-up in infrastructure activities in J&K and line of control areas after recent stand-off with China will benefit ACEM the most, as its Northern plants are located in Punjab and Himachal Pradesh belt. Our channel check also suggests that ban on import of Pakistani cement is already helping the Indian cement companies including ACEM in Punjab and adjacent states.

IV. Trade Sales & Premium Products Support RealizationTrade segment accounts for >80% of ACEM’s total cement sales in last couple of years, which along with higher premium products has been supporting its blended realisation, and we expect this to continue in ensuing quarters as well. Notably, premium products currently account for 10% of ACEM’s total trade volume.


Y/E Mar CY20E CY21E CY22E


Volume (mnT) 21.8 21.8 (0.1) 24.8 24.9 0.4 25.9


Sales 1,03,520 1,07,547 3.9 1,19,844 1,23,382 3.0 1,29,739

EBITDA 16,023 20,042 25.1 19,688 22,984 16.7 24,384

EBITDA margins (%) 15.5 18.6 16.4 18.6 18.8

EBITDA/tonne (Rs) 736 920 25.0 792 923 16.5 940

Adjusted PAT 11,240 14,246 26.7 13,876 16,337 17.7 17,338



Rs/tonne CY16 CY17 CY18 CY19 CY20E CY21E CY22E

Raw Materials 349 368 385 433 419 423 425

Employees 276 288 280 281 337 324 334

Power & Fuel 856 971 1,049 1,079 1,069 1,079 1,085

Freight 1,156 1,249 1,349 1,291 1,304 1,317 1,324

Other Exps. 871 828 830 852 894 894 894

Realisation 4,281 4,457 4,518 4,738 4,789 4,849 4,921


Investment RationaleOur investment thesis is based on the following premises:I. Healthy Exposure to Northern & Western RegionsII. Capacity Expansion Programme on ScheduleIII. Key Beneficiary of Demand Up-tick in J&K and LAC AreasIV. Trade Sales & Premium Products Support Realization

37

Exhibit 4: EBITDA & SOTP Target Price Exhibit 5: EV/EBITDA 1yr Fwd


Exhibit 6: Price Sensitivity analysis at parent level EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 10 11.5 12.5 13 14CY16 (-3) 16.8 10.0 21.0 97 110 118 123 131

CY17 (-2) 19.4 15.7 18.2 115 130 140 144 154

CY18 (-1) 18.9 -2.5 18.6 112 126 136 140 150

CY19 (Base year) 21.5 13.7 16.4 132 148 159 164 175

CY20E (year 1) 22.3 3.9 15.8 133 150 162 167 178

CY21E (Year 2) 25.6 14.6 13.8 155 174 187 194 207

CY22E (Year 3) 27.1 5.9 13.0 171 191 205 212 225





165186 182

206 208234

252

16.819.4 18.9

21.5 22.3

25.627.1

0

5

10

15

20

25

30

0

50

100

150

200

250

300

CY16 (-3) CY17 (-2) CY18 (-1) CY19 (Base year)

CY20E (year 1)

CY21E (Year 2)

CY22E (Year 3)

SOTP TP (Rs) EBITDA (Rs bn)

120

140

160

180

200

220

240

260

280

300

Jan-

13

Jun-

13

Nov-

13

Apr-1

4

Sep-

14

Feb-

15

Jul-1

5

Dec-

15

May

…

Oct-1

6

Mar

-17

Aug-

17

Jan-

18

Jun-

18

Nov-

18

Apr-1

9

Sep-

19

Feb-

20

Jul-2

0

12x13x14x

15x

16x

38








Ambiguity over parent’s strategy to drive domestic business has been the prime concern for the investors, which has also resulted in de-rating in valuation multiples. Going forward, we believe timely capacity expansion and improvement in operating synergies will be the key catalysts for the stock. Broadly maintaining our EBITDA estimate for CY21E and rolling over our estimate to CY22E, we maintain BUY on ACEM with a revised 2-Year Target Price of Rs252 (12.5x of CY22E).

22.2 21.8 21.4 23.0

24.3 24.0

21.8

24.9 25.9

-

5.0

10.0

15.0

20.0

25.0

30.0


Volume(mt)

99 94 91

103 110 114

108

123 130

-

20

40

60

80

100

120

140


Revenue (Rs bn)

18.5

14.3 15.8

17.3 15.1

18.3 20.0

23.0 24.4

-

5.0

10.0

15.0

20.0

25.0

30.0


EBITDA (Rs bn)

13.2

8.3 9.3

12.5 12.0

14.3 14.2

16.3 17.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0


PAT (Rs bn)

18.8

12.3

9.1 8.8 7.7

9.4 8.6

9.5 9.5

15.3

7.9 6.3 6.4

7.3 7.1 6.3 6.8 6.9

0

2

4

6

8

10

12

14

16

18

20


RoCE (%) RoE (%)

39

Profit & Loss StatementY/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

Revenue 1,09,770 1,13,530 1,07,547 1,23,382 1,29,739 % yoy growth 7.1 3.4 (5.3) 14.7 5.2

Total Cost 94,663 95,190 87,505 1,00,398 1,05,355

Cost/tone (Rs) 3,896 3,973 4,017 4,030 4,062

Raw Materials Consumed 9,364 10,372 9,132 10,547 11,035

Employee Costs 6,796 6,726 7,197 7,874 8,661

Power & Fuel 25,497 25,864 23,282 26,888 28,133

Freight & Forwarding 32,776 30,942 28,415 32,817 34,337

Others 20,171 20,403 19,479 22,273 23,189

EBITDA 15,107 18,340 20,042 22,984 24,384 EBITDA Margin (%) 13.8 16.2 18.6 18.6 18.8 Depreciation and Amortisation 5,481 5,438 6,766 7,374 7,952

Interest & Fin. Charges 823 835 579 851 889

Less : Self Consumption of clinker, cement & limestone

(10) - - - -

Exceptional Items 1,300 - - - -

Other Income 7,547 7,416 6,339 7,073 7,626

Profit before Tax 15,061 19,483 19,037 21,832 23,170 Tax 190 4,195 4,792 5,495 5,832

% Tax 1.3 21.5 25.2 25.2 25.2

Net Profit 14,871 15,288 14,246 16,337 17,338 YoY Growth (%) 19.0 2.8 (6.8) 14.7 6.1


Adjusted profit 12,017 14,255 14,246 16,337 17,338

Key Financials

Balance Sheet Y/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E EQUITY AND LIABILITIES Share Capital 3,971 3,971 3,971 3,971 3,971 Reserves and Surplus 2,06,158 2,18,081 2,29,348 2,41,714 2,54,088 Shareholder's funds 2,10,129 2,22,053 2,33,320 2,45,686 2,58,060 Long-Term Borrowings 397 353 353 353 353 Deferred Tax Liabilities (Net) 3,722 2,161 2,161 2,161 2,161 Other Long-Term Liabilities 84 365 335 384 403 Long Term Provisions 385 503 463 531 557 Non-Current Liabilities 4,587 3,381 3,311 3,429 3,474 Trade Payables 11,095 9,360 8,604 9,872 10,359 Other Current Liabilities 19,097 25,198 17,741 20,355 21,071 Short-Term Provisions 6,962 9,916 9,115 10,458 10,975 Current Liabilities 37,153 44,473 35,460 40,685 42,405

Total Liabilities 2,51,870 2,69,907 2,72,091 2,89,799 3,03,939 ASSETS Tangible Assets 56,636 58,125 73,358 77,985 75,033 Intangible Assets 3 - - - - Capital Work-in-Progress 6,100 11,087 5,000 3,000 2,000 Fixed Assets 62,739 69,212 78,358 80,985 77,033 Non-Current Investments 1,18,138 1,17,890 1,17,890 1,17,890 1,17,890 Long term Loans and Adv. 603 877 830 953 1,002 Other Non-Current Assets 12,987 13,696 12,974 14,884 15,651 Non-Current Assets 1,31,728 1,32,462 1,31,694 1,33,727 1,34,543 Current Investments - - - - - Inventories 12,778 9,541 9,038 10,369 10,903 Trade Receivables 4,703 5,132 4,862 5,578 5,865 Cash and Bank Balances 33,300 46,995 41,919 52,006 68,092 ST Loans and Advances 2,429 2,334 2,211 2,536 2,667 Other Current Assets 4,195 4,231 4,008 4,598 4,835 Current Assets 57,403 68,233 62,038 75,087 92,362 Total Assets 2,51,870 2,69,907 2,72,091 2,89,799 3,03,939

40

Cash Flow Statement Y/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

Profit Before tax 15,061 19,483 19,037 21,832 23,170 Depreciation and Obsolescence 5,481 5,438 6,766 7,374 7,952

Interest and Finance charges 823 835 579 851 889

Others (1,820) (2,717) - - -

Operating profit before WC changes 19,545 23,039 26,382 30,057 32,010

Change in Working Capital (6,166) 3,877 (7,196) 348 (240)


Direct Tax Paid (6,251) (808) (4,792) (5,495) (5,832)

Net Cash from Operating Activities 7,129 26,108 14,394 24,909 25,938

Purchase / Sale of Fixed Assets (5,936) (11,114) (15,913) (10,000) (4,000)Others 1,981 2,402 - - -

Net Cash used in Investing Activities (3,955) (8,713) (15,913) (10,000) (4,000)

Proceeds from Borrowings 216 - - - -

Interest and finance charges paid (513) (558) (579) (851) (889)Dividend Paid (including DDT) (4,498) (3,320) (2,978) (3,971) (4,964)

Net Cash Generated / (Used) in Financing Activities

(4,795) (3,878) (3,557) (4,822) (5,853)

Net Inc. in Cash and Cash Equivalents (1,621) 13,517 (5,076) 10,087 16,086

Opening Cash 34,971 33,300 46,995 41,919 52,006

Closing Cash 33,300 46,995 41,919 52,006 68,092

Key RatiosY/E Dec (Rs mn) CY18 CY19 CY20E CY21E CY22E

P/E 36.2 30.5 30.5 26.6 25.1

P/CEPS 20.2 21.0 20.7 18.3 17.2

P/BV 2.1 2.0 1.9 1.8 1.7

EV/EBITDA 17.0 13.5 13.7 11.8 10.5

EV/Sales 2.2 2.0 2.3 1.9 1.7

EV/tonne (USD) 116 112 110 97 93

Dividend Payout (%) 30 22 21 24 29

Dividend Yield (%) 1.0 0.8 0.7 0.9 1.1

Per Share Data (Rs) EPS (Basic) 6.1 7.2 7.2 8.2 8.7

EPS (Diluted) 6.1 7.2 7.2 8.2 8.7

CEPS 10.2 10.4 10.6 11.9 12.7

DPS 2.3 1.5 1.5 2.0 2.5

Book Value 106 112 118 124 130

EBITDA/tone 622 765 920 923 940

Returns (%) RoCE 7.7 9.4 8.6 9.5 9.5

RoE 7.3 7.1 6.3 6.8 6.9

Turnover ratios (x) Asset Turnover (Gross block) 1.5 1.4 1.0 1.1 1.1

Inventory (days) 42.5 30.7 30.7 30.7 30.7

Receivables (days) 15.6 16.5 16.5 16.5 16.5

Payables (days) 42.8 35.9 35.9 35.9 35.9

WCC (days) 15.3 11.3 11.3 11.3 11.3

41

Premium Valuation to Sustain

Shree CementCement | India


BUYCMP* (Rs) xxx

Upside/ (Downside) (%) xx

Bloomberg Ticker xxx IN

Market Cap. (Rs bn) xxx

Free Float (%) xxx

Shares O/S (mn) xxx Company Update | 18 Aug 2020

1. Shree Cement (SRCM) continues to enjoy a leadership position in Northern markets despite UTCEM ramping up its presence through inorganic means. We believe SRCM strikes the best balance between growth and balance-sheet discipline, which justifies its premium valuation.

2. Strong demand outlook in Northern and Eastern regions will aid SRCM to improve its sales volume, going forward. It has recently commissioned 2.5mnT split grinding unit (SGU) in Jharkhand and is likely to commission another 3mnT SGU in Odisha shortly.

3. Contrary to the past trend, SRCM has started placing itself as a value player and intends to get remunerative growth rather than volumetric growth. It had launched 2 value-added products including Shree Roofon in the Southern markets last year, which already has yielded desired result so far.

4. Cost leadership has aided the company to generate better than industry’s profitability over the years, which is expected to be accentuated, going forward with further emphasis of remunerative growth.

Impact of COVID-19: As per its latest FY20 Annual Report, COVID-19 pandemic has dented the cement demand due to nationwide lockdown and resultant decline in overall economic activities. As per the company, it is difficult to give any near-term guidance in light of uncertainty over any extended impact of the pandemic. However, SRCM has delivered a better volume performance compared to its peers in 1QFY21, as its volume declined by 18% YoY vs. ~30% decline expected to be witnessed by the industry.

Outlook & ValuationWe believe SRCM has been moving in the right direction in its pursuit to dominate the markets by adding capacity at regular intervals, which we expect to aid the company in growing its market share and profitability without much stress on balance sheet. Hence, its premium multiple is expected to sustain, going forward which can be supported by thin liquidity and meagre non-institutional holdings. Keeping our earnings estimates unchanged for forward years, we maintain BUY on SRCM with an unrevised SOTP-based 2-Year Target Price of Rs24,053 (valuing standalone entity at Rs22,953 and UAE subsidiary at Rs1,100).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23E Sales 117,599 119,301 112,594 134,036 149,884EBITDA 26,528 36,745 33,193 41,547 47,086Net Profit 10,685 15,702 14,883 20,240 25,488EPS (Rs) 273 435 412 561 706DPS (Rs) 55 144 80 135 150P/E (x) 78.8 49.4 52.2 38.4 30.5P/B (x) 7.8 6.0 5.5 5.0 4.4

EV/EBITDA 29.2 21.1 22.8 17.6 14.9

RoE (%) 10.3 13.9 11.0 13.6 15.3Divi. Yield (%) 0.003 0.007 0.004 0.006 0.007



Absolute performance -1.3% 18.2% 10.2%

Relative to Nifty -5.3% 5.5% 9.1%


Promoter 62.5 62.5

Public 37.5 37.5


ote: * CMP as on 17 Aug 2020

Cement | India



CMP* 21,513


Bloomberg Ticker SRCM IN


Free Float (%) 37

Shares O/S (mn) 36

Key Triggers:Leadership position in Northern region offers an edgeMaintains the best balance between growth and balance-sheet discipline Expected to deliver better than industry’s growth led by upcoming capacities and

revival in demand scenario in 2HFY21Placing itself as a value player with focus on remunerative growth in lieu of volumetric growthBest-in-class EBITDA/tonne despite higher incentives to dealers/distributors

2,500

7,500

12,500

17,500

22,500

27,500

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Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-

20

42


Management Quality 9 Low One of the best managements given the company has achieved size and scale without any capital raising



Industry Growth 8 Low Demand clocked ~7% CAGR over last 15 years; Expected to be maintained in coming fiscals



New Business/Client Potential 8 Low Capacity increased by 3.4x over last ten years; the company ventured into new geographies too

Business Diversification 8 Low It is aggressively looking into Southern and Western markets, where it has relatively low presence as of now

Market Share Potential 9 Low It has consistently gained market share in Northern and Eastern regions

Margin Expansion Potential 9 Low It already generates the best margin compared to peers

Earnings Growth (10 Years) 7 Low Earnings clocked 9% CAGR over last ten years led by timely capacity addition; expected to clock 15% CAGR in next three years

Balance Sheet Strength 8 Low Strong balance sheet owing to low working capital and low debt

Debt Profile 9 Low Net Debt to EBITDA was at -0.01x in FY20

FCF Generation 9 Low It generated FCF of Rs51bn in last ten years despite incurring huge capex






43



Base Case

Volume (mnT) 24.9 23.4 27.7 30.9 14.8%

Relisation/tonne (Rs) 4,622 4,645 4,699 4,746 1.1%

Revenue 1,19,301 1,12,594 1,34,036 1,49,884 15.4%

EBITDA 36,745 33,193 41,547 47,086 19.1%

EBITDA/tonne 1,446 1,385 1,473 1,505

EBITDA margin (%) 30.8 29.5 31.0 31.4

APAT 15,702 14,883 20,240 25,488 19.6%

Target EV/EBITDA multiple (x) 16

Target Price 24,053

Bull Case

Volume (mnT) 24.9 22.9 28.0 32.5 19.1%


Revenue 1,19,301 1,14,512 1,44,534 1,71,663 22.4%

EBITDA 36,745 35,405 48,286 59,227 29.3%

EBITDA/tonne 1,446 1,513 1,699 1,804

EBITDA margin (%) 30.8 30.9 33.4 34.5

APAT 15,702 13,658 23,805 33,283 34.6%


Target Price 29,888

Bear Case

Volume (mnT) 24.9 21.2 24.7 27.8 14.5%

Relisation/tonne (Rs) 4,622 4,585 4,493 4,493 -1.0%

Revenue 1,19,301 1,01,077 1,14,781 1,28,534 12.8%

EBITDA 36,745 29,407 33,761 37,791 13.4%

EBITDA/tonne 1,446 1,350 1,337 1,334

EBITDA margin (%) 30.8 29.1 29.4 29.4

APAT 15,702 9,280 13,202 17,243 22.9%


Target Price 19,647


Scenario AnalysisBase Case: In base case scenario, we assume 17.6% volume CAGR in FY21E-FY23E with 0.6% growth in realization. Revenue, EBITDA and APAT are expected to clock 18%, 21% and 29% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 19.1% volume CAGR in FY21E-FY23E with 3.5% growth in realization. Revenue, EBITDA and APAT are expected to clock 22%, 29% and 35% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 14.5% volume CAGR in FY21E-FY23E with 1% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 12.8%, 13.4% and 22.9% CAGR, respectively over the same period.

44

I. Dominant Presence in Northern & Eastern RegionsShree Cement (SRCM) continues to enjoy a leadership position in Northern markets despite UTCEM ramping up its presence through inorganic means. We believe SRCM strikes the best proper balance between growth and balance-sheet discipline, which justifies its premium valuation. While SRCM is currently expanding more in other regions to become a pan-India player, we believe it has sufficient scope to grow further in Northern and Eastern regions with current level of resources.

II. Ongoing Expansion to Ensure Healthy VolumeWhile SRCM’s sales volume was adversely impacted in 4QFY20 owing to slowdown in construction activities led by COVID-19, we continue to believe that it can potentially grow in double-digit over the next 2 years led by upcoming capacities and meaningful revival in demand. Further, strong demand outlook in Northern and Eastern regions will aid the company to improve its sales volume, going forward. It has recently commissioned 2.5mnT SGU in Jharkhand and is likely to commission another 3mnT SGU in Odisha shortly. However, in order to overcome a likely situation of clinker deficit in the Eastern region, SRCM may soon announce clinker expansion plan in the region for which it has already obtained required regulatory clearances/approvals.

III. Shift in Strategy from Volume to Value Contrary to the past trend, SRCM has started placing itself as a value player and intends to get remunerative growth rather than volumetric growth. It had launched 2 value-added products including Shree Roofon in the Southern markets last year, which already has yielded desired result so far. Currently, the premium products account for 5% of its total sales volume. Going forward, we expect healthy realization trend in its key markets and improving volume of premium products to result in sustainably strong operating profit.

IV. Superior Operating PerformanceDespite offering higher Rs322/tonne rebate/discounts/incentives to its dealers/distributors (vs. Rs222/tonne in FY19), SRCM’s EBITDA/tonne remained the best among peers at Rs1,446 in FY20. Notably, cost leadership has aided the company to generate better than industry’s profitability over the years, which is expected to be accentuated, going forward with further emphasis of remunerative growth.



Raw Materials 305 342 334 308 317 313 309

Employees 261 261 262 293 337 309 316

Power & Fuel 702 878 1,062 942 904 931 940

Freight 744 882 890 864 882 886 890

Other Exps. 954 928 974 904 951 897 876

Realisation 3,817 4,166 4,223 4,622 4,645 4,699 4,746 Source: RSec Research

Investment RationaleOur investment thesis is based on the following premises:I. Dominant Presence in Northern & Eastern RegionsII. Ongoing Expansion to Ensure Healthy VolumeIII. Shift in Strategy from Volume to ValueIV. Superior Operating Performance


Y/E Mar FY21E FY22E FY23E

(Rsmn) Old Revised % change Old Revised % change Old Revised % change

Sales Volume - Cement (mnT) 22.15 23.42 5.8 26.71 27.72 3.8 30.62 30.86 0.8

Realizations-Cement (Rs/tone) 4,695 4,645 (1.1) 4,709 4,699 (0.2) 4,757 4,746 (0.2)

Sales Volume - Power (mn units) 950 950 0.0 900 900 0.0 800 800 0.0

Sales (Rs mn) 107,785 112,594 4.5 129,572 134,036 3.4 149,106 149,884 0.5

EBIDTA (Rs mn) 32,245 33,193 2.9 40,305 41,547 3.1 46,970 47,086 0.2

Cement EBITDA/tonne (Rs) 1,422 1,385 (2.6) 1,482 1,473 (0.6) 1,513 1,505 (0.5)

EBIDTA margins (%) 29.9 29.5 31.1 31.0 31.5 31.4

PAT (Rs mn) 11,352 14,883 31.1 17,979 20,240 12.6 24,112 25,488 5.7


45



Exhibit 6: Price Sensitivity at Standalone EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 14 15 16 17 18FY17 (-3) 25.1 30.7 9,605 10,302 10,998 11,695 12,392

FY18 (-2) 24.7 -1.6 31.2 9,326 10,011 10,696 11,382 12,067

FY19 (-1) 26.5 7.3 29.1 9,612 10,347 11,083 11,818 12,553

FY20 (Base year) 36.7 38.5 21.0 14,272 15,290 16,309 17,327 18,345

FY21E (year 1) 33.2 -9.7 23.2 13,463 14,383 15,303 16,223 17,142

FY22E (Year 2) 41.5 25.2 18.6 17,392 18,544 19,695 20,847 21,998

FY23E (Year 3) 47.1 13.3 16.4 20,342 21,648 22,953 24,258 25,563





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5,000

10,000

15,000

20,000

25,000

30,000

Mar

-13

Jul-1

3N

ov-1

3M

ar-1

4Ju

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Jul-1

5N

ov-1

5M

ar-1

6Ju

l-16

Nov

-16

Mar

-17

Jul-1

7N

ov-1

7M

ar-1

8Ju

l-18

Nov

-18

Mar

-19

Jul-1

9N

ov-1

9M

ar-2

0Ju

l-20

15x

18x20x21x22x

12,098 11,796 12,183

17,409 16,403

20,795

24,053

25.1 24.7 26.5

36.733.2

41.547.1

05101520253035404550

0

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10,000

15,000

20,000

25,000

30,000


FY21E (year 1)

FY22E (Year 2)

FY23E (Year 3)


46








We believe SRCM has been moving in the right direction in its pursuit to dominate the markets by adding capacity at regular intervals, which we expect to aid the company in growing its market share and profitability without much stress on balance sheet. Hence, its premium multiple is expected to sustain, going forward which can be supported by thin liquidity and meagre non-institutional holdings. Keeping our earnings estimates unchanged for forward years, we maintain BUY on SRCM with an unrevised SOTP-based 2-Year Target Price of Rs24,053 (valuing standalone entity at Rs22,953 and UAE subsidiary at Rs1,100).

