Sunil Singhania
2
0
5
10
15
20
4
6
8
10
12
(5)
12
(%)
FY86 FY82
(%)
11
FY87 FY83
16
FY88 FY84
11
FY85
FY89
6
FY86
FY90
9
FY87
7
FY91
FY88
12
FY92 FY89
3
FY93 FY90
7
FY94 FY91
11
FY95 FY92
FY93 0
FY96
6
FY94
FY97
8
FY95
FY98
11
FY96
8
FY99 FY97
10
FY00 FY98
6
FY01 FY99
15
FY02 FY00
(1)
FY01
FY03
9
FY02
Positive traction in demand
FY04
9
FY03
5
FY05
FY04
9
FY06 FY05
Moving 5 year demand CAGR slow downs to ~5% in mid of the decade
11
FY07 FY06
10
FY08 FY07
8
FY09 FY08
8
FY09
FY10
11
FY10
FY11
5
FY11
7
FY12
FY12
Distinct possibility of demand growth to outstrip supply growth (3-4% annually till FY21)
FY13 FY13
4
FY14 FY14
5
FY15 FY15
5
FY16 FY16
1
FY17
FY17E
7
FY18E
FY18E
8
FY19E
8
FY19E
FY20E
8
FY20E FY21E
3
Increasing demand to lead to higher utilizations
All India capacity utilization to bottom out in FY17
(%)
550 100
(mn tonne)
450
80
350
250
60
150
50 40
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Production(LHS) Capacity(LHS) Capacity utilization (RHS)
4
Demand might surprise on the upside
Proposed spending in Housing & Infra can add 720bps of incremental annual addition to demand over FY18-21
Note: *Housing demand estimated at 50% of target while infrastructure spending rate taken at 5% lower than the ratio of last year target v/s actual spending
5
Dynamics of setting up a new cement plant
Significant changes in operating dynamics over the past few years should enable established, sizeable players to
command a large premium over the average sector valuation metrics
Pre 2016 Post 2016
Mining leases were given on first come first serve basis. Limestone mine allocation only through auctions.
Limestone mines could be acquired without the end use Acquisition of mines allowed only when there is a attached
assets cement plant to it; mine transfer to attract transfer fees
Greenfield projects used to yield 12-15% RoCE even in the Current cement prices/profitability make Greenfield projects
down cycle, for a moderately efficient player economically unviable
Operating cost per tonne INR 3,400 (5 yrs avg.) Operating cost per tonne INR 3,600
Replacement cost per tonne USD 90-10 0 Replacement cost per tonne USD 120-135
6
However, stocks have run up too much too fast
Absolute Return (%)
6 months 1 year 2 year 3 year
UltraTech Cement Ltd 18 30 46 73
Ambuja Cements Ltd 17 5 4 8
ACC Ltd 24 8 11 19
Shree Cement Ltd 19 34 59 162
Dalmia Bharat Ltd 52 163 303 543
Ramco Cements Ltd/The 21 48 120 170
India Cements Ltd/The 78 122 147 103
Birla Corp Ltd 34 117 116 143
Century Textiles & Industries Ltd 36 72 68 114
JK Lakshmi Cement Ltd 26 41 41 155
JK Cement Ltd 52 90 81 218
Orient Cement Ltd 14 (6) (16) 94
Prism Cement Ltd 31 28 8 93
Kesoram Industries Ltd 2 28 64 83
Heidelberg Cement India Ltd 16 27 94 129
7
Lets see how companies have grown
First 15MT is very difficult, thereafter cement companies have demonstrated a remarkable compression in future
expansion time and delivered more consistent & superior returns
Year Of Incorporation 15MT 25MT Current Capacity (MT)
(Year) (Year) (31 Mar'17)
40 400
20 200
17.5
J K Lakshmi 13.0 58 91
Note: *M Cap as on 31st May, 2017 **Calculations asume JPAs capacities acquisition ***EV/ton calculated considering only the cement business debt and estimated M. Cap
11
Our recommendation. There is a big opportunity,
returns though shall be stock specific
We would back 15MT capacity companies which can scale up to 25MT
BUY two 15MT companies. One in North/Central India, other in South, thereby creating a quasi All India play
12
Large caps trade at 2x of replacement in up cycle
Midcaps have traded at 50% discount to large caps (15MT+) and at par with replacement cost in an up cycle.
However, with increase in size, improvement in operating efficiency and leaner balance sheets, this valuation gap
should started reducing significantly
(%) Replacement cost at High metal prices and robust order book Land acquisition Replacement cost
200 INR/tonne 3000-4000 of equipment supplier increased the act increased increased to 100
replacement cost to INR/tonne 5000-6000 replacement cost INR/tonne 9000-
to INR/tonne 10000 due to new
180 mining act and new
7000-8000 90
emission norms
160
80
140
120 70
100 60
80
50
60
40
40
20 30
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Large cap % of replacement Cost (RHS) Midcap % of replacement Cost (RHS) Capacity utilization (LHS)
13
Scenario 2021
EV (INR bn) 85 95
EV/tonne (USD) 65 73
14
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