16.2 14.2

20.6 22.5

25.9 24.9 23.4

27.7

30.9

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Volume(mt)

67 55

86 99

118 119 113

134

150

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40

60

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100

120

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Revenue (Rs bn)

13.4 14.1

25.1 24.7 26.5

36.7 33.2

41.5

47.1

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

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EBITDA (Rs bn)

4.3

11.4 13.4 13.8

10.7

15.7 14.9

20.2

25.5

-

5.0

10.0

15.0

20.0

25.0

30.0


PAT (Rs bn)

7.5

15.0 15.6 15.9

9.3

13.4

13.0

16.3

18.7

8.5

18.9 18.4

16.7

10.3

13.9 11.0

13.6

15.3

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0


RoCE (%) RoE (%)

47

Profit & Loss Statement FY19 FY20 FY21E FY22E FY23E

Revenue 1,17,599 1,19,301 1,12,594 1,34,036 1,49,884 % yoy growth 18.9 1.4 (5.6) 19.0 11.8

Total Cost 91,072 82,555 79,402 92,489 1,02,798


Cost/tonne (Rs) 334 308 317 313 309

Employee Costs 6,779 7,310 7,882 8,578 9,742

Cost/tonne (Rs) 262 293 337 309 316

Power & Fuel 27,450 23,476 21,172 25,811 29,019

Cost/tonne (Rs) 1,062 942 904 931 940

Freight and Forwarding 23,025 21,547 20,646 24,559 27,475

Cost/tonne (Rs) 890 864 882 886 890


Cost/tonne (Rs) 974 904 951 897 876

EBIDTA 26,528 36,745 33,193 41,547 47,086 EBIDTA Margin (%) 22.6 30.8 29.5 31.0 31.4 Depreciation and Amortisation 13,917 16,994 13,892 16,691 17,906

Interest & Fin. Charges 2,470 2,865 2,396 1,676 1,271

Preoperative Expenses written back 1,781 - - - -

Other Income 2,454 2,716 3,483 4,545 6,153

Profit before Tax 10,814 19,602 20,388 27,725 34,062 Tax 1,304 3,900 5,505 7,486 8,573

Net Profit (Reported) 9,510 15,702 14,883 20,240 25,488 YoY Growth (%) (31.3) 65.1 (5.2) 36.0 25.9


Net Profit (Adjusted) 10,685 15,702 14,883 20,240 25,488


SOURCES OF FUNDS

Share Capital 348 361 361 361 361

Reserves & Surplus 95,625 1,29,003 1,41,000 1,56,368 1,76,444

Total Shareholder's funds 95,974 1,29,364 1,41,360 1,56,729 1,76,805

Secured Loans 27,980 31,042 21,042 15,042 12,042

Unsecured Loans - 400 400 400 400

Total Debt 27,980 31,442 21,442 15,442 12,442


APPLICATION OF FUNDS

Gross Block 88,365 1,03,634 1,18,634 1,28,634 1,36,634

Less: Accumulated Depreciation 43,608 60,602 74,494 91,185 1,09,090

Net Block 44,757 43,032 44,140 37,450 27,544

CWIP 11,211 9,621 6,621 3,621 2,121

Investments 44,439 89,179 97,179 1,15,179 1,39,179

Deferred Tax Assets (net) 6,126 7,438 7,438 7,438 7,438

Inventories 15,891 14,279 13,476 16,042 17,939

Sundry Debtors 7,324 8,285 7,819 9,308 10,408

Cash & Bank 3,078 1,082 3,627 4,449 6,351

Loans & Advances 6,921 8,701 8,212 9,776 10,932


Total Current Assets 45,400 43,976 44,518 51,683 59,569


Provisions 93 103 112 122 133


Total Assets 1,23,953 1,60,806 1,62,802 1,72,171 1,89,247

Key Financials

48


PBT 10,814 19,602 20,388 27,725 34,062

Depreciation 13,917 16,994 13,892 16,691 17,906

Interest Expenses 2,470 2,865 2,396 1,676 1,271

Others 998 -2,680 0 0 0


Trade and Other Receivables (4,007) (30) 1,201 (3,776) (4,087)

Inventories (200) 1,612 803 (2,566) (1,897)

Trade Payables and Other Liabilities -1,094 4,010 4,654 6,106 3,404


Direct Taxes and Others (2,300) (4,859) (5,505) (7,486) (8,573)

Net Cash from Operating Activities 20,596 37,514 37,828 38,369 42,086

Purchase of Fixed Assets (18,993) (12,984) (12,000) (7,000) (6,500)

Others 10,867 (40,749) (8,000) (18,000) (24,000)

Net Cash used in Investment activities (8,126) (53,733) (20,000) (25,000) (30,500)

Proceeds from Borrowings (7,591) 1,175 (10,000) (6,000) (3,000)

Interest Paid (2,753) (2,868) (2,396) (1,676) (1,271)

Dividend and Tax thereon (2,308) (6,231) (2,886) (4,871) (5,412)

Net Cash from Financing Activities (12,653) (7,924) (15,283) (12,547) (9,683)

Net Increase / (Decrease) in Cash (182) (24,143) 2,545 822 1,902

Opening Cash 1,209 3,078 1,082 3,627 4,449

Closing Cash 3,078 1,082 3,627 4,449 6,351


P/E 78.8 49.4 52.2 38.4 30.5

P/CEPS 32.0 23.7 27.0 21.0 17.9

P/BV 7.8 6.0 5.5 5.0 4.4

EV/EBIDTA 29.2 21.1 22.8 17.6 14.9

EV/Sales 6.6 6.5 6.7 5.4 4.7

EV/tonne (USD) 272 256 217 210 202

Dividend Payout (%) 20.1 33.0 19.4 24.1 21.2

Dividend Yield (%) 0.003 0.007 0.004 0.006 0.007

Adj. OCF Yield 2.4 4.5 4.6 4.7 5.3

Per Share Data (Rs) EPS (Basic) 273 435 412 561 706

EPS (Diluted) 273 435 412 561 706

CEPS 672 906 798 1,024 1,203

DPS 55 144 80 135 150

Book Value 2,755 3,585 3,918 4,344 4,900

EBIDTA/tone 955 1,446 1,385 1,473 1,505

Returns (%) RoCE 9.3 13.1 13.0 16.3 18.7

RoE 10.3 13.9 11.0 13.6 15.3

Turnover ratios (x) Asset Turnover 1.3 1.2 0.9 1.0 1.1




WCC (days) 38 25 25 25 25

49

A perfect Bet on South Play

Ramco CementsCement | India


BUY2 Year Target Price: Rs

CMP* (Rs) xxx




Free Float (%) xxx


1. Ramco Cements Ltd. (TRCL) enjoys a strong market share in Tamil Nadu (~40%) and Kerala (~20-25%), where realization has mostly been healthier compared to other regions. These two states jointly account for >60% of TRCL’s total sales mostly in trade segment.

2. In order to strengthen its presence in Eastern region and de-risk its geographical concentration, TRCL plans to enhance its presence in Eastern market with new grinding units (GUs). It has already commissioned 1.1mnT GU in Vizag in Mar’20, while 1mnT GU in Odisha is scheduled to be commissioned in Aug’20.

3. We expect TRCL’s net debt to EBITDA to peak at 3.1x in FY21E and then to improve to 1.3x in FY23E. We foresee TRCL to generate Rs17.8bn FCF over next three years

4. Against 51mnT expected cement capacity addition in next three years on pan-India level, Southern region is likely to witness a mere 4.3mnT capacity addition that bodes well for the region.

Impact of COVID-19: Demand momentum was significantly impacted in the Southern markets due to COVID-led disruptions. Despite significant up-tick in monthly volume in May’20 and Jun’20, its current volume still remains lower than pre-COVID level. TRCL reported ~28% drop in sales volume in 1QFY21 and we expect it to report 7% volume drop in FY21E.

Outlook & ValuationTRCL has been demonstrating strong performance despite being in the region that has been witnessing supply glut for several years. Strong free cash flow (FCF) generation led by healthy operating efficiency and decent corporate governance aided the stock to command premium valuation over peers. Trimming our EBITDA estimate by ~4% for FY22E and rolling over our estimate to FY23E, we maintain BUY on TRCL with a 2-Year Target Price of Rs802 (12x of FY23 EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 50,603 52,854 52,586 60,759 68,263EBITDA 9,505 10,536 12,010 14,123 15,967Net Profit 5,059 6,011 5,413 8,352 10,150EPS (Rs) 21.5 25.5 23.0 35.5 43.1DPS (Rs) 3.0 2.5 2.0 3.0 3.0P/E (x) 31.2 26.3 29.2 18.9 15.6EV/EBITDA (x) 18.2 17.8 16.0 13.1 10.9

RoE (%) 11.9 12.8 10.5 14.4 15.3

Divi. Yield (%) 0.4 0.4 0.3 0.4 0.4






Promoter 42.7 42.7

Public 57.3 57.3



Cement | India



CMP* 670


Bloomberg Ticker TRCL IN


Free Float (%) 57

Shares O/S (mn) 236

Key Triggers:Strong market share in Southern states, where realization has mostly been healthier

New capacities in Eastern region to minimize dependence on Southern region

Likely rise in total cement capacity to 18.6mnT (excluding 4.2mnT satellite capacity) by 3QFY22E from 15.5mnT in FY20

Low capacity addition in Southern region along with likely revival in demand scenario

300

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Management Quality 8 Low The management has displayed its excellence several times starting from operation to improving balance sheet

Promoter’s Holding Pledge 9 Low Merely 1.9% promoters holding is pledged


Industry Growth 8 Low Demand clocked ~7% CAGR over last 15 years; expected to be maintained in coming fiscals



New Business/Client Potential 8 Low It is expanding its capacity in its existing markets in Eastern and Southern regions

Business Diversification 6 Low Considered to be a regional player due to presence in only Southern and Eastern markets

Market Share Potential 7 Low Excess supply situation in Southern region did not allow the company to set up new capacity for long; however, it has started expanding now

Margin Expansion Potential 7 Low Enjoys sound operational efficiency; presence in rich realisation market continue to aid margin

Earnings Growth (10 Years) 6 Low Earnings clocked 5.5% CAGR over last ten years; expected to clock 17% earnings CAGR over next three years

Balance Sheet Strength 7 Low Low working capital and healthy cash from operation continue to offer support to balance sheet

Debt Profile 7 Low Net Debt to EBITDA ratio peaked out at 2.8x in FY20 due to new expansion

FCF Generation 8 Low It generated FCF of Rs15bn in last ten years; expected to generate Rs18bn FCF in next three years






51



Base Case

Volume (mnT) 11.2 10.4 12.1 13.5 6.3%

Realisation/tonne (Rs) 4,718 5,057 5,041 5,066 2.4%

Revenue 52,854 52,586 60,759 68,263 8.9%

EBITDA 10,536 12,010 14,123 15,967 14.9%

EBITDA/tonne 940 1,155 1,172 1,185

EBITDA margin (%) 19.9 22.8 23.2 23.4

APAT 6,011 5,413 8,352 10,150 19.1%


Target Price 802

Bull Case

Volume (mnT) 11.2 11.0 13.3 14.8 9.7%


Revenue 52,854 55,429 68,546 78,260 14.0%

EBITDA 10,536 12,791 17,658 21,243 26.3%

EBITDA/tonne 940 1,166 1,332 1,433

EBITDA margin (%) 19.9 23.1 25.8 27.1

APAT 6,011 5,998 10,997 14,098 32.9%


Target Price 1,144

Bear Case

Volume (mnT) 11.2 9.8 11.2 12.5 3.7%

Realisation/tonne (Rs) 4,718 4,668 4,690 4,691 -0.2%

Revenue 52,854 45,968 52,439 58,624 3.5%

EBITDA 10,536 8,040 9,935 11,259 2.2%

EBITDA/tonne 940 816 888 901

EBITDA margin (%) 19.9 17.5 18.9 19.2

APAT 6,011 2,443 5,218 6,627 3.3%


Target Price 553


Scenario AnalysisBase Case: In base case scenario, we assume 6.3% volume CAGR in FY20-FY23E with 2.4% growth in realization. Revenue, EBITDA and APAT are expected to clock 9%, 15% and 19% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 9.7% volume CAGR in FY20-FY23E with 3.8% growth in realization. Revenue, EBITDA and APAT are expected to clock 14%, 26% and 33% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 3.7% volume CAGR in FY20-FY23E with 0.2% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 4%, 2% and 3% CAGR, respectively over the same period.

52

I. Strong Hold in Key Southern Markets to Drive RealizationTRCL enjoys a strong market share in Tamil Nadu (~40%) and Kerala (~20-25%), where realization has mostly been healthier compared to other regions. These two states jointly account for >60% of TRCL’s total sales mostly in trade segment. Further, TRCL established a decent presence in Andhra Pradesh, Karnataka and West Bengal. Going forward, new capacities in Eastern region will aid TRCL to get additional volume from other markets to minimize its dependence on Southern region.

II. Focus on Capacity Expansion In order to strengthen its presence in Eastern region and de-risk its geographical concentration, TRCL plans to enhance its presence in Eastern market with new GUs. It has already commissioned 1.1mnT GU in Vizag in Mar’20, while 1mnT GU in Odisha is scheduled to be commissioned in Aug’20. Additionally, 1.5mnT clinker expansion at Jayanthipuram with 27MW Waste Heat Recovery Systems (WHRS) is scheduled to be commissioned in Mar’21. Notably, 2.25mnT clinker and 1mnT cement in Kurnool (Andhra Pradesh) are expected to be commissioned by Mar’21. The proposed plant includes railway siding, 12.15MW WHRS and 18MW thermal power plant. We expect TRCL’s total cement capacity to reach at 18.6mnT (excluding 4.2mnT satellite capacity) by 3QFY22E.

III. Disciplined Balance Sheet Getting Leveraged for Fresh Capacity AdditionTRCL witnessed a sharp reduction in its debt over FY14-FY18 led by strong cash generation and absence of capacity addition. It generated Rs27bn free cash flow (FCF) during FY14-FY18 and reduced net debt to Rs19bn in FY18 from Rs29bn in FY14 and thereby improving net debt to EBITDA from 5.6x to 1x. However, with ongoing capacity expansion programme, we expect TRCL’s net debt to EBITDA to peak at 3.1x in FY21E and then to improve to 1.3x in FY23E. We foresee TRCL to generate Rs17.8bn FCF over next three years.

IV. Minimal Capacity Addition in Southern RegionAgainst 51mnT expected cement capacity addition in next three years on pan-India level, Southern region is likely to witness a mere 4.3mnT capacity addition that bodes well for the region. Minimal capacity addition along with likely revival in demand scenario post current pandemic is likely to aid TRCL to register strong profitable growth, going forward.




Volume (mnT) 11.20 10.40 (7.2) 13.50 12.05 (10.7) 13.47

Net Realization (Rs/tonne) 4,631 5,057 9.2 4,728 5,041 6.6 5,066

Sales (Rs mn) 51,654 52,586 1.8 63,893 60,759 (4.9) 68,263

EBIDTA (Rs mn) 9,632 12,010 24.7 13,240 14,123 6.7 15,967

EBIDTA margins (%) 18.6 22.8 20.7 23.2 23.4

EBITDA/tonne (Rs) 864 1,155 33.7 980.0 1,172 19.6 1,185

PAT (Rs mn) 3,584 5,413 51.0 7,944 8,352 5.1

PAT margins (%) 6.9 10.3 12.4 13.7




Raw Materials 766 774 762 780 843 834 846

Employees 333 326 296 329 364 343 344

Power & Fuel 619 783 951 938 901 919 919

Freight 884 997 1,068 1,016 1,036 1,046 1,057

Other Exps. 699 671 619 715 758 727 715

Realisation 4,636 4,775 4,509 4,718 5,057 5,041 5,066


Investment RationaleOur investment thesis is based on the following premises:I. Strong Hold in Key Southern Markets to Drive RealizationII. Focus on Capacity ExpansionIII. Disciplined Balance Sheet Getting Leveraged for Fresh Capacity AdditionIV. Minimal Capacity Addition in Southern Region

53



Exhibit 6: Price Sensitivity at Standalone EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 10 11 12 13 14FY17 (-3) 11.9 4.9 16.2 452 502 553 629 654

FY18 (-2) 11.0 -8.0 17.6 424 471 518 588 611

FY19 (-1) 10.4 -5.7 18.7 375 419 463 529 551

FY20 (Base year) 11.4 9.7 17.0 358 406 454 527 551

FY21E (year 1) 12.9 13.6 15.0 405 460 514 597 624

FY22E (Year 2) 15.2 17.9 12.7 532 596 661 758 790

FY23E (Year 3) 17.2 12.8 11.3 657 730 802 912 948





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Nov

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Mar

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Jul-1

9

Nov

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Mar

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Jul-2

0

13x14x15x16x17x

553 518463 454

514

661

802

11.911 10.4

11.412.9

15.2

17.2

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FY21E (year 1)

FY22E (Year 2)

FY23E (Year 3)


54








TRCL has been demonstrating strong performance despite being in the region that has been witnessing supply glut for several years. Strong free cash flow (FCF) generation led by healthy operating efficiency and decent corporate governance aided the stock to command premium valuation over peers. Trimming our EBITDA estimate by ~4% for FY22E and rolling over our estimate to FY23E, we maintain BUY on TRCL with a 2-Year Target Price of Rs802 (12x of FY23 EBITDA).

7.9 7.2

8.3 9.3

11.1 11.2 10.4

12.0

13.5

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2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


Volume(mt)

35.9 35.9 38.6 43.2

50.6 52.9 52.6

60.8

68.3

-

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20.0

30.0

40.0

50.0

60.0

70.0

80.0


Revenue (Rs bn)

6.6

10.5 11.0 10.1 9.5

10.5 12.0

14.1

16.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


EBITDA (Rs bn)

2.4

5.6 6.5

5.6 5.1

6.0 5.4

8.4

10.2

-

2.0

4.0

6.0

8.0

10.0

12.0


PAT (Rs bn)

7.9

12.5

18.2

16.4

13.6 12.2 11.2

14.8 16.6

9.5

19.5 19.0

14.3

11.9 12.8 10.5

14.4 15.3

-

5.0

10.0

15.0

20.0

25.0


RoCE (%) RoE (%)

55

Profit & Loss Statement Y/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E

Income 50,603 52,854 52,586 60,759 68,263 % yoy growth 17.2 4.4 (0.5) 15.5 12.4

Total Cost 41,097 42,318 40,576 46,636 52,296

RM Consumed 8,469 8,738 8,771 10,057 11,406

Exmployee Costs 3,295 3,682 3,786 4,132 4,642

Power & Fuel 10,573 10,509 9,364 11,070 12,377

Freight Costs 11,880 11,379 10,774 12,612 14,241

Other Exps. 6,881 8,011 7,881 8,765 9,631

EBIDTA 9,505 10,536 12,010 14,123 15,967 EBIDTA Margin (%) 18.8 19.9 22.8 23.2 23.4 Depreciation & Amortization 2,985 3,153 3,835 2,173 2,261

Finance Costs 509 714 2,203 2,177 1,670

Other Income 1,145 1,202 1,262 1,389 1,527

PBT 7,156 7,872 7,234 11,161 13,564

Tax 2,097 1,861 1,821 2,809 3,414

% Tax 29.3 23.6 25.2 25.2 25.2

Net Profit- Reported 5,059 6,011 5,413 8,352 10,150

YoY Growth (%) (9.0) 18.8 (9.9) 54.3 21.5 Net Profit- Adjusted 5,059 6,011 5,413 8,352 10,150



LIABILITIES Share Capital 236 236 236 236 236

Reserves & Surplus 44,366 48,950 53,892 61,537 70,981

Total Shareholder's funds 44,601 49,186 54,128 61,773 71,216

Long Term Borrowings 7,012 18,323 21,521 19,521 13,521

Deferred Tax Liability 8,704 9,172 9,172 9,172 9,172

Other Long Term Liability 131 209 200 230 258

Long Term Provisions 157 240 230 265 297

Total LT Liabilities 16,004 27,945 31,124 29,188 23,248


Trade Payables 2,572 3,414 3,274 3,763 4,219

Other Current Liabilities 10,516 11,634 11,673 12,777 14,328

Short Term Provisions 253 290 278 320 359

Total Current Liabilities 20,477 23,340 25,225 23,860 22,907

Total Liabilities 81,082 1,00,470 1,10,477 1,14,822 1,17,371

ASSETS

Fixed Assets

Net Block 51,212 57,883 83,048 85,875 85,114

CWIP 8,308 18,143 3,500 1,000 1,000

Intabgible Assets under development 218 261 261 261 261

Non Current Investments 4,295 4,275 4,275 4,275 4,275

Long Term Loans & Advances 517 789 785 907 1,019

Other Non-Current Assets 2,774 3,440 3,422 3,954 4,302

Total 67,324 84,790 95,291 96,272 95,971

Inventories 5,597 6,453 5,892 6,772 7,450


Cash and Bank Balance 928 914 1,287 2,526 3,555

ST Loans and Advances 274 298 372 429 482



Total Assets 81,082 1,00,470 1,10,477 1,14,822 1,17,371

Key Financials

56


PBT 7,156 7,872 7,234 11,161 13,564

(Profit)/Loss on sale of assets (15) (2) - - -

Depreciation 2,985 3,153 3,835 2,173 2,261

Interest and dividend received (112) (155) - - -

Rent Receipt (89) - - - -

Interest Paid 509 714 2,203 2,177 1,670

Others (16) 116 - - -


Trade and Othe receivables (1,104) (1,103) 327 (1,899) (1,602)

Inventories 3 (856) 561 (880) (679)

Trade Payables 172 (962) 284 2,199 2,106

Cash generated from operations 9,489 8,776 14,444 14,932 17,320

Direct Taxes Paid (1,584) (1,376) (1,821) (2,809) (3,414)

Net Cash from Operating activities 7,904 7,400 12,623 12,123 13,906Purchase of Fixed Assets (12,063) (19,199) (14,357) (2,500) (1,500)

Sale fo Fixed Assets 45 6 - - -

Interest and dividend received 75 152 - - -

Purchase of investments (162) (150) - - -

Rent receipts from investment property 89 104 - - -

Others 108 (237) - - -

Net cash in Investing activities (11,909) (19,325) (14,357) (2,500) (1,500)Borrowings (net) 7,755 14,271 4,780 (5,500) (9,000)

Payment of dividend and tax threron (853) (1,564) (471) (707) (707)

Interest paid (476) (580) (2,203) (2,177) (1,670)

Net cash from financing activities 6,426 12,127 2,106 (8,384) (11,377)Net Inc/(Dec) in cash & cash equivalent 2,422 202 372 1,239 1,029


P/E 31.2 26.3 29.2 18.9 15.6

P/CEPS 19.6 17.2 17.1 15.0 12.7

P/BV 3.5 3.2 2.9 2.6 2.2

EV/EBIDTA 18.2 17.8 16.0 13.1 10.9

EV/Sales 3.4 3.5 3.6 3.0 2.6

EV/tonne (USD) 138 127 117 108 102

Dividend Payout (%) 14.0 9.8 8.7 8.5 7.0

Dividend Yield (%) 0.4 0.4 0.3 0.4 0.4

Adj. OCF Yield 4.7 4.3 6.6 6.3 7.8

Per Share Data (Rs) 4.0 3.6 5.6 6.9 EPS (Basic) 21.5 25.5 23.0 35.5 43.1

EPS (Diluted) 21.5 25.5 23.0 35.5 43.1

CEPS 34.1 38.9 39.3 44.7 52.7

DPS 3.0 2.5 2.0 3.0 3.0

Book Value 189 209 230 262 302

EBIDTA/tone (Cement) 855 940 1,155 1,172 1,185

Returns (%) RoCE 13.6 12.2 11.2 14.8 16.6

RoE 11.9 12.8 10.5 14.4 15.3





WCC (days) 62 63 59 59 58

57

Higher Debt sans New Capacity Addition

India CementsCement | India


2 Year Target Price: Rs

Company Update | 18 Aug 2020

1. India Cements Ltd. (ICEM) has not set up any capacity since FY10, as continued supply glut in the Southern region did not encourage the company to enhance its capacity, which led to continued to fall in market share.

2. While ICEM did not add any capacity for last one decade, it has not been able to bring down its debt level either. On the contrary, its net debt position has consistently increased over the years and peaked to Rs36bn in FY20 from Rs21bn in FY10.

3. On accumulated basis, it generated interest-adjusted free cash flow (FCF) to the tune of negative Rs1.9bn over FY10-FY20 despite accumulated FCF of Rs34.5bn.

4. Unlike its peers, ICEM’s cost of production has been on higher side due to vintage plants, which consume higher power and fuel with low efficiency. We note its cost of production has consistently been in the excess of Rs4,000/tonne over the years.

5. Inability to improve its balance sheet due to consistent increase in working capital requirement will lead to further delay in capacity expansion.

Impact of COVID-19: ICEM’s sales volume fell by 53% YoY in 1QFY21 due to COVID-led disruptions. However, the company stated that the demand momentum is now looking up from Jun’20 onwards. Its fixed cost and freight cost reduced significantly during the quarter. A sharp slowdown in government projects along with labour issues impacted sales volume in 1QFY21. The company significantly reduced the number of contract labourers as well as the number of godowns/Carrying & Forwarding agents during the quarter.

Outlook & ValuationInability to improve its balance sheet due to consistent increase in working capital requirement will lead to further delay in capacity expansion. We continue to believe that strong cash generation and debt reduction will be the key catalysts for the stock until which, the stock might

not get re-rated. Keeping EBITDA estimate broadly unchanged for FY22E and rolling over our estimates to FY23E, we maintain SELL on ICEM with a revised 2-Year Target Price of Rs81 (6.5x of FY23 EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 56,280 50,575 43,918 48,465 53,578EBITDA 6,379 5,852 6,475 6,884 7,880APAT 694 312 546 1,019 2,608EPS (Rs) 2.2 1.0 1.8 3.3 8.4DPS (Rs) 1.1 0.8 1.0 1.0 1.0P/E (x) 51.3 114.2 65.2 35.0 13.7P/B (x) 0.7 0.7 0.7 0.6 0.6

EV/EBITDA (x) 10.9 12.3 10.5 9.4 7.8

RoE (%) 1.3 0.6 1.0 1.9 4.6Divi. Yield (%) 0.9 0.7 0.9 0.9 0.9


Absolute performance -1.9% -3.1% 45.8%

Relative to Nifty -6.0% -15.9% 44.7%


Promoter 28.3 28.3

Public 71.7 71.7



Cement | India


2 Year Target Price: Rs.81

CMP* 115

Upside/Downside (%) -30

Bloomberg Ticker ICEM IN


Free Float (%) 72

Shares O/S (mn) 310

Key Setbacks:Erosion in market share owing to no capacity addition since FY10

Constant rise in net debt over the years, which peaked to Rs36bn in FY20

Higher cost of production due to vintage plants, which consume higher power/fuel with low efficiency

Change in sales practice may impact volume growth adversely

SELL

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20

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80

100

120

140

160

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Sep-

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Nov

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20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-

20

58


Management Quality 5 Medium The management could not be able to ramp-up operational efficiency and performance

Promoter’s Holding Pledge 5 Medium Around 27% promoters holding is pledged mainly to meet working capital requirements

Board of Directors Profile 6 Low Board of Directors consists of sixteen members including nine independent and non-executive directors




New Business/Client Potential 4 High Absence of new capacity over the years hurt company’s ability to get incremental sales volume

Business Diversification 4 High It is mainly concentrated in Southern and Northern markets

Market Share Potential 4 High Highly leveraged balance sheet with no capacity addition in the pipeline; tough to get additional market share

Margin Expansion Potential 5 Medium Given vintage plants, margin expansion is mainly dependent on realisation increase and decline in input prices

Earnings Growth (10 Years) 3 High Earnings clocked negative CAGR of 22% over last ten years

Balance Sheet Strength 4 High Low profitability and relatively higher working capital; higher non-trade sales continue to weaken balance sheet

Debt Profile 3 High Net Debt to EBITDA ratio stood at 6.2x and net Debt to Equity ratio stood at 0.7x in FY20

FCF Generation 6 Low It generated FCF of Rs35bn in last ten years and is expected to generate Rs20bn FCF in next three years


Total Score Out of 150 74 High




59



Base Case

Volume (mnT) 11.0 9.0 10.0 11.0 -0.2%


Revenue 50,575 43,918 48,465 53,578 1.9%

EBITDA 5,852 6,475 6,884 7,880 10.4%

EBITDA/tonne 531 723 691 719

EBITDA margin (%) 11.6 14.7 14.2 14.7

APAT 312 546 1,019 2,608 102.9%


Target Price 81

Bull Case

Volume (mnT) 11.0 9.4 10.7 12.0 2.8%


Revenue 50,575 47,478 56,275 64,268 8.3%

EBITDA 5,852 8,468 11,704 14,423 35.1%

EBITDA/tonne 531 905 1,093 1,203

EBITDA margin (%) 11.6 17.8 20.8 22.4

APAT 312 2,037 4,627 7,505 188.6%


Target Price 233

Bear Case

Volume (mnT) 11.0 8.6 9.4 10.2 -2.5%


Revenue 50,575 41,660 44,670 48,258 -1.6%

EBITDA 5,852 5,706 5,090 5,482 -2.2%

EBITDA/tonne 531 667 539 537

EBITDA margin (%) 11.6 13.7 11.4 11.4

APAT 312 (29) (323) 814 37.7%


Target Price 40


Scenario AnalysisBase Case: In base case scenario, we assume a negative volume CAGR of 0.2% in FY20-FY23E with 2.7% growth in realization. Revenue, EBITDA and APAT expected to clock 2%, 10% and 103%, CAGR respectively over the same period.

Bull Case: In bull case scenario, we assume 3% volume CAGR in FY20-FY23E with 6% growth in realization. Revenue, EBITDA and APAT are expected to clock 8%, 35% and 188% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume a negative volume CAGR of 2.5% in FY20-FY23E with 1.5% growth in realization. Revenue, EBITDA and APAT are expected to clock -1.6%, -2% and 38% CAGR, respectively over the same period.

60

I. No Capacity Addition on the AnvilICEM has not set up any capacity since FY10, as continued supply glut in the Southern region did not encourage the company to bring new capacity. However, ICEM had entered into a share purchase agreement (SPA) with Madhya Pradesh-based Springway Mining in 2018 to acquire entire stake for Rs1.8bn to set up an integrated cement plant in the state. However, the capacity expansion programme is yet to begin on the ground due to various reasons.

II. High Debt to Weigh on ProfitabilityWhile ICEM did not add any capacity for last one decade, it has not been able to bring down its debt level either. On the contrary, its net debt position has consistently increased over the years and peaked to Rs36bn in FY20 from Rs21bn in FY10. On accumulated basis, it generated interest-adjusted FCF to the tune of negative Rs1.9bn over FY10-FY20 despite accumulated FCF of Rs34.5bn. It shows that ICEM’s inability of repay debt over the years. Going forward, even we expect its debt level to come down to Rs28bn, this is not sufficient for the stock to get re-rated.

III. Higher Cost of ProductionUnlike its peers, ICEM’s cost of production has been on higher side due to vintage plants, which relatively consume higher power and fuel with low efficiencies. We note its cost of production has consistently been in the excess of Rs4,000/tonne over the years. This aggravates the company’s concern in a scenario of higher debt and additional required expenditures for up-gradation of kilns and machineries. While lower fuel prices at current scenario may offer some cushion to the company, a reversal in the fuel prices may hurt its profitability more than its peers.

IV. Volume Loss Risk on Scrapping Discount PolicyIn recent conference call, the management cited that the company has scrapped discount policies for the dealers. Hence, any dealer selling cement below invoice price will not be compensated hereon. We believe it may result in volume loss for the company, even though its realization will improve.



Raw Materials 962 984 930 924 977 963 967

Employees 326 344 282 317 383 361 345

Power & Fuel 960 1,106 1,319 1,229 1,193 1,216 1,229

Freight 1,419 1,416 1,354 1,415 1,444 1,448 1,454

Other Exps. 154 152 126 172 185 183 173

Realisation 4,601 4,504 4,376 4,461 4,822 4,807 4,831


Rationale for SELL RecommendationOur SELL recommendation is based on the following premises:I. No Capacity Addition on the AnvilII. High Debt to Weigh on ProfitabilityIII. Higher Cost of ProductionIV. Volume Loss Risk on Scrapping Discount Policy




Volume (mnT) 10.00 8.96 (10.4) 11.60 9.97 (14.1) 10.96


Sales (Rs mn) 48,050 43,918 (8.6) 55,987 48,465 (13.4) 53,578

EBIDTA (Rs mn) 5,995 6,475 8.0 7,288 6,884 (5.5) 7,880

EBIDTA margins (%) 12.5 14.7 13.0 14.2 14.7

EBITDA/tonne (Rs) 598 723 20.9 628 691 10.0 719

PAT (Rs mn) 475 546 15.0 1,625 1,019 (37.3) 2,608


61

Exhibit 6: Price Sensitivity EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 5.5 6 6.5 7 8FY17 (-3) 8.6 8.4 59 73 87 100 128

FY18 (-2) 6.9 -19.5 10.4 22 34 45 56 78

FY19 (-1) 6.4 -7.9 11.3 5 15 25 36 56

FY20 (Base year) 5.9 -8.3 12.3 -13 -3 6 16 35

FY21E (year 1) 6.5 10.6 11.1 11 21 32 42 63

FY22E (Year 2) 6.9 6.3 10.5 28 39 50 61 84

FY23E (Year 3) 7.9 14.5 9.1 56 69 81 94 119


Key Risks f Sharp increase in average realization.

f Meaningful contraction in fuel and input cost.

f Higher-than-expected recovery in demand scenario.

87

45

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81

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6.96.4

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FY21E (year 1)

FY22E (Year 2)

FY23E (Year 3)




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9x10x11x

12x

62








Inability to improve its balance sheet due to consistent increase in working capital requirement will lead to further delay in capacity expansion. We continue to believe that strong cash generation and debt reduction will be the key catalysts for the stock until which, the stock might

not get re-rated. Keeping EBITDA estimate broadly unchanged for FY22E and rolling over our estimates to FY23E, we maintain SELL on ICEM with a revised 2-Year Target Price of Rs81 (6.5x of FY23 EBITDA).

8.6 8.4

10.8 11.1

12.5

11.0

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10.0

11.0

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4.0

6.0

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14.0


Volume(mnT)

44.2 42.3

50.8 51.8 56.3

50.6

43.9 48.5

53.6

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30.0

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60.0


Revenue (Rs bn)

6.8

7.8 8.6

6.9 6.4

5.9 6.5

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3.0

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5.0

6.0

7.0

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10.0


EBITDA (Rs bn)

0.3

1.3

1.7

1.0

0.7

0.3 0.5

1.0

2.6

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0.5

1.0

1.5

2.0

2.5

3.0


PAT (Rs bn)

6.3

7.2 7.0

5.1 4.5

2.8

4.3 4.8

5.9

0.8

3.1 3.4

2.0 1.3

0.6 1.0

1.9

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5

6

7

8


RoCE (%) RoE (%)

63


Net sales 56,280 50,575 43,918 48,465 53,578 % yoy growth 8.7 (10.1) (13.2) 10.4 10.5

Total Cost 49,901 44,723 37,443 41,582 45,698

Ram Material Expenditures 11,572 10,187 8,746 9,602 10,608

Employee Costs 3,505 3,499 3,429 3,600 3,780

Power and Fuel 16,410 13,551 10,679 12,125 13,470

Freight and Forewarding 16,842 15,592 12,932 14,434 15,938


EBITDA 6,379 5,852 6,475 6,884 7,880 EBITDA Margin (%) 11.3 11.6 14.7 14.2 14.7 Depreciation 2,513 2,469 2,547 2,570 2,582

Interest 3,242 3,345 3,420 3,195 2,080

Other Income 310 277 222 244 269

Exceptional Items - 1,000 - - -

PBT 934 (684) 730 1,362 3,486 Tax 240 (329) 184 343 877

Effective tax rate (%) 25.7 48.1 25.2 25.2 25.2

Net Profit 694 (355) 546 1,019 2,608 YoY Growth (%) (31.0) (151.1) (253.8) 86.6 155.9

APAT 694 312 546 1,019 2,608 PAT % 1.2 0.6 1.2 2.1 4.9


Share Capital 3,099 3,099 3,099 3,099 3,099



Secured Loans 29,837 36,170 33,170 31,170 28,170

Unsecured Loans 3,838 - - - -

Total Debt 33,675 36,170 33,170 31,170 28,170

Deffered Tax liability 6,308 5,910 5,910 5,910 5,910

Other NC Liabilities 1,694 2,336 1,955 2,172 2,387

TOTAL LIABILITIES 94,074 98,565 95,421 94,347 93,860

APPLICATION OF FUNDS

Net Block 67,130 68,258 66,411 64,591 62,809

CWIP 1,770 1,958 1,958 1,958 1,958

Investments 6,946 7,369 7,369 7,369 7,369

Other NC Assets 13,984 15,185 13,186 13,278 14,679

Inventories 8,232 8,263 7,175 7,918 8,753

Real-estate - - - - -

Sundry Debtors 7,290 7,163 6,016 6,373 6,606

Cash & Bank 67 66 890 1,987 2,121

Loans & Advances 5,630 6,262 5,776 5,710 5,872

Current Liablities & Prov. 16,976 15,958 13,361 14,837 16,306


Total Assets 94,074 98,565 95,421 94,347 93,860

64


PBT before Extraordinary Items 934 316 730 1,362 3,486

Depreciation 2,513 2,469 2,547 2,570 2,582

Interest Exp. 3,157 3,138 3,420 3,195 2,080

Others (202) (168) - - -

Operation Profit before WC changes 6,402 5,754 6,697 7,128 8,148

Trade and Other Receivables (2,812) (31) 3,631 (383) (1,795)

Inventories (1,510) (578) 1,088 (743) (835)

Trade Payables 1,253 (661) (2,978) 1,693 1,684

Cash generated from Operation 3,333 4,485 8,438 7,695 7,202

Direct Taxes (88) (312) (184) (343) (877)

Net cash from Operating Activities 3,245 4,173 8,254 7,352 6,325

Purchase of Fixed Assets (1,784) (1,401) (700) (750) (800)

Others (620) (2,002) - - -

Net cash from Investing activities (2,404) (3,403) (700) (750) (800)

Proceed from issue of Share Capital 17 - - - -

Proceed from Long Term Borrowings 5,424 5,718 (3,000) (2,000) (3,000)

Int paid/dividend paid (net of remission) (3,471) (3,300) (3,730) (3,505) (2,390)

Others (2,746) (3,155) - - -

Net Cash from financing activities (776) (738) (6,730) (5,505) (5,390)

Inc / (Dec) in cash and cash equivalent 65 33 824 1,097 134


P/E 51.3 114.2 65.2 35.0 13.7

P/CEPS 11.1 12.8 11.5 9.9 6.9

P/BV 0.7 0.7 0.7 0.6 0.6

EV/EBIDTA 10.9 12.3 10.5 9.4 7.8

EV/Sales 1.2 1.4 1.5 1.3 1.2

EV/tonne (USD) 59 62 58 56 53

Dividend Payout (%) 48.2 (70.7) 56.7 30.4 11.9

Dividend Yield (%) 0.9 0.7 0.9 0.9 0.9

OCF Yeild (%) 9.1 11.7 23.2 20.6 17.7


EPS (Diluted) 2.2 1.0 1.8 3.3 8.4

CEPS 10.3 9.0 10.0 11.6 16.7

DPS 1.1 0.8 1.0 1.0 1.0

Book Value 169 175 175 178 185

EBIDTA/tone 513 531 723 691 719

Returns (%) RoCE 4.5 2.8 4.3 4.8 5.9

RoE 1.3 0.6 1.0 1.9 4.6





WCC (days) 67 78 76 74 71

65

Continues to be the Best Pick in Mid-cap Space

JK CementCement | India



CMP* (Rs) xxx




Free Float (%) xxx


1. J.K. Cement (JKCE) has been able to add capacity consistently given its abundant resources. Over the last five years, JKCE has expanded its grey cement capacity by ~50% to 14mnT, which aided it to clock >6% CAGR in volume over FY15-FY20.

2. JKCE had undertaken a number of measures in last two years to improve its grey cement operating performance, which have already started paying off. Resultantly, its grey cement EBITDA/tonne improved from Rs439 in FY19 to Rs861 in FY20. JKCE expects ~Rs80-100/tonne opex savings in FY22E led by improvement in efficiency owing to new clinker unit (2.6mnT) at Mangrol and savings on raw material logistics cost front.

3. We expect its grey cement’s unitary EBITDA to improve further to Rs900 and Rs986 in FY22E and FY23E, respectively.

4. JKCE has already acquired 425 acres of land out of targeted 500 acres in Panna for Rs900mn. It expects to acquire remaining land in FY21 for another Rs500-700mn. With current resources, JKCE can essentially set up 3.5mnT integrated cement unit.

Impact of COVID-19: JKCE’s volume was impacted meaningfully in 4QFY20 due to COVID-19 pandemic, as some of its plants were under containment zones, which could not start immediately after ease in lockdown restrictions. Despite improvement in demand momentum in May’20 and June’20, the management is uncertain about sustainability of demand in near-to-medium term. JKCE has already taken various measures to mitigate its fixed cost elements and expects to reduce fixed cost by ~Rs50-60mn/month. JKCE is estimated to report ~23% volume decline in 1QFY21.

Outlook & ValuationStrong back-up of value-added products, which ensures healthy and consistent cash flow, offers an edge to JKCE over its peers. Further, recent capacity expansion, operating synergies and steady pricing trend in its key markets are likely to aid its profitability in ensuing quarters. We continue to see JKCE as the best play in mid-cap cement space. Keeping EBITDA estimate for FY22E broadly unchanged and rolling over estimates to FY23E, we maintain BUY on JKCE with a revised 2-Year SOTP Target Price of Rs.1,711 (8.5x of FY23E EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 49,192 54,040 51,483 61,589 67,629EBITDA 7,480 11,217 10,305 12,851 14,749PAT 3,249 4,004 4,672 6,498 8,109EPS (Rs) 42.0 51.8 60.5 84.1 104.9DPS (Rs) 9.0 7.5 10.0 10.0 10.0P/E (x) 35.7 28.9 24.8 17.8 14.3P/B (x) 4.0 3.7 3.3 2.8 2.4

EV/EBITDA (x) 17.5 12.1 13.0 10.0 8.1

RoE (%) 12.9 13.3 14.1 17.1 18.2Divi. Yield (%) 0.6 0.5 0.7 0.7 0.7



Absolute performance 8.2% 38.3% 48.8%

Relative to Nifty 4.2% 25.6% 47.7%


Promoter 58.1 58.1

Public 41.9 41.9



Cement | India



CMP* 1,500


Bloomberg Ticker JKCE IN


Free Float (%) 42

Shares O/S (mn) 77

Key Triggers:Expansion of grey cement capacity by ~50% to 14mnT over the last five years

Measures undertaken to improve grey cement operating performance have started paying off

Embarking on next line of expansion, which offers comfort for sustainable growth

Low capacity addition in the Northern region augurs well for grey cement profitability

Value-added products continue to remain cash cow

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Management Quality 8 Low The management has been quite prudent in terms of timely expansion and expanding value-added portfolio

Promoter’s Holding Pledge 10 Low Zero pledge by the promoters offers comfort





New Business/Client Potential 8 Low The company is expanding into new geographies with new capacity addition

Business Diversification 9 Low The company enjoys the best product diversification led by strong presence in white cement and wall putty segment

Market Share Potential 7 Low New capacity addition and strong resources for new leg of expansion augur well for gaining market share

Margin Expansion Potential 8 Low The company has been showing strong improvement in operating efficiency for last two years

Earning Growth (10 Years) 7 Low Earnings clocked 10% CAGR over last ten years; expected to clock 27% CAGR over next three years

Balance Sheet Strength 7 Low Low working capital and healthy cash flow from operation continue to support balance sheet

Debt Profile 7 Low Net Debt to EBITDA ratio stood at 1.8x in FY20 due to new expansion; Net Debt to Equity ratio stood at 0.6x

FCF Generation 7 Low It generated FCF of Rs8.6bn in last ten years despite huge capacity addition; expected to generate Rs24bn FCF in next three years






67



Base Case

Volume (mnT) 8.5 8.0 9.6 10.3 6.7%


Revenue 54,040 51,483 61,589 67,629 7.8%

EBITDA 11,217 10,305 12,851 14,749 9.6%

EBITDA/tonne 1,146 1,115 1,172 1,252

EBITDA margin (%) 20.8 20.0 20.9 21.8

APAT 4,004 4,672 6,498 8,109 26.5%


Target Price 1,711

Bull Case

Volume (mnT) 8.5 8.4 10.0 10.8 8.4%


Revenue 54,040 55,027 67,291 71,732 9.9%

EBITDA 11,217 11,740 15,520 16,317 13.3%

EBITDA/tonne 1,146 1,218 1,356 1,327

EBITDA margin (%) 20.8 21.3 23.1 22.7

APAT 4,004 5,677 8,367 9,206 32.0%


Target Price 1,945

Bear Case

Volume (mnT) 8.5 7.6 9.1 9.8 4.9%


Revenue 54,040 48,867 56,133 62,758 5.1%

EBITDA 11,217 9,462 10,340 12,685 4.2%

EBITDA/tonne 1,146 1,071 986 1,126

EBITDA margin (%) 20.8 19.4 18.4 20.2

APAT 4,004 4,083 4,741 6,664 18.5%


Target Price 1,422


Scenario AnalysisBase Case: In base case scenario, we assume 6.7% volume CAGR in FY20-FY23E with 1% growth in realization. Revenue, EBITDA and APAT are expected to clock 8%, 10% and 27% CAGR, respectively over the same period.


Bear Case: In bear case scenario, we assume 4.9% volume CAGR in FY20-FY23E with 1.6% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 5%, 4% and 19% CAGR, respectively over the same period.

68

I. Timely Expansion over the Years Paying offJKCE has been able to add capacity rather consistently given its abundant resources. Over the last five years, it has expanded its grey cement capacity by ~50% to 14mnT, which aided it to clock >6% CAGR in volume over FY15-FY20. Further, it commissioned 3.5mnT new capacity in FY20, while 0.7mnT capacity is likely to be commissioned shortly, which will help the company to witness volume traction in ensuing quarters.

II. Cost Saving Measures Aided Grey Cement PerformanceJKCE had undertaken a number of measures in last two years to improve its grey cement operating performance, which already started paying off. Resultantly, its grey cement EBITDA/tonne improved from Rs439 in FY19 to Rs861 in FY20. JKCE expects ~Rs80-100/tonne opex savings in FY22E led by improvement in efficiency owing to new clinker unit (2.6mnT) at Mangrol and savings on raw material logistics cost front. We note that appointing BCG as consultant has already saved ~Rs50-70/tonne on logistic front. We calculate its grey cement’s unitary EBITDA to improve further to Rs900 in FY22 to Rs986 in FY23E.

III. Next Line of Expansion on the AnvilJKCE has already started working on for the next line of expansion in the Central region. It is currently in the process of converting 2 prospective licenses (PLs) into mining licenses (MLs) in Panna (Madhya Pradesh). JKCE has already acquired 425 acres of land out of targeted 500 acres in Panna for Rs900mn. It expects to acquire remaining land in the current fiscal with additional investment of Rs500-700mn. Thereafter, it will seek approval of the Board for new expansion programme. With current resources, the company can essentially set up 3.5mnT integrated cement unit.

IV. Minimal Capacity Addition in North to Aid CompanyNorthern region is expected to see only 4mnT of cement capacity in next three years out of 51mnT capacity addition on pan-India basis. The region has already been witnessing superior capacity utilization for last two years. Hence, likely improvement in utilization further with minimal capacity addition will lead to strong pricing environment in the region, which will aid JKCE’s performance on grey cement front, going ahead.



Raw Materials 1,148 1,159 1,187 1,244 1,297 1,301 1,312

Employees 349 347 358 399 446 416 425

Power & Fuel 793 947 1,067 1,031 990 1,010 1,020

Freight 1,179 1,318 1,284 1,253 1,268 1,272 1,282

Other Exps. 414 307 333 448 457 437 442

Realisation (Grey Cement) 3,662 3,906 4,002 4,527 4,611 4,611 4,785





Grey Cement Realization/tonne- (Rs) 4,435 4,611 4.0 4,479 4,611 2.9 4,785

Grey- Volume (mnT) 8.99 8.04 (10.6) 10.12 9.57 (5.5) 10.3

Sales (Rs mn) 54,885 51,483 (6.2) 61,743 61,589 (0.2) 67,629

EBIDTA (Rs mn) 10,887 10,305 (5.3) 12,813 12,851 0.3 14,749

EBIDTA margins (%) 19.8 20.0 20.8 20.9 21.8

PAT (Rs mn) 4,938 4,672 (5.4) 6,334 6,498 2.6 8,109

PAT margins (%) 9.0 9.1 10.3 10.6 12.0


Investment RationaleOur investment thesis is based on the following premises:I. Timely Expansion over the Years Paying offII. Cost Saving Measures Aided Grey Cement PerformanceIII. Next Line of Expansion on the AnvilIV. Minimal Capacity Addition in North to Aid Company

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Exhibit 6: Price Sensitivity at Standalone EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 7.5 8 8.5 9 10FY17 (-3) 6.4 32.1 20.2 344 386 469 552 635

FY18 (-2) 7.1 11.0 18.2 467 513 605 697 789

FY19 (-1) 7.5 5.0 17.3 535 583 680 777 873

FY20 (Base year) 11.2 50.0 11.6 831 904 1,049 1,194 1,340

FY21E (year 1) 10.3 -8.1 12.6 765 831 965 1,098 1,232

FY22E (Year 2) 12.9 24.7 10.1 1,092 1,175 1,341 1,508 1,674

FY23E (Year 3) 14.7 14.8 8.8 1,378 1,473 1,664 1,855 2,046





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Strong back-up of value-added products, which ensures healthy and consistent cash flow, offers an edge to JKCE over its peers. Further, recent capacity expansion, operating synergies and steady pricing trend in its key markets are likely to aid its profitability in ensuing quarters. We continue to see JKCE as the best play in mid-cap cement space. Keeping EBITDA estimate for FY22E broadly unchanged and rolling over estimates to FY23E, we maintain BUY on JKCE with a revised 2-Year SOTP Target Price of Rs.1,711 (8.5x of FY23E EBITDA).

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Net sales 49,192 54,040 51,483 61,589 67,629 % yoy growth 8.3 9.9 (4.7) 19.6 9.8

Total Cost 41,712 42,822 41,178 48,738 52,880

Raw Materials Cost 11,708 12,174 11,979 14,273 15,461

Employee Costs 3,535 3,909 4,119 4,558 5,005

Power & Fuel 10,523 10,091 9,144 11,072 12,013

Selling and Distribution 12,665 12,260 11,716 13,952 15,097

Other Exp. 3,281 4,388 4,221 4,791 5,208

EBITDA 7,480 11,217 10,305 12,851 14,749 EBITDA Margin (%) 15.2 20.8 20.0 20.9 21.8 Depreciation 1,944 2,144 2,546 2,793 2,907

Interest 2,221 2,229 2,219 2,035 1,680

Other Income 1,420 1,457 1,135 1,261 1,422

Exceptional item - 1,781.5 - - -

PBT 4,736 6,520 6,675 9,283 11,584 Tax 1,487 2,516 2,002 2,785 3,475

Net Profit 3,249 4,004 4,672 6,498 8,109

YoY Growth (%) (5.0) 23.2 16.7 39.1 24.8 Net Margin (%) 6.6 7.4 9.1 10.6 12.0

Effective tax rate (%) 31 39 30 30 30


Shareholders Fund

Share Capital 773 773 773 773 773

Reserve and Surplus 28,155 30,516 34,416 40,142 47,478

28,928 31,289 35,189 40,914 48,250


Deferred Tax Liability (Net) 3,125 4,181 4,181 4,181 4,181

Other Long Term Liabilities 3,256 3,642 3,507 4,042 4,361


26,293 31,066 29,912 26,522 22,887

Short Term Borrowings 1,598 1,388 1,688 1,488 988

Trade Payables 6,983 4,526 5,442 6,412 7,041


Short Term Provisions 102 1,107 1,064 1,260 1,367

14,303 16,196 17,016 19,602 20,725

TOTAL 69,523 78,551 82,117 87,038 91,862

ASSETS

Tangible Assets 36,250 44,551 51,504 52,211 51,803

Intangible Assets 105 130 130 130 130

CWIP 5,438 5,092 1,500 600 600

Non Current Investments 6,104 5,652 5,652 5,652 5,652

Long Term Loans and Advances 2,497 1,971 1,878 2,246 2,467

50,394 57,396 60,664 60,840 60,652

Current Investments 3,943 10 1,010 3,010 7,010

Inventories 5,705 6,272 5,975 7,148 7,849


Cash and Cash Equivalent 4,857 6,311 6,323 6,298 5,653


19,129 21,155 21,452 26,198 31,210

TOTAL 69,523 78,551 82,117 87,038 91,862

Key Financials

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PBT 4,736 6,520 6,675 9,283 11,584

Depreciation 1,944 2,144 2,546 2,793 2,907

Interests 2,160 2,135 2,219 2,035 1,680

Others (323) (398) - - -

Operating Profit before WC changes 8,516 10,401 11,440 14,112 16,171

Change in Working Capital (471) 271 1,174 256 111

Tax Paid (977) (1,529) (2,002) (2,785) (3,475)

Deferred Rev Expenditures - - - - -


Purchase of FA including capital advances

(6,045) (9,890) (5,908) (2,600) (2,500)

Sale of Fixed Assets 35 76 - - -

Purchase of Investments (7,884) (15,843) (1,000) (2,000) (4,000)

Sale of Investments 627 8,678 - - -

Others 5,200 3,866 - - -

Net Cash from Investing activities (8,067) (13,113) (6,908) (4,600) (6,500)

QIP Proceedings and Inc in Sh. Capital 5,043 - - - -

Net Borrowings 68 4,040 (700) (4,200) (4,500)

Interest paid (2,178) (2,166) (2,219) (2,035) (1,680)

Others (861) (1,651) (773) (773) (773)

Net Cash from Financing activities 2,071 223 (3,692) (7,007) (6,952)

Net Increase / (decrease) in cash 1,072 (3,747) 12 (25) (645)


P/E 35.7 28.9 24.8 17.8 14.3

P/CEPS 22.3 18.9 16.1 12.5 10.5

P/BV 4.0 3.7 3.3 2.8 2.4

EV/EBIDTA 17.5 12.1 13.0 10.0 8.1

EV/Sales 2.7 2.5 2.6 2.1 1.8

EV/tonne (USD) 146 117 109 104 98

Dividend Payout (%) 21.5 14.5 16.5 11.9 9.5

Dividend Yield (%) 0.6 0.5 0.7 0.7 0.7

OCF Yield (%) 6.10 7.89 9.16 9.99 11.05


EPS (Diluted) 42.0 51.8 60.5 84.1 104.9

CEPS 67.2 79.6 93.4 120.3 142.6

DPS 9.0 7.5 10.0 10.0 10.0

Book Value 374 405 455 530 624

EBIDTA/tone 759 1,146 1,115 1,172 1,252

Returns (%) RoCE 14.9 16.6 15.6 19.0 21.5

RoE 12.9 13.3 14.1 17.1 18.2





WCC (days) (4) 19 19 19 19

73

Valuation Rerating on the Cards

JK Lakshmi CementCement | India



CMP* (Rs) xxx




Free Float (%) xxx


1. JK Lakshmi Cement (JKLC) has a balanced presence in key Northern, Eastern and Western (Gujarat) markets. With ~7.8mnT cement capacity in Northern region, it currently enjoys ~8% market share in Northern markets. JKLC is expected to maintain its market share given its rich limestone reserves in Sirohi and Udaipur (Rajasthan).

2. Following the recent price up-tick in Chhattisgarh (~Rs20-40/bag in last four months), JKLC’s profitability is expected to improve hereon.

3. With commissioning of 0.8mnT SGU in Odisha, we believe JKLC’s blended realisation will improve further due to higher realization.

4. The company has already repaid debt to the tune of Rs7.2bn over last three years. This has already resulted in sharp improvement in return ratios with RoCE and RoE coming in at 17.6% and 14.5%, respectively in FY20.

5. Likely improvement in utilization with minimal capacity addition in the Northern region will lead to strong pricing environment in the region, which will aid JKLC’s performance.

Impact of COVID-19: JKLC witnessed ~18% volume decline in 1QFY21 due to COVID-led demand slowdown, which is albeit better than the industry’s decline of >30%. As per the company, the demand momentum has picked up meaningfully in June’20 and July’20. Despite YoY improvement in July’20 volume, the management it is still not certain about demand sustainability due to recent frequent lockdowns in Eastern, Northern and Western markets.

Outlook & ValuationRecent initiatives in the form of commissioning of 20MW captive power plant (CPP), SGU in Odisha and lower clinker sales have started paying off. Further, recent price hike and cost deflation are expected to aid JKLC on margin front despite volume pressure due to COVID-led disruptions. Current valuations at US$42 and US$37 of EV for FY22E and FY23E, respectively appear to be very attractive. We believe improved return ratio warrants a valuation re-rating. Keeping our FY22E EBITDA estimate broadly unchanged and rolling over our estimates to FY23E, we maintain BUY on JKLC with a revised 2-year Target Price of Rs401 (6x of 23E EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 38,823 40,435 36,453 43,199 45,375EBITDA 4,150 6,724 5,614 7,273 7,483APAT 795 2,552 1,708 3,412 3,710EPS (Rs) 6.8 21.7 14.5 29.0 31.5DPS (Rs) 0.8 2.5 2.0 3.0 4.0P/E (x) 40.0 12.5 18.6 9.3 8.6P/B (x) 2.1 1.9 1.7 1.5 1.3

EV/EBITDA (x) 10.6 6.2 7.0 4.8 3.9

RoE (%) 5.3 14.5 9.6 17.0 15.9Divi. Yield (%) 0.3 0.9 0.7 1.1 1.5



Absolute performance -3.7% 43.3% -17.0%

Relative to Nifty -7.8% 30.5% -18.1%


Promoter 46.2 46.2

Public 53.8 53.8



Cement | India



CMP* 270


Bloomberg Ticker JKLC IN


Free Float (%) 54

Shares O/S (mn) 118

Key Triggers:Diversified presence with strong hold in northern markets

Split Grinding Unit (SGU) in Odisha and realisation recovery in Chhattisgarh to improve profitability

Favourable demand-supply scenario in northern region

Balance sheet deleveraging to result in sharp improvement in return ratios

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Management Quality 7 Low The management could not handle its Eastern expansion in a better way (being addressed now); however, it has done excellent job in other regions


Board of Directors Profile 8 Low A perfect blend of experience, expertise and professionalism with sound track record offers comfort. Independent Directors form 64% of the board of directors




New Business/Client Potential 5 Medium Clinker constraints may pose a challenge for generating incremental volume

Business Diversification 8 Low Barring Southern and Central regions, it has made a decent presence in other three regions

Market Share Potential 6 Low It holds additional resources in Durg and Udaipur units to expand its capacity

Margin Expansion Potential 8 Low The company has been witnessing strong improvement in operating efficiency for last two years

Earnings Growth (10 Years) 6 Low Earnings clocked 1% CAGR over last ten years; expected to clock 16% CAGR over next three years

Balance Sheet Strength 7 Low Low profitability from Durg unit was an overhang, which impacted cash flow and did not reflect in faster debt reduction

Debt Profile 7 Low Net Debt to EBITDA ratio stood at 1.5x in FY20 due to new expansion and Net Debt to Equity ratio stood at 0.6x

FCF Generation 7 Low It generated FCF of Rs8.8bn in last ten years and is expected to generate Rs16bn FCF in next three years






75



Base Case

Volume (mnT) 9.2 8.5 10.0 10.4 4.0%


Revenue 40,435 36,453 43,199 45,375 3.9%

EBITDA 6,724 5,614 7,273 7,483 3.6%

EBITDA/tonne 725 657 729 721

EBITDA margin (%) 16.6 15.4 16.8 16.5

APAT 2,552 1,708 3,412 3,710 13.3%


Target Price 401

Bull Case

Volume (mnT) 9.2 9.0 10.5 11.0 6.0%


Revenue 40,435 39,098 46,320 49,093 6.7%

EBITDA 6,724 6,756 8,636 9,003 10.2%

EBITDA/tonne 725 753 825 819

EBITDA margin (%) 16.6 17.3 18.6 18.3

APAT 2,552 2,456 4,420 4,833 23.7%


Target Price 543

Bear Case

Volume (mnT) 9.2 7.7 8.8 8.9 -1.0%

Relisation/tonne (Rs) 4,207 4,080 4,120 4,120 -0.7%

Revenue 40,435 32,715 38,181 38,631 -1.5%

EBITDA 6,724 4,487 5,754 5,358 -7.3%

EBITDA/tonne 725 586 650 599

EBITDA margin (%) 16.6 13.7 15.1 13.9

APAT 2,552 973 2,298 2,150 -5.6%


Target Price 256


Scenario AnalysisBase Case: In base case scenario, we assume 4% volume CAGR in FY20-FY23E with flat growth in realization. Revenue, EBITDA and APAT are expected to clock 4%, 3.6% and 13% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 6% volume CAGR in FY20-FY23E with 1% growth in realization. Revenue, EBITDA and APAT are expected to clock 7%, 10% and 24% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume a negative volume CAGR of -1% in FY20-FY23E with -1% de-growth in realization. Revenue, EBITDA and APAT are expected to clock -1.5%, -7.3% and -5.6% CAGR, respectively over the same period.

76

I. Diversified Presence with Strong Hold in Northern MarketsJKLC has a balanced presence in key Northern, Eastern and Western (Gujarat) markets. With ~7.8mnT cement capacity in Northern region, it currently enjoys ~8% market share in Northern markets. The company is expected to maintain its market share given its rich limestone reserves in Sirohi and Udaipur. Further, as JKLC also possesses state-of-the-art plant and machineries, its energy consumption is relatively lower than the industry’s average at 69 units/tonne of cement and 701Kcal/kg of clinker.

II. Odisha SGU & Realisation Recovery in Chhattisgarh to Improve ProfitabilityA subdued realisation scenario in Chhattisgarh, where JKLC sells >60% of its total production, has been a major cause of worry for lower margin. With recent price up-tick in Chhattisgarh (~Rs20-40/bag in last four months), JKLC’s profitability is expected to improve hereon. Additionally, with commissioning of 0.8mnT SGU in Odisha, we believe JKLC’s blended realisation will improve further due to higher realization in the Odisha market. JKLC in its latest earnings conference call stated that it has undertaken price hike to the tune of ~Rs10-15/bag in May’20 in Eastern and Northern regions.

III. Balance Sheet Deleveraging to Lead to Sharp Improvement in Return RatiosWhile JKLC has not put up any additional capacity (except for 0.8mnT SGU in Odisha) in last three years, it has already repaid debt to the tune of Rs7.2bn over last three years. This has already resulted in sharp improvement in its return ratios with RoCE and RoE coming in at 17.6% and 14.5%, respectively in FY20. It further plans to pare down debt by Rs2.5bn each in FY21E and FY22E on standalone level. Notably, gross standalone debt stood at Rs14.5bn, while the debt for Udaipur Cement Works stood at Rs5.5bn as on FY20.

IV. Favourable Demand-Supply Scenario in Northern RegionNorthern region – which has already been witnessing the superior capacity utilization for last two years – is expected to see merely 4mnT of cement capacity in next three years. Hence, likely improvement in utilization with minimal capacity addition will lead to strong pricing environment in the region, which will aid JKLC’s performance.



Raw Materials 959 914 1,003 923 961 997 1,008

Employees 262 276 269 338 406 390 411

Power & Fuel 713 935 952 915 887 896 905

Freight 906 1,025 987 886 904 913 922

Other Exps. 362 375 379 592 454 405 406

Realisation 3,950 3,828 3,844 4,207 4,094 4,158 4,199





Volume (mnT) 8.65 8.54 (1.3) 9.93 9.98 0.4 10.37

Realization (Rs/tonne) 4,236 4,094 (3.4) 4,292 4,158 (3.1) 4,199

Sales (Rs mn) 38,201 36,453 (4.6) 44,435 43,199 (2.8) 45,375

EBIDTA (Rs mn) 5,509 5,614 1.9 6,987 7,273 4.1 7,483

EBIDTA margins (%) 14.4 15.4 15.7 16.8 16.5

APAT (Rs mn) 1,522 1,708 12.2 3,070 3,412 11.2 3,710


Investment RationaleOur investment thesis is based on the following premises:I. Diversified Presence with Strong Hold in Northern MarketsII. Odisha SGU & Realisation Recovery in Chhattisgarh to Improve ProfitabilityIII. Balance Sheet Deleveraging to Lead to Sharp Improvement in Return RatiosIV. Favourable Demand-Supply Scenario in Northern Region

77



Exhibit 6: Price Sensitivity at Standalone EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 5 5.5 6.0 7 8FY17 (-3) 3.7 34.3 12.4 14 30 45 76 107

FY18 (-2) 4.1 12.6 11.0 41 59 76 111 146

FY19 (-1) 4.1 0.9 10.9 72 89 107 142 177

FY20 (Base year) 6.7 62.0 6.7 201 229 258 315 372

FY21E (year 1) 5.6 -16.5 8.1 176 200 224 271 319

FY22E (Year 2) 7.3 29.5 6.2 285 316 347 409 470

FY23E (Year 3) 7.5 2.9 6.1 337 369 401 464 528





-100

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7

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8

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-19

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9

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-20

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0

6x

8x

9x

10x

12x

4576

107

258224

347

401

3.74.1 4.1

6.7

5.6

7.3 7.5

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FY21E (year 1) FY22E (Year 2) FY23E (Year 3)


78








Recent initiatives in the form of commissioning of 20MW captive power plant (CPP), SGU in Odisha and lower clinker sales have started paying off. Further, recent price hike and cost deflation are expected to aid JKLC on margin front despite volume pressure due to COVID-led disruptions. Current valuations at US$42 and US$37 of EV for FY22E and FY23E, respectively appear to be very attractive. We believe improved return ratio warrants a valuation re-rating. Keeping our FY22E EBITDA estimate broadly unchanged and rolling over our estimates to FY23E, we maintain BUY on JKLC with a revised 2-year Target Price of Rs401 (6x of 23E EBITDA).

6.0

7.3 8.0

8.5

9.7 9.2

8.5

10.0 10.4

-

2.0

4.0

6.0

8.0

10.0

12.0


Volume(mnT)

23.1 26.2

29.1

34.1

38.8 40.4 36.5

43.2 45.4

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0


Revenue (Rs bn)

3.5

2.7

3.7 4.1 4.1

6.7

5.6

7.3 7.5

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


EBITDA (Rs bn)

1.4

-0.0

0.8 0.8 0.8

2.6

1.7

3.4 3.7

-0.5

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


PAT (Rs bn)

7.1 4.9

8.3 9.1 9.6

17.6

14.2

21.1 21.5

10.4

-0.1

6.1 5.9 5.3

14.5

9.6

17.0 15.9

-5.0

-

5.0

10.0

15.0

20.0

25.0


RoCE (%) RoE (%)

79


Net Sales 38,823 40,435 36,453 43,199 45,375 % yoy growth 13.8 4.2 (9.8) 18.5 5.0

Total Cost 34,673 33,711 30,839 35,926 37,892

RM Consumed 9,687 8,513 8,206 9,950 10,457

Employee Costs 2,599 3,120 3,463 3,888 4,265

Power & Fuel 9,198 8,439 7,577 8,940 9,390

Freight Costs 9,533 8,176 7,719 9,108 9,567

Other Exps. 3,656 5,464 3,874 4,040 4,213


Interest 1,874 1,644 1,421 1,129 901

Other Income 563 501 401 481 505

Excep. Items - 302 - - -

PBT 1,044 3,395 2,588 4,560 4,958 Tax 249 1,042 880 1,148 1,248

% Tax 23.8 30.7 34.0 25.2 25.2

Net Profit (Reported) 795 2,352 1,708 3,412 3,710 Net Profit (Adjusted) 795 2,552 1,708 3,412 3,710 Net Profit Margin (%) 2.0 5.8 4.7 7.9 8.2

EPS (Basic) 6.8 21.7 14.5 29.0 31.5


I. EQUITY AND LIABILITIES Share Capital 589 589 589 589 589

Reserves and Surplus 14,638 16,538 18,011 21,070 24,309

SHAREHOLDERS’ FUNDS 15,227 17,127 18,599 21,658 24,898

Long-Term Borrowings 12,604 10,782 8,132 4,132 2,432

Deferred Tax Liabilities (Net) - 205 205 205 205

Other Long-Term Liabilities 3,513 3,961 3,624 4,221 4,452


NON-CURRENT LIABILITIES 16,225 15,062 12,063 8,671 7,213

Short-Term Borrowings 586 1,048 729 729 729

Trade Payables 5,114 4,685 4,394 4,921 5,087


Short-Term Provisions 60 55 50 59 62

CURRENT LIABILITIES 13,102 13,310 12,054 13,091 13,664

Total Liabilities 44,554 45,499 42,716 43,420 45,774 II. ASSETS Tangible Assets 26,334 27,994 26,989 26,124 25,195

Intangible Assets 51 38 38 38 38

Capital Work-in-Progress 4,111 1,519 800 600 600

Fixed Assets 30,495 29,551 27,827 26,762 25,833

Non-Current Investments 3,579 3,678 3,678 3,678 3,678

Long term Loans and Advances 874 1,005 1,099 1,184 1,243

Other Non-Current Assets 220 - - - -

NON -CURRENT ASSETS 4,673 4,683 4,777 4,862 4,921

Current Investments 3,624 4,169 3,500 3,500 3,500

Inventories 3,117 4,128 3,722 4,411 4,633

Trade Receivables 1,066 882 795 942 990

Cash and Bank Balances 180 314 500 1,052 3,911

Short-term Loans and Advances 98 581 524 621 652


CURRENT ASSETS 9,387 11,265 10,113 11,796 15,020

Total Assets 44,554 45,499 42,716 43,420 45,774

Key Financials

80


PBT 1,044 3,697 2,588 4,560 4,958


Interest & Dividend Income (25) (70) - - -

Profi t on sale of Assets & Current Investments (Net)

(195) (461) - - -

Interest Expenses (Gross) 1,874 1,644 1,421 1,129 901

Others (115) (164) - - -

Operating Profit before Working Capital changes

4,378 6,530 6,015 7,753 7,988

Adjustment for working capital changes 2,698 (359) (712) 429 390

Income Tax Payments (181) (758) (880) (1,148) (1,248)

Net cash from operating activities 6,894 5,413 4,423 7,034 7,130

Purchase of Fixed Assets (1,906) (924) (281) (1,000) (1,200)

Sale of Fixed Assets 18 58 - - -

Others 1,095 (721) 669 - -

Net Cash from / (used in) Investing Activities (794) (1,586) 388 (1,000) (1,200)

Buy-Back of Equity Shares - - - - -

Debt Proceeds / (Repayments)- Net (3,934) (1,469) (2,969) (4,000) (1,700)

Others (2,102) (2,224) (1,657) (1,482) (1,372)

Net Cash from / (used in) Financing Activities (6,036) (3,693) (4,626) (5,482) (3,072)

Increase / (Decrease) in Cash and Cash Equivalents

64 134 185 552 2,859


P/E 40.0 12.5 18.6 9.3 8.6

P/CEPS 12.3 7.5 8.6 5.8 5.4

P/BV 2.1 1.9 1.7 1.5 1.3

EV/EBITDA 10.6 6.2 7.0 4.8 3.9

EV/Sales 1.1 1.0 1.1 0.8 0.7

EV/tonne (US$) 55 52 45 40 34

Dividend Payout (%) 11.1 12.5 13.8 10.3 12.7

Dividend Yield (%) 0.3 0.9 0.7 1.1 1.5

OCF Yield (%) 21.7 17.0 13.9 22.1 22.4


EPS (Diluted) 6.8 21.7 14.5 29.0 31.5

CEPS 22.0 36.0 31.6 46.5 49.6

DPS 0.8 2.5 2.0 3.0 4.0

Book Value 129 146 158 184 212

EBITDA/tone (Rs) 427 725 657 729 721

Returns (%)RoCE 9.6 17.6 14.2 21.1 21.5

RoE 5.3 14.5 9.6 17.0 15.9

Turnover ratios (x)Asset Turnover (Gross block) 1.2 1.1 1.0 1.1 1.1




81

Best Play for Central Region

HeidelbergCement IndiaCement | India



CMP* (Rs) xxx




Free Float (%) xxx


1. HeidelbergCement India Ltd. (HEIM) enjoys a strong presence in Central region, which currently accounts for >90% of its total sales. While Central region is likely to witness incremental capacity of 10.5mnT (20% of total capacity addition) in next three years, a favourable demand environment is likely to help the pricing scenario in the region.

2. HEIM’s volume is expected to clock ~3% CAGR over FY20-FY23E and 11% CAGR over FY21E-FY23E owing to recent capacity expansion of 1mnT through debottlenecking.

3. HEIM had undertaken several initiatives, which have started paying off in the form of remarkable improvement in its performance in the last two years.

4. Favourable realization scenario in central markets is expected to result in healthy operating performance.

5. HEIM enjoys strong parentage of German promoter Heidelberg AG – world’s largest cement manufacturer – in the form of operational support and rich technical expertise.

6. Strong cash generation and resultant debt reduction helped HEIM to enjoy the best RoE and RoCE in the cement industry. It became a net cash company in FY20. Notably, HEIM’s interest-adjusted operating cash flow yield reached 10% in FY20, which is impressive, in our view.

Impact of COVID-19: Demand – which witnessed a sharp 85% YoY drop in Apr’20 – has been consistently improving since May’20 (down 22%) onwards. The management indicated that demand remained almost flat/grew marginally in Jun’20 and is likely to remain flat in Jul’20. A voluntary payment cut taken by a number of employees due of COVID-19 pandemic resulted in sequential drop in quarterly employee cost. Further, there was a sharp drop in discretionary expenditures as well.

Outlook & ValuationHEIM has been demonstrating a remarkable performance for last two years. It continues to be in a sweet spot on the back of healthy demand outlook owing to favourable monsoon, up-tick in infrastructure development in Uttar Pradesh and steady pricing environment. Further, capacity expansion by way of debottlenecking bodes well for its performance on volume front. Going ahead, we expect clinker expansion would be the key catalyst for stock to get re-rated. Upwardly revising our EBITDA estimate by 2% for FY22E and rolling over our estimates to FY23E, we maintain BUY on HEIM with a revised 2-Year Target Price of Rs226 (8x of FY23E EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20E FY21E FY22E FY23ESales 21,094 21,576 19,456 22,752 24,332EBITDA 4,594 5,158 4,310 5,253 5,394Net Profit 2,207 2,681 2,527 3,306 3,528EPS (Rs) 9.7 11.8 11.2 14.6 15.6DPS (Rs) 3.5 4.5 7.5 7.5 7.5P/E (x) 19.8 16.3 17.3 13.2 12.4P/B (x) 3.7 3.3 3.1 2.8 2.5

EV/EBITDA (x) 9.9 8.3 9.6 7.4 6.6

RoE (%) 19.9 21.6 18.6 22.4 21.4 Divi. Yield (%) 1.8 2.3 3.9 3.9 3.9





Promoter 69.4 69.4

Public 30.6 30.6


Note: * CMP as on 17 Aug1 2020

Cement | India



CMP* 193


Bloomberg Ticker HEIM IN


Free Float (%) 31

Shares O/S (mn) 227

Key Triggers:Strong presence in Central region, which currently accounts for >90% of its total sales

Volume is likely to clock ~3% CAGR over FY20-FY23E and 11% CAGR over FY21E-FY23E

Remarkable improvement in operating performance in last two years

Favourable realization scenario in central region to help operating performance

Strong MNC parentage and best-in-class return ratios

120

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82


Management Quality 8 Low The management quality has significantly improved in last three years, which is reflected in operating performance of the company






New Business/Client Potential 5 Medium Capacity constraints may hurt its growth in the long-run; however, we expect announcement of expansion programme

Business Diversification 4 High As the company is majorly present in central region, any sharp decline in regional demand may adversely impact its performance

Market Share Potential 5 Medium Absence of expansion plan may hamper its market share

Margin Expansion Potential 8 Low The company has been showing strong improvement in operating efficiency for last three years

Earnings Growth (10 Years) 7 Low Earnings clocked 7% CAGR over last ten years; expected to clock 10% CAGR over next three years

Balance Sheet Strength 8 Low With improvement in balance sheet, the company now generates the best return ratio in the industry

Debt Profile 8 Low Net Debt to EBITDA ratio stood at -0.2x and Net Debt to Equity ratio stood at -0.1x in FY20

FCF Generation 8 Low It generated FCF of Rs2.8bn in last ten years and is expected to generate Rs12.8bn FCF in next three years






83



Base Case

Volume (mnT) 4.71 4.19 4.88 5.19 3.3%


Revenue 21,576 19,456 22,752 24,332 4.1%

EBITDA 5,158 4,310 5,253 5,394 1.5%

EBITDA/tonne 1,096 1,029 1,078 1,040

EBITDA margin (%) 23.9 22.2 23.1 22.2

APAT 2,681 2,527 3,306 3,528 9.6%


Target Price 226

Bull Case

Volume (mnT) 4.71 4.40 5.12 5.45 5.0%


Revenue 21,576 21,308 24,919 26,648 7.3%

EBITDA 5,158 6,092 7,337 7,623 13.9%

EBITDA/tonne 1,096 1,385 1,433 1,399

EBITDA margin (%) 23.9 28.6 29.4 28.6

APAT 2,681 3,857 4,854 5,180 24.6%


Target Price 326

Bear Case

Volume (mnT) 4.71 3.98 4.63 4.93 1.6%


Revenue 21,576 17,687 20,684 22,120 0.8%

EBITDA 5,158 2,612 3,267 3,269 -14.1%

EBITDA/tonne 1,096 656 705 663

EBITDA margin (%) 23.9 14.8 15.8 14.8

APAT 2,681 1,260 1,829 1,953 -10.0%


Target Price 130



Bull Case: In bull case scenario, we assume 5% volume CAGR in FY20-FY23E with 2.2% growth in realization. Revenue, EBITDA and APAT are expected to clock 7%, 14% and 25% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 1.6% volume CAGR in FY20-FY23E with 0.7% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 0.8%, -14% and -10% CAGR, respectively over the same period.

84

I. Healthy Presence in Central RegionHEIM enjoys a strong presence in Central region, which currently accounts for >90% of its total sales. While Central region is likely to witness 10.5mnT (20% of total capacity addition) in next three years, a favourable demand environment led by a strong pipeline of infrastructure projects and robust rural demand are likely to help the pricing scenario in the region. HEIM’s volume is expected to witness ~3% CAGR over FY20-FY23E and 11% CAGR over FY21E-FY23E owing to recent capacity expansion of 1mnT through debottlenecking.

II. Improved Operating Efficiency Ensures Better ProfitabilityWith a view to improving operating efficiency, HEIM had undertaken several initiatives including commissioning of Waste Heat Recovery Systems (WHRS) at Damoh plant, setting up railway sidings, increased usage of petcoke, balanced rail-road mix (50:50) and increased proportion of premium products MycemPower (~13% of trade volume), which have started paying off in the form of remarkable improvement in its performance in the last two years. Further, a favourable realization scenario in central markets is expected to result in healthy operating performance, going ahead. We foresee HEIM’s EBITDA/tonne to remain over Rs1,000-mark in ensuing fiscals.

III. Strong Parentage Offers Comfort & Best Return RatiosHEIM enjoys strong parentage of German promoter Heidelberg AG – world’s largest cement manufacturer – in the form of operational support and rich technical expertise. Besides, strong cash generation owing to its improved operating performance and resultant debt reduction enabled HEIM to enjoy the best RoE and RoCE in the industry. It became a net cash company in FY20. Notably, HEIM’s interest-adjusted operating cash flow yield reached 10% in FY20, which is impressive, in our view.



Raw Materials 806 797 789 826 859 868 868

Employees 257 259 253 279 344 326 367

Power & Fuel 959 955 1,031 1,007 986 1,006 1,026

Freight 535 610 629 612 624 630 637

Other Exps. 659 663 668 766 801 760 753

Realisation 3,772 4,004 4,308 4,586 4,644 4,667 4,690





Volume (mnT) 4.48 4.19 (6.5) 5.13 4.88 (5.0) 5.19

Sales (Rs mn) 20,520 19,456 (5.2) 23,685 22,752 (3.9) 24,332

Realizations (Rs/tonne) 4,576 4,644 1.5 4,621 4,667 1.0 4,690

EBIDTA (Rs mn) 4,245 4,310 1.5 5,152 5,253 2.0 5,394

Margins (%) 20.7 22.2 21.8 23.1 22.2

EBITDA/tonne (Rs) 947 1,029 8.6 1,005 1,078 7.2 1,040

PAT (Rs mn) 2,432 2,527 3.9 3,313 3,306 (0.2) 3,528


Investment RationaleOur investment thesis is based on the following premises:I. Healthy Presence in Central RegionII. Improved Operating Efficiency Ensures Better ProfitabilityIII. Strong Parentage Offers Comfort & Best Return Ratios

85

Exhibit 6: Price Sensitivity at Standalone EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 6 7 8.0 8.5 9FY17 (-3) 2.5 18.0 16.3 35 46 57 63 68

FY18 (-2) 3.3 34.4 12.1 71 85 100 108 115

FY19 (-1) 4.6 37.3 8.8 114 134 154 164 175

FY20 (Base year) 5.2 12.3 7.9 141 163 186 197 209

FY21E (year 1) 4.3 -16.4 9.4 124 143 162 172 181

FY22E (Year 2) 5.3 21.9 7.7 161 184 207 219 230

FY23E (Year 3) 5.4 2.7 7.5 178 202 226 238 249





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FY21E (year 1) FY22E (Year 2)

FY23E (Year 3)




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6x7x8x9x

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86








HEIM has been demonstrating a remarkable performance for last two years. It continues to be in a sweet spot on the back of healthy demand outlook owing to favourable monsoon, up-tick in infrastructure development in Uttar Pradesh and steady pricing environment. Further, capacity expansion by way of debottlenecking bodes well for its performance on volume front. Going ahead, we expect clinker expansion would be the key catalyst for stock to get re-rated. Upwardly revising our EBITDA estimate by 2% for FY22E and rolling over our estimates to FY23E, we maintain BUY on HEIM with a revised 2-Year Target Price of Rs226 (8x of FY23E EBITDA).

5.3

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4.9 5.2

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Volume(mnT)

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16.3 16.9 18.6

21.1 21.6 19.5

22.8 24.3

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Revenue (Rs bn)

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EBITDA (Rs bn)

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4.0


PAT (Rs bn)

11.9

7.5

11.3

16.9

24.8 27.9

23.5

29.1 29.1

7.0 4.0

8.2

13.2

19.9 21.6

18.6

22.4 21.4

0

5

10

15

20

25

30

35


RoCE (%) RoE (%)

87



Total Cost 16,500 16,418 15,145 17,499 18,938

Cost/tone (Rs) 3,369 3,490 3,615 3,590 3,651


Employee 1,239 1,312 1,443 1,587 1,905

Power & Fuel 5,049 4,736 4,133 4,905 5,324

Freight & Forwarding 3,079 2,879 2,615 3,073 3,303

Others 3,269 3,605 3,355 3,704 3,905


Interest 748 738 558 450 388

Other Income 587 647 668 681 800

PBT 3,416 3,981 3,377 4,417 4,715 Tax 1,210 1,300 850 1,112 1,187

% Tax 35.4 32.7 25.2 25.2 25.2

Net Profit 2,207 2,681 2,527 3,306 3,528 YoY Growth (%) 65.7 21.5 (5.7) 30.8 6.7



I. EQUITY AND LIABILITIES Share Capital 2,266 2,266 2,266 2,266 2,266



Long Term Borrowings 3,918 2,801 1,801 801 501

Deferred Tax Liabilities (net) 1,303 1,903 1,903 1,903 1,903

Other Long Term Liabilities 197 167 161 165 184


Total NC Liabilities 6,110 5,492 4,461 3,483 3,273

Trade Payables 2,778 2,584 2,485 2,556 2,851


Short Term Provisions 2,342 2,672 2,570 2,643 2,948

Total Curr Liabilities 9,133 9,290 8,934 9,190 10,251

TOTAL LIABILITIES 26,956 27,929 27,370 28,253 30,933 Gross Block 21,378 22,026 22,526 23,026 23,526

Less: Accumulated Depreciation 4,010 5,096 6,139 7,206 8,296

Net Block 17,369 16,930 16,387 15,820 15,230

CWIP 172 160 160 160 160

Total 17,541 17,090 16,547 15,980 15,390

Long Term Loans and Advances 285 288 277 285 317

Other NC Assets 255 309 297 306 341

Current Investments - - 3,000 4,500 6,000

Inventories 1,674 1,458 1,402 1,442 1,608

Receivables 253 257 247 254 283

Cash & Bank 3,377 4,707 1,926 1,708 2,778

ST Loans & Advances 145 138 133 137 152

Other CA 3,425 3,683 3,541 3,643 4,063


Total Assets 26,956 27,929 27,370 28,253 30,933

Key Financials

88


Depreciation and Obsolescence 1,018 1,086 1,043 1,067 1,090

Interest & Dividend Income (177) (296) - - -

Interest and Finance Expense 721 705 558 450 388

Others (160) (205) - - -

Operating Profit Before Working Capital Changes

4,818 5,271 4,978 5,934 6,194

Net change in WC (174) 67 (152) 109 451

Tax Paid (713) (751) (850) (1,112) (1,187)


Purchase of fixed assets (net) (420) (435) (500) (500) (500)

Investment (net) (4) (3) (3,000) (1,500) (1,500)

Others 160 297 - - -

Net Cash from Investing activities (263) (141) (3,500) (2,000) (2,000)

Proceeds / (Repayment) of Loans (Net) (827) (1,250) (1,000) (1,000) (300)

Finance Costs (639) (591) (558) (450) (388)

Divident Paid (952) (1,227) (1,700) (1,700) (1,700)

Others - (44) - - -

Net Cash from Financing activities (2,419) (3,112) (3,257) (3,150) (2,388)

Net Increase or decrease in Cash 1,249 1,334 (2,781) (219) 1,070


P/E 19.8 16.3 17.3 13.2 12.4

P/CEPS 13.6 11.6 12.2 10.0 9.5

P/BV 3.7 3.3 3.1 2.8 2.5

EV/EBIDTA 9.9 8.3 9.6 7.4 6.6

EV/Sales 2.2 2.0 2.1 1.7 1.5

EV/tonne (USD) 116 91 88 83 76

Dividend Payout (%) 35.9 38.0 67.3 51.4 48.2

Dividend Yield (%) 1.81 2.33 3.89 3.89 3.89

Adj. OCF Yield 7.5 9.1 7.8 10.2 11.6


EPS (Diluted) 9.7 11.8 11.2 14.6 15.6

CEPS 14.2 16.6 15.8 19.3 20.4

DPS 3.5 4.5 7.5 7.5 7.5

Book Value 52 58 62 69 77

EBIDTA/tonne 938 1,096 1,029 1,078 1,040

Returns (%)RoCE 24.8 27.9 23.5 29.1 29.1

RoE 19.9 21.6 18.6 22.4 21.4

Turnover ratios (x)Asset Turnover 1.0 1.0 0.9 1.0 1.0




WCC (days) -16 -15 -15 -15 -15

89

Great Prospects; Inexpensive Valuation

Mangalam CementCement | India



CMP* (Rs) xxx




Free Float (%) xxx


1. Mangalam Cement (MGC) is likely to see healthy traction hereon in terms of higher production and volume post COVID-19 scenario, led by 5-year supply agreement for fly-ash.

2. MGC has recently commissioned 75% of its 11MW WHRS unit at Morak, which is expected to save ~Rs250mn annually at 100% utilization level.

3. Higher proportion of PPC production from now onwards, further US$3-4/tonne drop in petcoke prices as indicated by the company and steady realization trend are expected to aid MGC’s operating performance in ensuing quarters.

4. MGC is currently in the process of expanding clinker capacity by 0.3mnT in Kiln-1 Morak via debottlenecking with an estimated capex of Rs1.25bn, which is expected to be completed in next 7-8 months.

5. MGC has established ‘Birla Uttam’ as a strong brand name in Northern and Central (Western Uttar Pradesh) markets. Given strong demand scenario in these markets along with healthy demand supply equation, we expect MGC to witness decent volume, going ahead.

Impact of COVID-19: Following volume loss to the tune of 0.15mnT in Mar’20 and 4QFY20 due to lockdown, MGC witnessed sharp 33% volume drop in 1QFY21. Its plants started functioning from beginning of Jun’20. As per the management, the industry and company’s utilization level for FY21E is likely to be ~65%. However, the management continued to remain skeptical about the demand scenario in coming months due to local lockdowns. We expect MGC to report 13% volume decline in FY21E.

Outlook & ValuationWe maintain our positive stance on MGC in the backdrop of improving operating synergy, healthy market mix and steady pricing scenario. Going ahead, impact of newly commissioned WHRS and higher PPC production are expected to ensure sustainably strong operating performance, which should essentially result in valuation rerating. Current valuations at US$25 and US$20 of EV for FY22E and FY23E, respectively appear to be very attractive. Upgrading EBITDA estimate by 8% for FY22E and rolling over our estimates to FY23E, we maintain BUY on MGC with a revised 2-Year Target Price of Rs295 (4x of 23E EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 11,996 12,283 10,746 12,797 14,263EBITDA 571 1,994 1,567 2,028 2,225Net Profit (97) 759 451 813 1,198EPS (Rs) (3.6) 28.4 16.9 30.5 44.9DPS (Rs) 0.5 0.5 1.0 1.0 1.0P/E (x) (54.0) 6.9 11.7 6.5 4.4

P/B (x) 1.0 0.9 0.9 0.8 0.6

EV/EBITDA (x) 15.5 4.4 5.3 3.8 2.8

RoE (%) (1.9) 14.1 7.6 12.4 15.9Divi. Yield (%) 0.3 0.3 0.5 0.5 0.5



Absolute performance -1.1% 28.4% -20.3%



Promoter 20.8 22.1

Public 79.2 77.9



Cement | India



CMP* 1947


Bloomberg Ticker MGC IN


Free Float (%) 78

Shares O/S (mn) 27

Key Triggers:Improved fly-ash availability to result in strong operating performance

Cost savings from its new Waste Heat Recovery Systems (WHRS) unit offers comfort

Clinker expansion of 0.3mnT is progressing well

Trades at significant discount to replacement cost

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Management Quality 5 Medium Management quality cannot be considered strong as financial performance was extremely volatile over the years and it is the only co. which has generated negative FCF in last ten years from our coverage universe


Board of Directors Profile 8 Low A perfect blend of experience, expertise and professionalism; there are three independent directors out of total six board members




New Business/Client Potential 5 Medium Its presence is limited to Northern markets and Western Uttar Pradesh

Business Diversification 5 Medium The company has no plan for any geographical diversification as of now

Market Share Potential 8 Low It has abundant resources to expand further in case of significant improvement in utilisation

Margin Expansion Potential 8 Low The company has taken up a number to measures to improve operating efficiency

Earnings Growth (10 Years) 7 Low Earnings clocked a negative CAGR of 4% over last ten years; expected to clock 16% CAGR over next three years

Balance Sheet Strength 6 Low Balance sheet strength deteriorated led by volatile operating performance and lower utilisation

Debt Profile 6 Low Net Debt to EBITDA ratio stood at 1.7x and Net Debt to Equity ratio stood at 0.6x in FY20

FCF Generation 6 Low It generated negative FCF of Rs1.4bn in last ten years and is expected to generate Rs3.9bn FCF in next three years






91



Base Case

Volume (mnT) 2.68 2.33 2.72 3.00 3.8%


Revenue 12,283 10,746 12,797 14,263 5.1%

EBITDA 1,994 1,567 2,028 2,225 3.7%

EBITDA/tonne 743 671 746 742

EBITDA margin (%) 16.2 14.6 15.8 15.6

APAT 759 451 813 1,198 16.4%


Target Price 295

Bull Case

Volume (mnT) 2.68 2.45 2.85 3.15 5.5%


Revenue 12,283 11,773 14,008 15,613 8.3%

EBITDA 1,994 2,151 2,714 2,987 14.4%

EBITDA/tonne 743 877 951 948

EBITDA margin (%) 16.2 18.3 19.4 19.1

APAT 759 836 1,266 1,769 32.6%


Target Price 451

Bear Case

Volume (mnT) 2.68 2.22 2.58 2.85 2.0%


Revenue 12,283 9,765 11,641 12,846 1.5%

EBITDA 1,994 1,026 1,392 1,401 -11.1%

EBITDA/tonne 743 463 539 492

EBITDA margin (%) 16.2 10.5 12.0 10.9

APAT 759 94 393 582 -8.5%


Target Price 145




Bear Case: In bear case scenario, we assume 2% volume CAGR in FY20-FY23E with 0.5% de-growth in realization. Revenue, EBITDA and APAT are expected to clock 1.5%, -11% and -9% CAGR, respectively over the same period.

92

I. Improved Fly-ash Availability Bodes WellMGC was impacted in last three years especially after commissioning of 0.8mnT (SGU) in Aligarh. However, for Morak (Rajasthan) unit, the company has started getting fly-ash from Jhalawar power plant (40km away from the plant) at Rs700-800/tonne under recently concluded 5-years supply contract, which helped MGC to ramp-up its PPC production in recent times. We expect MGC’s production to increase further with improvement in construction activities after the COVID-led crisis wanes. On the flip side, fly-ash availability at Aligarh plant is still an issue despite signing supply agreement at Rs250/tonne, for which the capacity utilization for Aligarh SGU continues to remain very low.

II. WHRS & Cost Saving Measures to Aid MarginMGC has recently commissioned 75% of its 11MW WHRS unit at Morak, which is expected to save ~Rs250mn annually at 100% utilization level. Further, higher proportion of PPC production from now onwards, further US$3-4/tonne drop in petcoke prices as indicated by the company and steady realization trend are expected to aid MGC’s operating performance in ensuing quarters. We note that MGC has reported strong EBITDA/tonne in last two quarters despite higher power and fuel cost. Hence, we expect the company to sustain healthy unitary operating performance, going ahead.

III. Clinker Expansion Progressing WellMGC is currently in the process of expanding clinker capacity by 0.3mnT in Kiln-1 Morak via debottlenecking with an estimated capex of Rs1.25bn, which is expected to be completed in next 7-8 months. Commissioning of 0.3mnT clinker capacity will take its total clinker capacity to 2.7mnT as against cement capacity of 4mnT. Cement clinker ratio of 1.5x looks to healthy, which also gives legroom to MGC to enhance cement capacity further with higher PPC production.

IV. Presence in Strong Markets Offers Comfort‘Birla Uttam’ has been established as a strong brand name in Northern and Central (Western Uttar Pradesh) markets. Given strong demand scenario in these markets along with healthy demand supply equation, we expect MGC to witness decent volume traction, going forward.



Raw Materials 703 705 719 530 583 595 607

Employees 320 320 300 405 499 471 469

Power & Fuel 818 1,088 1,290 1,253 1,190 1,214 1,238

Freight 945 1,068 1,221 1,242 1,255 1,267 1,280

Other Exps. 443 451 328 403 405 414 418

Realisation 3,697 3,944 4,041 4,576 4,603 4,708 4,755





Volume (mnT) 2.55 2.3 (8.5) 2.88 2.72 (5.6) 3.00

Sales (Rs mn) 11,702 10,746 (8.2) 13,343 12,797 (4.1) 14,263

Realizations (Rs/tonne) 4,587 4,603 0.4 4,633 4,708 1.6 4,755

EBIDTA (Rs mn) 1,510 1,567 3.8 1,873 2,028 8.3 2,225

EBITDA/tonne (Rs) 592 671 13.4 650 746 14.8 742

Margins (%) 12.9 14.6 14.0 15.8 15.6

PAT (Rs mn) 529 451 (14.8) 979 813 (17.0) 1,198


Investment RationaleOur investment thesis is based on the following premises:I. Improved Fly-ash Availability Bodes WellII. WHRS & Cost Saving Measures to Aid MarginIII. Clinker Expansion Progressing WellIV. Presence in Strong Markets Offers Comfort

93

Exhibit 6: Price Sensitivity at Standalone EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 3.5 3.8 4 5 6FY17 (-3) 1.2 163.1 7.4 28 41 51 94 138

FY18 (-2) 0.9 -26.6 10.1 -4 5 12 44 76

FY19 (-1) 0.6 -33.8 15.3 -60 -53 -48 -28 -6

FY20 (Base year) 2.0 249.2 4.4 133 155 171 245 319

FY21E (year 1) 1.6 -21.4 5.6 92 110 123 180 239

FY22E (Year 2) 2.0 29.4 4.3 177 200 217 291 367

FY23E (Year 3) 2.2 9.7 3.9 251 276 295 376 460





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-48

171123

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1.2

0.9

0.6

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FY21E (year 1)

FY22E (Year 2)

FY23E (Year 3)




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We maintain our positive stance on MGC in the backdrop of improving operating synergy, healthy market mix and steady pricing scenario. Going ahead, impact of newly commissioned WHRS and higher PPC production are expected to ensure sustainably strong operating performance, which should essentially result in valuation rerating. Current valuations at US$25 and US$20 of EV for FY22E and FY23E, respectively appear to be very attractive. Upgrading EBITDA estimate by 8% for FY22E and rolling over our estimates to FY23E, we maintain BUY on MGC with a revised 2-Year Target Price of Rs295 (4x of 23E EBITDA).

2.4 2.4 2.4

2.8 3.0

2.7

2.3

2.7

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Volume(mnT)

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Revenue (Rs bn)

0.9

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2.0 2.2

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1.5

2.0

2.5


EBITDA (Rs bn)

0.18

-0.21

0.37

0.11

-0.10

0.76

0.45

0.81

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-0.2

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PAT (Rs bn)

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1.5

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RoCE (%) RoE (%)

95



Total Cost 11,425 10,289 9,179 10,769 12,039


Employee Cost 889 1,088 1,164 1,280 1,408

Power & Fuel 3,819 3,363 2,779 3,301 3,715

Selling and Distribution Exp. 3,615 3,334 2,929 3,445 3,839

Other Expenditures 972 1,081 946 1,126 1,255

EBIDTA 571 1,994 1,567 2,028 2,225 EBIDTA Margin (%) 4.8 16.2 14.6 15.8 15.6 Depreciation and Amortisation 461 487 576 596 617

Interest 508 633 620 528 351

Other Income 239 297 312 328 344

PBT (159) 1,171 683 1,232 1,602

Tax (62) 412 232 419 403

% Tax 38.9 35.2 34.0 34.0 25.2

Net Profit (97) 759 451 813 1,198 YoY Growth (%) (185.5)

Net Profit Margin (%) (0.8) 6.2 4.2 6.4 8.4


I. EQUITY AND LIABILITIES Share Capital 267 267 267 267 267



Secured Loans 4,056 4,926 4,726 4,226 3,226

Total Debt 4,056 4,926 4,726 4,226 3,226

Other Liabilities 397 465 406 484 540

TOTAL LIABILITIES 9,489 11,149 11,315 11,679 11,906 Gross Block 9,878 11,310 11,720 12,130 12,540

Less: Accumulated Depreciation 1,669 2,156 2,732 3,328 3,945

Net Block 8,209 9,154 8,989 8,802 8,596

Other NC Assets 322 885 774 922 1,028

CWIP 730 207 200 200 200

Investments 330 652 652 652 652

Inventories 1,166 1,642 1,325 1,578 1,759

Sundry Debtors 352 269 294 351 391

Cash & Bank 137 836 1,045 1,212 1,493

Loans & Advances 2,894 2,281 2,326 2,454 2,579



Provisions 392 228 204 239 267

Net Current Assets 258 816 1,266 1,668 1,996

Net Deferred Tax (360) (565) (565) (565) (565)

Total Assets 9,489 11,149 11,315 11,679 11,906

Key Financials

96


Net Profit before Tax & Extraordinary Items (159) 1,171 683 1,232 1,602

Depreciation 461 487 576 596 617

Interest (Net) 508 633 620 528 351

Dividend Received (66) (185) - - -

Others (57) (34) - - -

Operating profit before WC Changes 687 2,072 1,879 2,356 2,569

Working Capital Changes 155 201 (130) (383) (154)

Direct Tax 2 (114) (232) (419) (403)

Extraordinary Items - - - - -

Net Cash from Operating Activities 844 2,158 1,516 1,554 2,012

Purchase of Fixed Assets (1,024) (1,672) (403) (410) (410)

Purchase of Investments (2,096) (1,095) - - -

Others 1,357 1,206 - - -

Cash from Investment Activities (1,764) (1,561) (403) (410) (410)

Proceeds from LT Borrowings 2,272 2,285 (200) (500) (1,000)

Dividend Paid (16) (16) (27) (27) (27)

Interest Paid (541) (634) (620) (528) (351)

Others (887) (1,606) (58) 78 55

Cash from Financing Activities 828 29 (905) (977) (1,322)

Net Inc/(Dec) in Cash and Cash Equivalent (93) 627 209 167 281


P/E (54.0) 6.9 11.7 6.5 4.4

P/CEPS 14.5 4.2 5.1 3.7 2.9

P/BV 1.0 0.9 0.9 0.8 0.6

EV/EBIDTA 15.5 4.4 5.3 3.8 2.8

EV/Sales 15.5 4.4 5.3 3.8 2.8

EV/tonne (US$) 29.5 29.0 27.6 25.4 21.1

Dividend Payout (%) (13.7) 1.8 5.9 3.3 2.2

Dividend Yield (%) 0.3 0.3 0.5 0.5 0.5

OCF Yield (%) 16.0 41.0 28.8 29.6 38.3

Per Share Data (Rs)EPS (Basic) (3.6) 28.4 16.9 30.5 44.9

EPS (Diluted) (3.6) 28.4 16.9 30.5 44.9

CEPS 13.6 46.7 38.5 52.8 68.0

DPS 0.5 0.5 1.0 1.0 1.0

Book Value 189 216 232 261 305

EBIDTA/tone (Rs) 193 743 671 746 742

Returns (%)RoCE 3.7 17.5 11.6 15.3 16.6

RoE (1.9) 14.1 7.6 12.4 15.9

Turnover ratios (x)Asset Turnover (Gross block) 1.2 1.1 0.9 1.1 1.1



Payables (days) 125 141 140 125 120

WCC (days) (78) (85) (85) (70) (65)

97

Sustainability in Operating Performance Holds the Keys

Sagar Cements Cement | India



CMP* (Rs) xxx




Free Float (%) xxx


1. Acquisition of BMM Cements – concluded in August 2015 – has enabled Sagar Cements (SGC) to scale-up operations and enjoy tremendous synergy by way of savings in freight cost through reducing lead distance in Karnataka, Tamil Nadu and Kerala.

2. Foray into Eastern markets by acquiring 0.3mnT Bayyavaram grinding unit (GU) in FY18 and expanding it to 1.5mnT in FY19 aided SGC to save on logistic cost in the Eastern markets.

3. Southern region witnessed ~17% QoQ price recovery in 1QFY21 led by sharp recovery in AP and Telangana markets, where SGC sells 50-60% of its total volume.

4. Opex/tonne is likely to see further improvement with increase in utilization level and higher volume from newly ventured markets due to superior realization.

5. Ongoing capacity expansion in Satguru Cements (1mnT integrated) and Jajpur (1.5mnT split grinding unit) is expected to be commissioned in early FY22E.

Impact of COVID-19: While volume improved in May’20 on month-on-month basis after the ease of lockdown restrictions at various parts of the country, labour issues and funding constraints continued to pose challenge on demand front. Its utilization stood at ~25-30% in May’20, which improved to >50% in Jun’20. It recorded 32% volume drop in 1QFY21. The company cited that it would take at least 3-4 months to get a proper understanding of the demand outlook for subsequent quarters. We expect SGC to witness 10% volume drop in FY21E.

Outlook & ValuationCurrently, SGC’s opex/tonne is very much comparable with all cement companies now on the back of several cost saving initiatives undertaken by the company over last five years. Further, opex/tonne may see further improvement with increase in utilization level and higher volume from newly ventured markets due to superior realization. Recent improvement in realization in its key markets will lead to healthier operating performance in subsequent quarters. A likely surge in debt level due to large capex programme could be a near-term concern, which can be eased with superior operating performance. Keeping our EBITDA estimate for FY22E broadly unchanged and rolling over our estimates to FY23E, we maintain BUY on SGC with a revised 2-Year Target Price of Rs619 (6x of FY23E EBITDA).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 12,176 11,752 12,171 13,776 15,882EBITDA 1,494 1,855 3,110 2,868 3,301Net Profit 136 265 1,131 697 942EPS (Rs) 6.7 11.9 50.8 31.3 42.3DPS (Rs) 1.5 2.5 - 2.5 2.5P/E (x) 70.7 39.6 9.3 15.1 11.1P/B (x) 1.1 1.1 1.0 0.9 0.9

EV/EBITDA (x) 9.6 8.2 5.5 6.2 5.0

RoE (%) 1.7 2.9 11.1 6.3 7.9Divi. Yield (%) 0.3 0.5 - 0.5 0.5

Source: Company; RSec Research





Promoter 50.8 50.9

Public 49.2 49.1



Cement | India



CMP* 471


Bloomberg Ticker SGC IN


Free Float (%) 49

Shares O/S (mn) 24

Key Triggers:Long-term advantage of strategic expansion initiatives

Sharp realization recovery in Andhra Pradesh (AP) and Telangana markets

Ongoing expansion to ensure presence in new geographies

Sharp improvement in operating efficiencies over last five years

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Management Quality 7 Low The management quality has improved in recent years in terms of prudent decision making; however, this is yet to reflect in financials

Promoter’s Holding Pledge 8 Low 6.6% of promoters holding is pledged

Board of Directors Profile 8 Low A perfect blend of experience, expertise and professionalism; There are three independent directors out of total nine board members




New Business/Client Potential 8 Low Ongoing expansion in Central and Eastern region will help the company to increase its business in ensuing years

Business Diversification 7 Low The company is majorly present in Southern, Eastern and Western Maharashtra; it is also expanding into Central region.

Market Share Potential 8 Low Consistent capacity addition aided the company to gain market share in recent years

Margin Expansion Potential 8 Low The company has taken up a number to measures to improve operating efficiency

Earnings Growth (10 Years) 7 Low Earnings clocked a mere 3% CAGR over last ten years; expected to clock 53% CAGR over next three years

Balance Sheet Strength 8 Low With improvement in balance sheet, the company now generates the best return ratio in the industry

Debt Profile 6 Low Net Debt to EBITDA ratio stood at 2.6x and Net Debt to Equity ratio stood at 0.5x in FY20

FCF Generation 6 Low It generated FCF of Rs0.5bn in last ten years; expected to generate Rs15.7bn FCF in next three years






99



Base Case

Volume (mnT) 3.13 2.81 3.36 3.85 7.1%


Revenue 11,752 12,171 13,776 15,882 10.6%

EBITDA 1,855 3,110 2,868 3,301 21.2%

EBITDA/tonne 592 1,106 854 858

EBITDA margin (%) 15.8 25.6 20.8 20.8

APAT 265 1,131 697 942 52.6%


Target Price 619

Bull Case

Volume (mnT) 3.13 2.95 3.53 3.94 8.0%


Revenue 11,752 13,222 14,994 16,679 12.4%

EBITDA 1,855 3,743 3,580 3,804 27.0%

EBITDA/tonne 592 1,268 1,015 965

EBITDA margin (%) 15.8 28.3 23.9 22.8

APAT 265 1,605 1,229 1,318 70.6%


Target Price 847

Bear Case

Volume (mnT) 3.13 2.67 3.19 3.57 4.4%


Revenue 11,752 11,162 12,609 14,377 7.0%

EBITDA 1,855 2,519 2,207 2,645 12.6%

EBITDA/tonne 592 943 691 742

EBITDA margin (%) 15.8 22.6 17.5 18.4

APAT 265 689 202 451 19.4%


Target Price 379


Scenario AnalysisBase Case: In base case scenario, we assume 7% volume CAGR in FY20-FY23E with 3.2% growth in realization. Revenue, EBITDA and APAT are expected to clock 11%, 21% and 53% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 8% volume CAGR in FY20-FY23E with 4.1% growth in realization. Revenue, EBITDA and APAT are expected to clock 12%, 27% and 71% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume 4.4% volume CAGR in FY20-FY23E with 2.4% growth in realization. Revenue, EBITDA and APAT are expected to clock 7%, 13% and 19% CAGR, respectively over the same period.

100

I. Strategic Expansion Initiatives; Long-term AdvantageSGC has been very active in last five years in terms of expanding its businesses and various strategic initiatives. Acquisition of BMM Cements – concluded in August 2015 – has enabled the company to scale-up operations and enjoy tremendous synergy by way of savings in freight cost through reducing lead distance in Karnataka, Tamil Nadu and Kerala. SGC is estimated to have saved ~Rs150-200/tonne in freight cost due to reduced lead distance, as BMM’s plant is strategically located at Tadipatri in Anantapur district of AP, which shares border with Karnataka and caters to Tamil Nadu, Karnataka and AP markets. It has also reduced lead distance to sub-400 km from 500 km earlier. Further, SGC forayed into Eastern markets by acquiring 0.3mnT Bayyavaram GU in FY18 and expanding it to 1.5mnT in FY19. This also aided SGC to save on logistic cost in the Eastern markets.

II. Sharp Realization Recovery in AP & TelanganaA volatile pricing scenario in its key markets of AP and Telangana adversely impacted SGC’s margin in recent times. However, with recent sharp recovery in cement prices in these key states, SGC’s operating performance is expected to improve substantially in ensuing quarters. AP and Telangana jointly account for 50-60% of SGC’s total sales volume. Further, given minimal capacity addition in Southern region in next three years, the pricing trend is unlikely to witness any sharp deterioration, going forward.

III. Ongoing Expansion Delayed by 3-6 MonthsLockdown and labourers’ exodus have impacted the pace of ongoing capacity expansion programme at Satguru Cements (1mnT integrated) and Jajpur (1.5mnT SGU) units. Now, the company expects the commissioning date to get deferred by 3-6 months depending upon labourers’ availability. It has already incurred ~Rs2bn capex (including Letters of Credit) as against total project cost of Rs8bn for both projects. These capacities are expected to be commissioned in early FY22E, which will enable SGC to venture into Central region as well as to consolidate its presence in Eastern region.



Raw Materials 474 535 719 726 748 755 763

Employees 280 256 236 286 345 320 299

Power & Fuel 1,235 1,221 1,092 987 958 977 987

Freight 788 899 827 715 729 736 744

Other Exps. 502 424 400 526 541 547 552

Realisation 3,716 3,826 3,664 3,753 4,328 4,100 4,130Source: RSec Research




Volume (mnT) 3.20 2.81 (12.1) 4.0 3.36 (15.4) 3.85

Realisation (Rs/tonne) 3,812 4,343 13.9 3,900 4,091 4.9 4,116

Sales (Rs mn) 12,155 12,171 0.1 15,371 13,776 (10.4) 15,882

EBIDTA (Rs mn) 1,695 3,110 83.5 2,357 2,868 21.7 3,301

EBIDTA margins (%) 13.9 25.6 15.3 20.8 20.8

EBITDA/tonne (Rs) 530 1,106 108.7 594 854 43.7 858

APAT (Rs mn) 197 1,131 474.1 546 697 27.6 942


Investment RationaleOur investment thesis is based on the following premises:I. Strategic Expansion Initiatives; Long-term AdvantageII. Sharp Realization Recovery in AP & TelanganaIII. Ongoing Expansion Delayed by 3-6 Months

101



Exhibit 6: Price Sensitivity

EBITDA (Rs bn) Growth (%) Fwd EV/EBITDA (x) 4 5 6 7 8FY17 (-3) 1.1 -10.4 13.4 56 106 155 205 254

FY18 (-2) 1.5 37.1 9.8 83 151 219 287 355

FY19 (-1) 1.5 -1.2 9.9 53 120 187 254 321

FY20 (Base year) 1.9 24.2 8.0 120 203 286 369 453

FY21E (year 1) 3.1 67.7 4.7 263 402 542 682 821

FY22E (Year 2) 2.9 -7.8 5.1 185 314 442 571 700

FY23E (Year 3) 3.3 15.1 4.5 323 471 619 768 916




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Outlook & ValuationsCurrently, SGC’s opex/tonne is very much comparable with all cement companies now on the back of several cost saving initiatives undertaken by the company over last five years. Further, opex/tonne may see further improvement with increase in utilization level and higher volume from newly ventured markets due to superior realization. Recent improvement in realization in its key markets will lead to healthier operating performance in subsequent quarters. A likely surge in debt level due to large capex programme could be a near-term concern, which can be eased with superior operating performance. Keeping our EBITDA estimate for FY22E broadly unchanged and rolling over our estimates to FY23E, we maintain BUY on SGC with a revised 2-Year Target Price of Rs619 (6x of FY23E EBITDA).

1.6 1.7

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EBITDA (Rs bn)

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1.1

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PAT (Rs bn)

10.7

5.9

8.4

6.6 7.9

13.3

9.5 10.8

8.3

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1.7 2.9

11.1

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FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

RoCE (%) RoE (%)

103


Net Sales 12,176 11,752 12,171 13,776 15,882 % yoy growth 17.3% -3.5% 3.6% 13.2% 15.3%

Total Cost 10,681 9,897 9,061 10,908 12,581

EBIDTA 1,494 1,855 3,110 2,868 3,301

EBIDTA Margin (%) 12.3% 15.8% 25.6% 20.8% 20.8%

EBITDA/tonne (Rs) 450 592 1,106 854 858

Depreciation and Amortisation 657 789 956 1,081 1,171

Interest 634 610 685 900 917

Other Income 29 40 42 44 47

PBT 232 497 1,511 931 1,259 Tax 96 231 380 234 317

% Tax 41.4 46.6 25.2 25.2 25.2

Net Profit 136 265 1,131 697 942 YoY Growth (%) (48.2) 95.2 326.3 (38.4) 35.2



Share Capital 204 223 223 223 223



Non-Current Liabilities


Deferred Tax Liabilities (net) 411 439 439 439 439

Other Long Term Liabilities 569 1,289 1,289 1,353 1,469


Total 4,111 4,698 7,184 8,249 7,867


Trade Payables 2,038 2,230 2,230 2,418 2,764


Short Term Provisions 28 36 38 39 40

Total 5,062 5,023 5,319 5,738 5,717

TOTAL LIABILITIES 17,611 19,388 23,300 25,425 25,909 Non-current Assets

Fixed Assets

Tangible Assets 11,783 12,832 13,376 17,295 17,723

In-Tangible Assets 271 592 592 592 592

Capital Work - in- Progress 1,101 1,080 3,580 1,080 180

Goodwill on Consolidation 387 416 416 416 416

Deferred Tax Asets (Net) 328 212 212 212 212

Long - term Loans & Advances 353 1,084 1,084 1,102 1,138

Current Assets

Inventories 1,450 1,158 1,158 1,256 1,435

Receivables 1,156 1,368 1,368 1,483 1,695

Cash & Bank 295 128 996 1,427 1,875

ST Advances 208 39 39 43 49

Other current Assets 279 480 479 520 594


Total Assets 17,611 19,388 23,300 25,425 25,909

Key Financials

104


PBT 232 497 1,511 931 1,259

Depreciation 657 789 956 1,081 1,171

Interest and Fin Charges 634 610 685 900 917

Others 16 20 - - -

Cash generated from Operations 1,539 1,916 3,152 2,913 3,348

Change in WC (107) 306 82 8 (10)

Net Cash generated from Operations 1,431 2,222 3,235 2,921 3,338

Income Tax paid (38) (99) (380) (234) (317)

Net Generation from Op. Actitivities 1,393 2,123 2,854 2,686 3,021

Purchase of Fixed Assets (1,954) (2,279) (4,000) (2,500) (700)

Others 36 (25) - - -

Net cash used in Investing Activities (1,918) (2,304) (4,000) (2,500) (700)

Proceed/(Repayment) of Loans (Net) 307 (227) 2,700 1,200 (900)

Proceeds from Issue of Shares & Warrants 566 1,027 - - -

Dividend Paid (37) (62) - (56) (56)

Interest and Finance charges (618) (625) (685) (900) (917)

Others 90 - - - -

Net cash used in Financing Activities 307 113 2,015 244 (1,873)

Net Change in Cash (217) (67) 869 431 448


P/E 70.7 39.6 9.3 15.1 11.1

P/CEPS 12.1 10.0 5.0 5.9 5.0

P/BV 1.1 1.1 1.0 0.9 0.9

EV/EBIDTA 9.6 8.2 5.5 6.2 5.0

EV/Sales 1.2 1.3 1.4 1.3 1.0

EV/tonne (US$) 45.2 47.8 53.6 56.0 51.8

Dividend Payout (%) 22.5 21.0 0.0 8.0 5.9

Dividend Yield (%) 0.3 0.5 - 0.5 0.5


EPS (Diluted) 5.8 11.3 48.1 29.7 40.1

CEPS 38.9 47.3 93.7 79.8 94.9

DPS 1.5 2.5 - 2.5 2.5

Book Value 414 434 485 513 553

EBIDTA/tone (Rs) 450 592 1,106 854 858

Returns (%)RoCE 6.6 7.9 13.3 9.5 10.8

RoE 1.7 2.9 11.1 6.3 7.9

Turnover ratios (x)Asset Turnover 0.8 0.7 0.6 0.6 0.6




WCC (days) 18 9 9 9 9

105

Valuation Re-rating Unlikely

Kajaria Ceramics Cement | India


2 Year Target Price: Rs

CMP* (Rs) xxx




Free Float (%) xxx


1. Unlike other industries, the tile industry is unlikely to witness meaningful recovery in the near-term owing to delayed recovery in real estate sector and private capex. Hence, volume recovery may not be sharp in subsequent quarters.

2. Owing to wide pricing gap (enjoys price premium ~5%-20%), Kajaria Ceramics (KJE) won’t be able to hike prices even following similar move by the unorganized players. Thus, even though KJE won’t see any traction on margin front in the near-to-medium term, it will continue to generate better margin than peers.

3. Despite a number of measures to improve shop-floor efficiencies, KJE continues to make losses at subsidiary level. Its joint ventures/subsidiaries have been continuously incurring losses over the last three years, which is a key drag on its bottom-line front.

4. KJE has reported a mere ~7% earnings CAGR over last five years despite being the leader in the industry and commanding a strong price premium. Profit CAGR for next three years is expected at ~5%.

Impact of COVID-19: COVID-19 has adversely impacted the consumer sentiment, which has further slowed down the recovery. Further, imminent recovery in rural economy in the medium-term on the back of favourable monsoon and several government initiatives are not enough to boost sectoral demand. Plants were operated at very thin utilization level in May’20 after seeing almost zero utilization in Apr'20. KJC further cited that the plants operated at 26% capacity utilization in June’20, which further improved to 78% in July’20.

Outlook & ValuationProlonged slowdown in real estate sector and delayed revivial of private capex in India have impacted industry’s performance and hence KJE has reported a mere ~7% earnings CAGR over last five years despite being the leader in the industry. While we believe that improvement in KJE’s product-mix should offer some comfort on margin front, we do not expect its RoE to come back to 20% level in the next three years. Hence, we see very limited scope for valuation re-rating for KJE. Downwardly revising our earnings estimate by 52%/22% for FY21E/FY22E and rolling over our valuations to FY23E, we downgrade KJE to SELL with a revised 2-Year Target Price of Rs384 (20x FY23E).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20E FY21E FY22E FY23ESales 29,562 28,080 24,592 29,865 33,781 EBITDA 4,495 4,159 2,838 4,460 5,261 Net Profit 2,314 2,553 1,207 2,471 3,054 EPS (Rs) 14.2 16.1 7.6 15.5 19.2 DPS (Rs) 3.0 3.0 2.0 3.0 3.0 P/E (x) 28.6 25.4 53.7 26.3 21.2 P/B (x) 4.1 3.8 3.6 3.2 2.9

EV/EBIDTA (x) 14.1 15.4 22.1 13.8 11.5

RoE (%) 15.8 15.5 6.9 13.0 14.3 Div. Yield (%) 0.7 0.7 0.5 0.7 0.7






Promoter 47.6 47.6

Public 52.4 52.4



Cement | India


2 Year Target Price: Rs.384

CMP* 408

Upside/Downside (%) -6

Bloomberg Ticker KJC IN


Free Float (%) 52

Shares O/S (mn) 159

Key Setbacks: Prolonged slowdown in real estate sector may delay volume recovery

Minimal scope of price recovery to cap operating margin

Continued loss at joint venture/subsidiary level

RoE unlikely to reach 20% in next three years

SELL

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Management Quality 8 LowThe management has been displaying remarkable perseverance over the years in terms of maintaining industry leadership

Promoter’s Holding Pledge 9 Low Zero share pledging offer comfort


Industry Growth 5 MediumGiven the cyclicality and slowdown in real estate sector, the industry has been witnessing volatility volatile over the years


Entry Barriers / Competition 4 HighAny new player with strong capital base can enter into business and competition has been high in the industry. Unorganised players still account for ~50% of the total market

New Business/Client Potential 7 Low Strong brand equity always helps to get more customers

Business Diversification 9 Low The company has forayed in to Sanitary ware and Faucet segment


Margin Expansion Potential 5 Medium Absence of price hike was prime hindrance for margin improvement for last couple of years

Earnings Growth (10 Years) 7 Low Earnings clocked 22% CAGR in 10 year; expected to clock 5% CAGR in next three years

Balance Sheet Strength 7 Low Prudent management of working capital and strong franchise enabled the company to remain net cash rich

Debt Profile 8 Low Net debt to EBITDA ratio stood at -0.2x and Net Debt to Equity ratio stood at -0.1x in FY20

FCF Generation 8 Low It generated FCF of ~Rs5.5bn in last ten years

Dividend Policy 7 Low Average dividend payout ratio stood at 20% in last 10 years


Percentage Score 70% Low



107



Base Case

Volume (MSM) 78.1 66.4 79.6 89.2 4.5%

Realisation/SM (Rs) 334 337 339 340 0.7%

Revenue 28,080 24,592 29,865 33,781 6.4%

EBITDA 4,159 2,838 4,460 5,261 8.1%

EBITDA margin (%) 14.8 11.5 14.9 15.6

APAT 2,553 1,207 2,471 3,054 6.2%

Target P/E Multiple (x) 20.0

Target Price 384

Bull Case

Volume (MSM) 78.1 70.3 87.8 102.8 9.6%


Revenue 28,080 26,376 33,834 40,527 13.0%

EBITDA 4,159 3,393 5,917 7,834 23.5%

EBITDA margin (%) 14.8 12.9 17.5 19.3

APAT 2,553 1,598 3,530 4,898 24.3%


Target Price 770

Bear Case

Volume (MSM) 78.1 62.5 71.8 76.9 -0.5%


Revenue 28,080 23,173 26,980 29,195 1.3%

EBITDA 4,159 2,648 3,968 4,467 2.4%

EBITDA margin (%) 14.8 11.4 14.7 15.3

APAT 2,553 1,049 2,057 2,341 -2.9%


Target Price 220



Bull Case: In bull case scenario, we assume 9.6% volume CAGR in FY20-FY23E with 2.7% growth in realization. Revenue, EBITDA and APAT are expected to clock 13%, 23.5% and 24.3% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume a negative volume CAGR of 0.5% in FY20-FY23E with 0.2% growth in realization. Revenue, EBITDA and APAT are expected to clock 1.3%, 2.4% and -2.9% CAGR, respectively over the same period.

108

I. Recovery to Take Relatively Longer TimeUnlike other industries, meaningful recovery in Ceramics & Tiles industry is likely to take longer due to delayed recovery in real estate (residential and commercial) sector and private sector capex. COVID-19 has adversely impacted the consumer sentiment, which has further slowed down real estate development in the country. Further, imminent recovery in rural economy in the medium-term on the back of favourable monsoon and several government initiatives are not enough to revive sectoral demand.

II. Minimal Scope of Price Recovery to Cap Operating MarginKJE continues to enjoy premium pricing to the tune of 5-20% vis-à-vis its peers led by strong brand equity. Thus, any pricing actions would be very difficult especially in a muted demand scenario. Owing to wide pricing gap, the company won’t be able to hike prices even after similar move by the unorganized players. However, even though KJE won’t see any traction on margin front in the near-to-medium term, it will continue to generate better margin than peers.

III. Continued Loss at Joint Venture/Subsidiary LevelDespite a number of measures to improve shop-floor efficiencies, KJE continues to incur losses at subsidiary level. Its joint ventures/subsidiaries have been continuously incurring losses over the years, which is a key drag on its bottom-line front.


Rs/SM FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Raw Materials 136 147 143 141 148 145 144

Power & Fuel 66 72 77 72 77 75 77

Employee costs 43 44 43 46 48 46 46

Advt. and sales promotion 12 15 11 10 13 13 12

Other expenses 47 35 38 37 43 41 40

Realisation 360 357 343 334 337 339 340





Volume (msm) 77.3 66.4 -14.1 85.8 79.6 -7.2 89.2

Avg. Realisation (Rs/SM) 350 337 -3.7 353 339 -4.1 340

Revenue 29,437 24,592 -16.5 33,400 29,865 -10.6 33,781

EBITDA 4,268 2,838 -33.5 5,180 4,460 -13.9 5,261

EBITDA Margin (%) 14.5 11.5 15.5 14.9 15.6

PAT 2,506 1,207 -51.8 3,160 2,471 -21.8 3,054

EPS (Rs) 15.8 7.6 -51.8 19.9 15.5 -21.8 19.2


Rationale for SELL RecommendationOur SELL recommendation is based on the following premises:I. Recovery to Take Relatively Longer TimeII. Minimal Scope of Price Recovery to Cap Operating MarginIII. Continued Loss at Joint Venture/Subsidiary Level

109

Exhibit 4: EBITDA & Target Price Exhibit 5: P/E 1yr Fwd


Exhibit 6: Price Sensitivity EPS (Rs) Growth (%) Fwd PE (x) 14 17 20 25 30FY17 (-3) 15.9 25.6 223 270 318 398 477

FY18 (-2) 14.8 -7.1 27.6 207 251 296 369 443

FY19 (-1) 14.2 -3.6 28.6 199 242 285 356 427

FY20 (Base year) 16.1 12.7 25.4 225 273 321 401 482

FY21E (year 1) 7.6 -52.7 53.7 106 129 152 190 228

FY22E (Year 2) 15.5 104.6 26.3 218 264 311 388 466

FY23E (Year 3) 19.2 23.6 21.2 269 327 384 480 576


Key Risks f A better than expected demand recovery from 2HFY21 onwards

f Any meaningful uptick in realisation

f A steep decline in gas prices

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Outlook & ValuationsProlonged slowdown in real estate sector and delayed revivial of private capex in India have impacted industry’s performance and hence KJE has reported a mere ~7% earnings CAGR over last five years despite being the leader in the industry. While we believe that improvement in KJE’s product-mix should offer some comfort on margin front, we do not expect its RoE to come back to 20% level in the next three years. Hence, we see very limited scope for valuation re-rating for KJE. Downwardly revising our earnings estimate by 52%/22% for FY21E/FY22E and rolling over our valuations to FY23E, we downgrade KJE to SELL with a revised 2-Year Target Price of Rs384 (20x FY23E).

58.7 64.3

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PAT (Rs bn)

35.7 33.6 32.2 31.3

26.0 23.5

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RoCE (%) RoE (%)

111


Net Sales 29,562 28,080 24,592 29,865 33,781

Total operating income 29,562 28,080 24,592 29,865 33,781

% chg 9.1 (5.0) (12.4) 21.4 13.1

Total Expenditure 25,067 23,921 21,754 25,405 28,521


Power & Fuel 6,162 5,644 5,085 5,980 6,899

Employee costs 3,455 3,569 3,185 3,663 4,103

Others 3,987 3,698 3,682 4,229 4,680

EBITDA 4,495 4,159 2,838 4,460 5,261

% chg (1.5) (7.5) (31.8) 57.2 18.0

(% of Net Sales) 15.2 14.8 11.5 14.9 15.6

Depreciation& Amortisation 891 1,081 1,210 1,301 1,392

EBIT 3,604 3,078 1,628 3,159 3,868

% chg (2.0) (14.6) (47.1) 94.1 22.5

(% of Net Sales) 12.2 11.0 6.6 10.6 11.5

Interest & other Charges 156 195 155 110 95

Other Income 180 242 165 220 248

(% of PBT) 5.0 7.7 10.1 6.7 6.2

PBT (reported) 3,628 3,125 1,638 3,269 4,021

Tax 1,293 589 412 823 1,012

(% of PBT) 35.6 18.9 25.2 25.2 25.2

PAT 2,336 2,535 1,226 2,446 3,009

% chg 2.5 8.6 (51.7) 99.6 23.0

(% of Net Sales) 7.9 9.0 5.0 8.2 8.9

Minority interest (22) 18 (18) 24 45

Net profit 2,314 2,553 1,207 2,471 3,054

Basic EPS (Rs) 14.2 16.1 7.6 15.5 19.2

Fully Diluted EPS (Rs) 14.2 16.1 7.6 15.5 19.2

% chg (3.6) 12.7 (52.7) 104.6 23.6

Key Financials

112


I. EQUITY AND LIABILITIES Share capital 159 159 159 159 159

Reserves 15,590 16,983 17,873 19,866 22,444

Net worth 15,749 17,142 18,032 20,025 22,603

Total borrowings 1,203 1,280 780 680 580

Minority Interest 659 637 656 631 586

Deferred tax 1,073 731 731 731 731

Total liabilities 18,685 19,791 20,198 22,068 24,500

Gross block 16,674 18,934 19,934 21,434 22,934

Less: Acc. depreciation 5,980 7,061 8,271 9,573 10,965

Net block 10,694 11,873 11,663 11,861 11,969

CWIP 934 257 257 257 257

Investments 3 101 401 701 1,001

Goodwill 85 85 85 85 85

Other NC Assets 187 93 90 100 110

Current assets 11,830 11,978 11,902 13,405 16,153

Inventories 4,058 5,127 4,329 4,476 5,231

Debtors 4,751 3,967 3,625 3,748 4,380

Cash 2,524 2,252 3,371 4,584 5,843

Other CA 330 393 359 372 434

Loans and advances 168 239 218 226 264

Current liabilities 4,848 4,308 3,937 4,070 4,757

Provisions 200 288 263 272 318

Net current assets 6,782 7,382 7,703 9,063 11,078

Total Assets 18,685 19,791 20,198 22,068 24,500

113


Net profit 2,265 2,553 1,207 2,471 3,054

Depn and w/o 891 1,081 1,210 1,301 1,392

Deferred tax -26 -342 0 0 0

Change in working cap 117 993 798 -147 -756

Others -229 -2,235 21 -34 -55

Operating cash flow 3,018 2,050 3,237 3,591 3,636

Capital expenditure -1,235 -1,240 -1,000 -1,500 -1,500

Investments 1 -98 -300 -300 -300

Investing cash flow -1,235 -1,338 -1,300 -1,800 -1,800

Free cash flow 1,783 810 2,237 2,091 2,136

Dividend -575 -1,150 -318 -477 -477

Fresh equity 0 0 0 0 0

Debt/Preference shares -500 77 -500 -100 -100

Financing cash flow -1,075 -1,073 -818 -577 -577

Others -7 -170 0 0 0

Net change in cash 702 -531 1,119 1,214 1,259


Valuation Ratio (x)

P/E (on FDEPS) 28.6 25.4 53.7 26.3 21.2

P/CEPS 20.6 17.9 26.8 17.2 14.6

P/BV 4.1 3.8 3.6 3.2 2.9

Dividend yield (%) 0.7 0.7 0.5 0.7 0.7

EV/Sales 2.1 2.3 2.5 2.1 1.8

EV/EBITDA 14.1 15.4 22.1 13.8 11.5


Core EPS 14.2 16.1 7.6 15.5 19.2

Cash EPS 19.8 22.9 15.2 23.7 28.0

DPS 3.0 3.0 2.0 3.0 3.0

Book Value 99.1 107.8 113.4 125.9 142.2

Returns (%)

RoCE 26.0 23.5 18.8 9.6 17.1

RoE 15.8 15.5 6.9 13.0 14.3

Turnover ratios (x) Asset Turnover (Gross Block) 1.8 1.6 1.3 1.5 1.5

Inventory / Sales (days) 50 67 64 55 57



Cash conversion cycle (days) 49 62 60 51 52

114

Likely Improvement in Operating Performance May Warrant Re-rating

Somany Ceramics Cement | India



CMP* (Rs) xxx




Free Float (%) xxx


1. Somany Ceramics (SOMC) has been actively focusing on improving product-mix as well as launching new bath fitting variants, which we expect to aid the company on margin front in ensuing quarters. With improvement in utilization level, we expect SOMC’s margin to improve significantly in FY22E.

2. Despite challenging demand environment, SOMC emphasized on collections which resulted in improvement in receivable cycle to 53 days in FY20 from 89 days in FY19. Improvement in payment collection aided SOMC to witness positive free cash flow (FCF) of Rs825mn after five years.

3. The company has undertaken several cost rationalization measures to mitigate higher fixed cost due to low demand, which should arrest margin erosion in ensuing quarters.

4. SOMC commissioned Glazed Vitrified Tiles (GVT) manufacturing unit in Tirupati (Andhra Pradesh) in 4QFY19 with ~3.5mn annual capacity, which we see as a gateway to southern markets by reducing delivery time and logistic cost. We believe benefit from this would be more pronounced with the pick-up in demand scenario.

Impact of COVID-19: Unlike other industries, any meaningful recovery in Ceramics & Tiles industry is likely to take longer owing to delayed recovery in real estate sector and private sector capex. COVID-19 has adversely impacted the consumer sentiment, which has further slowed down the recovery. While SOMC witnessed zero utilization in Apr’20 and negligible utilization in May’20, its capacity utilization improved to 44% and 66% in June’20 in July’20, respectively mainly due to inventory restocking.

Outlook & ValuationWith likely demand recovery in 2HFY22, SOMC will witness visible improvement in operating parameters, which can result in re-rating of the stock. Again, being the second largest segmental player after Kajaria, we believe SOMC should not trade at a steep discount. At CMP, the stock trades at 9.7x/6.1x for FY22E/FY23E earnings, which is quite attractive in our view. Downwardly revising our earnings estimate by 96%/32% for FY21E/FY22E to factor in soft demand led by COVID-led disruptions and rolling over our estimates to FY23E, we maintain BUY on SOMC with a revised 2-Year Target Price of Rs173 (12x of FY23 Earnings).

Research Analyst


Research Associate:


Key Financials (Rs mn) FY19 FY20 FY21E FY22E FY23ESales 17,151 16,101 13,236 15,790 17,883EBITDA 1,634 1,311 981 1,365 1,829Net profit 464 147 (36) 260 610EPS Rs) 12.9 8.1 (0.9) 6.1 14.4DPS (Rs) 2.7 4.0 2.0 3.0 4.0P/E (x) 10.3 16.5 (156.0) 21.7 9.3P/B (x) 0.9 0.9 0.9 0.9 0.9

EV/EBITDA (x) 6.3 7.7 9.1 6.4 4.6

ROE (%) 8.7 2.8 (0.7) 5.1 11.5Dividend yield (%) 2.0 3.0 1.5 2.3 3.0






Promoter 51.5 51.5

Public 48.5 48.5



Cement | India



CMP* 133


Bloomberg Ticker SOMC.IN


Free Float (%) 49%

Shares O/S (mn) 42

Key Triggers:Improved product-mix to aid margin expansion

Significant improvement in receivable cycle

Several cost rationalization measures to offer downward protection to margin

Re-rating on the cards with likely improvement in operating performance in 2HFY22

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115


Management Quality 6 LowThe management has done quite well in terms of maintaining market share. However, the company has not been up to mark in terms of usage of QIP proceeds. Additionally, recent incidence of cheque bounce alleged by its broker raises red flags

Promoter’s Holding Pledge 9 Low Zero share pledging, despite the promoter group has varied interest in other businesses as well


Industry Growth 5 Medium Given cyclicality and slowdown in real estate sector, the industry growth has been witnessing volatility over the years


Entry Barriers / Competition 4 HighAny new player with strong capital base can enter into business and competition has been high in the industry. Unorganised segment players account for ~60% of total market

New Business/Client Potential 6 Low Capacity ramp-up and strong brand image help the company in getting new business

Business Diversification 9 Low The company has forayed in to Sanitary ware and Faucet segment


Margin Expansion Potential 5 Medium Working on various measures to contain opex further

Earnings Growth (10 Years) 9 Low Earnings clocked -3% CAGR in 10 year; expected to clock 17% CAGR in next three years

Balance Sheet Strength 6 Low Strong focus on payment collections offered strength to balance sheet

Debt Profile 6 Low Net debt to EBITDA ratio stood at 3.7x and Net Debt to Equity ratio stood at 0.8x in FY20

FCF Generation 4 High It generated negative FCF of Rs1.7bn in last ten years

Dividend Policy 7 Low Average dividend payout ratio stood at 19% in last 10 years


Percentage Score 63% Low



116



Base Case

Volume (MSM) 48.9 39.1 46.1 51.6 1.9%

Relisation/SM (Rs) 298 301 303 304 0.7%

Revenue 16,101 13,236 15,790 17,883 3.6%

EBITDA 1,311 981 1,365 1,829 11.8%

EBITDA margin (%) 8.1 7.4 8.6 10.2

APAT 343 (36) 260 610 21.2%

Target PE Multiple (x) 12

Target Price 173

Bull Case

Volume (MSM) 48.9 41.5 51.1 59.8 6.9%

Relisation/SM (Rs) 298 304 309 313 1.7%

Revenue 16,101 14,095 17,599 20,895 9.1%

EBITDA 1,311 1,171 1,830 2,657 26.6%

EBITDA margin (%) 8.1 8.3 10.4 12.7

APAT 343 106 608 1,229 53.1%


Target Price 406

Bear Case

Volume (MSM) 48.9 36.6 41.4 44.3 -3.2%

Relisation/SM (Rs) 298 300 300 300 0.2%

Revenue 16,101 12,446 14,240 15,448 -1.4%

EBITDA 1,311 858 1,088 1,365 1.4%

EBITDA margin (%) 8.1 6.9 7.6 8.8

APAT 343 (128) 53 262 -8.5%


Target Price 62


Scenario AnalysisBase Case: In base case scenario, we assume 2% volume CAGR in FY20-FY23E with 0.7% growth in realization. Revenue, EBITDA and APAT are expected to clock 3.6%, 10% and 16.5% CAGR, respectively over the same period.

Bull Case: In bull case scenario, we assume 6.9% volume CAGR in FY20-FY23E with 1.3% growth in realization. Revenue, EBITDA and APAT are expected to clock 8.8%, 22% and 44% CAGR, respectively over the same period.

Bear Case: In bear case scenario, we assume a negative volume CAGR of 3.2% in FY20-FY23E with 0.2% growth in realization. Revenue, EBITDA and APAT are expected to clock -1.4%, -1% and -17.2% CAGR, respectively over the same period.

117

I. Focus in Product-mix to Aid Margin Expansion from FY22ESOMC has been actively focusing on improving product-mix with premium value-added products across tiles segments as well as launching new bath fitting variants. We believe improvement in products-mix along with incremental contribution of high-margin sanitary and bath fittings segment is likely to aid SOMC on margin front in ensuing quarters, and with likely improvement in utilization level, we expect SOMC’s margin to improve significantly in FY22E. Notably, SOMC has been experiencing contraction in average realization for last three years, which we expect to improve albeit marginally in ensuing quarters.

II. Focus on Collection & Cost Rationalization SOMC emphasized on collections in FY20 despite challenging demand environment, which aided the company to improve its receivable cycle from 89 days in FY19 to 53 days in FY20. Improvement in collection aided SOMC to witness positive free cash flow (FCF) of Rs825mn after five years. We expect improvement in balance sheet to negate demand concern to some extent, as strong balance sheet can essentially help the company to materialize the maximum business when demand revives. Additionally, the company has undertaken cost rationalization measures to mitigate higher fixed cost due to low demand, which should arrest margin erosion in the near-term.

III. Benefits of New AP Unit to Flow with Volume Pick-upSOMC has commissioned GVT manufacturing unit in Tirupati (Andhra Pradesh) in 4QFY19 with a capacity of 11,000-12,000 sq meter/day (~3.5mn annual capacity). While Southern market already contributed around 25-30% to its total revenue, SOMC incurs higher logistic cost due to higher lead distance. This plant serves as a geographic gateway to the southern markets by shrinking delivery time at less logistic cost. We believe the benefits from this would be more pronounced with the pick-up in demand scenario.




Volume (msm) 49.2 39.1 -20.57 54 46.1 -14.8 51.6

Realisation (Rs/sm) 304 301 -0.96 307 303 -1.4 304

Net Sales 17,640 13,236 -24.97 19,809 15,790 -20.3 17,883

EBITDA 1,537 981 -36.2 1,960 1,365 -30.3 1,829

EBITDA Margin (%) 8.7 7.4 9.9 8.6 10.2

APAT 455 -36 -107.9 766 260 -66.0 610

EPS (Rs) 10.7 -0.9 -108.0 18.1 6.1 -66.1 14.4



Rs/SM FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Raw Materials 142 143 141 137 143 145 145

Power & Fuel 65 70 72 71 75 72 72

Employee costs 39 44 44 49 50 49 48

Advt. and sales promotion 13 12 10 11 8 10 10

Other expenses 42 39 36 36 37 36 35

Realisation 352 315 298 298 301 303 304


Investment RationaleOur investment thesis is based on the following premises:I. Focus in Product-mix to Aid Margin Expansion from FY22EII. Focus on Collection & Cost RationalizationIII. Benefits of New AP Unit to Flow with Volume Pick-up

118

Exhibit 4: EBITDA & Target Price Exhibit 5: P/E 1yr Fwd


Exhibit 6: Price Sensitivity at Standalone EPS (Rs) Growth (%) Fwd PE (x) 8 10 12 13 15FY17 (-3) 23.2 51.7 5.6 185 232 278 301 347

FY18 (-2) 16.6 -28.2 7.8 133 166 199 216 249

FY19 (-1) 10.9 -34.2 11.8 87 109 131 142 164

FY20 (Base year) 3.5 -68.4 37.3 28 35 42 45 52

FY21E (year 1) -0.9 -124.6 -151.3 -7 -9 -10 -11 -13

FY22E (Year 2) 6.1 -819.9 21.0 49 61 74 80 92

FY23E (Year 3) 14.4 134.2 9.0 115 144 173 187 216


Key Risks f A prolonged slowdown in economy due to ongoing pandemic

f Contraction in realisation

f Sharp increase in gas prices

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FY22E (Year 2)

FY23E (Year 3)

Target Price (Rs) EPS (Rs)

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Exhibit 8 Revenue Trend Exhibit 9: EBITDA Trend






Outlook & ValuationsWith likely demand recovery in 2HFY22, SOMC will witness visible improvement in operating parameters, which can result in re-rating of the stock. Again, being the second largest segmental player after Kajaria, we believe SOMC should not trade at a steep discount. At CMP, the stock trades at 9.7x/6.1x for FY22E/FY23E earnings, which is quite attractive in our view. Downwardly revising our earnings estimate by 96%/32% for FY21E/FY22E to factor in soft demand led by COVID-led disruptions and rolling over our estimates to FY23E, we maintain BUY on SOMC with a revised 2-Year Target Price of Rs173 (12x of FY23 Earnings).

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PAT (Rs bn)

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RoCE (%) RoE (%)

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Net Sales 17,151 16,101 13,236 15,790 17,883 Total operating income 17,151 16,101 13,236 15,790 17,883 % chg 0.1 (6.1) (17.8) 19.3 13.3 Total Expenditure 15,517 14,790 12,255 14,425 16,054

Cost of Materials 7,218 6,673 5,589 6,707 7,487 Power & Fuel 3,699 3,459 2,933 3,323 3,722 Employee costs 2,262 2,390 1,960 2,254 2,480 Others 2,337 2,268 1,772 2,140 2,366 EBITDA 1,634 1,311 981 1,365 1,829 % chg (12.1) (19.8) (25.2) 39.2 34.0 (% of Net Sales) 9.5 8.1 7.4 8.6 10.2 Depreciation& Amortisation 443 590 644 671 698 EBIT 1,191 721 337 694 1,131 % chg (17.6) (39.5) (53.3) 106.0 62.9 (% of Net Sales) 6.9 4.5 2.5 4.4 6.3 Interest & other Charges 459 494 421 396 372 Other Income 192 127 102 122 128 (% of PBT) 20.7 36.0 571.6 29.1 14.5 Exceptionl Item (122.4) (261.8) 0.0 0.0 0.0 Recurring PBT 924 354 18 421 887 % chg (22.0) (61.6) (95.0) 2258.6 111.0 PBT (reported) 801 92 18 421 887 Tax 268 (99) 4 106 223 (% of PBT) 33.5 (107.3) 25.2 25.2 25.2 PAT 533 192 13 315 664 % chg (32.7) (64.0) (93.0) 2258.6 111.0 (% of Net Sales) 3.1 1.2 0.1 2.0 3.7 Minority interest (69) (45) (50) (54) (54) Net profit 464 147 (36) 260 610 APAT 545 343 (36) 260 610 Basic EPS (Rs) 12.9 8.1 (0.9) 6.1 14.4 Fully Diluted EPS (Rs) 12.9 8.1 (0.9) 6.1 14.4 % chg (25.8) (37.1) (110.6) (819.9) 134.2


Share capital 85 85 85 85 85 Reserves 6,046 5,979 5,859 5,992 6,432

Net worth 6,130 6,064 5,944 6,077 6,517

Total borrowings 5,731 4,980 4,680 4,380 4,080

Minority Interest 867 941 990 1,045 1,099

Deferred tax 532 413 413 413 413

Other NC Liabilities - 549 485 479 556

Total liabilities 13,260 12,947 12,511 12,393 12,665 Gross block 8,039 9,232 9,632 10,032 10,432

Less: Acc. depreciation 983 1,526 2,170 2,841 3,539

Net block 7,056 7,706 7,462 7,191 6,892

CWIP 247 60 60 60 60

Goodwill 44 73 73 73 73

Investments 683 341 341 341 341

Current assets 8,551 7,393 7,241 7,721 8,723

Inventories 2,545 3,282 2,527 2,578 2,952

Debtors 4,179 2,798 2,619 3,094 3,542

Cash 400 201 1,054 991 1,049

Other CA 601 640 650 619 708

Loans and advances 825 472 391 438 472

Current liabilities 3,265 2,530 2,569 2,883 3,301

Provisions 56 96 97 109 125

Net current assets 5,230 4,767 4,575 4,728 5,298

Total Assets 13,260 12,947 12,511 12,393 12,665

Key Financials

121


PBT 801 92 18 421 887

Depreciation 443 590 644 671 698

Finance Cost 459 494 421 396 372

Others (147) 248 - - -

Operating Profit Before WC Changes 1,556 1,425 1,083 1,488 1,957

Change in Working Capital (381) 255 981 (222) (435)

Income Taxes Refund /(Paid) (315) (152) (4) (106) (223)

Net Cash Flow From Operating Activities 859 1,528 2,059 1,160 1,299

Capex (1,604) (703) (400) (400) (400)

Investment (net) 973 176 - - -

Others (229) 378 - - -

Net Cash Outflow From Investing Activities (861) (148) (400) (400) (400)

Proceeds from Borrowings 2,988 2,886 (300) (300) (300)

Repayment of Loans (2,267) (3,664) - - -

Proceeds/Redemption of Shares 69 - - - -

Interest Paid (410) (456) (421) (396) (372)

Dividend including DDT -138 -204 -85 -127 -170

Net Cash Inflow From Financing Activities 241 (1,438) (806) (823) (841)

Net Increase/ (Decrease) in Cash 239 (58) 853 (63) 58

122


Valuation Ratio (x)

P/E (on FDEPS) 10.3 16.5 (156.0) 21.7 9.3

P/CEPS 5.7 6.1 9.3 6.1 4.3

P/BV 0.9 0.9 0.9 0.9 0.9

Dividend yield (%) 2.0 3.0 1.5 2.3 3.0

EV/Sales 0.6 0.6 0.7 0.6 0.5

EV/EBITDA 6.3 7.7 9.1 6.4 4.6

Per Share Data (Rs)

EPS (Basic) 12.9 8.1 (0.9) 6.1 14.4

Core EPS 12.9 8.1 (0.9) 6.1 14.4

Cash EPS 23.3 22.0 14.3 22.0 30.8

DPS 2.7 4.0 2.0 3.0 4.0

Book Value 144.6 143.0 140.2 143.3 153.7

Returns (%)

RoCE 12.0 7.4 4.1 7.7 12.0

RoE 8.7 2.8 (0.7) 5.1 11.5

Turnover ratios (x)

Asset Turnover (Gross Block) 1.5 1.4 1.2 1.5 1.7

Inventory / Sales (days) 54 75 53 47 47



Cash conversion cycle (days) 74 81 54 51 51

123

Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India’s leading retail broking houses. Reliance Capital is amongst India’s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website www.reliancecapital.co.in. RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014

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The research analysts has served as an officer, director or employee of the said issuer company(ies)?: No

RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No

Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL.

RSL’s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report.

Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of.

RSL CIN: U65990MH2005PLC154052. SEBI registration no. (Stock Broker: INZ000172433, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889.

Change in Ratings

f We have shifted to BUY & SELL ratings only and no longer continue with HOLD rating.

f We have also shifted to 2-year Target Price from 1-year Target Price earlier.

Cement & Building Materials - Reliance Securities

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