Cement. Mid Caps: Ripe for re-rating

Transcription

1 Cement Mid Caps: Ripe for re-rating Jinesh Gandhi Sandipan Pal

2 Cement Mid Caps: Ripe for re-rating Page No. Summary View on sector remains positive Mid Caps' operating performance to improve Applying 5-S scale to pick potential winners Recommend basket of BCORP, DBEL, JKCE and OPI Companies Birla Corporation (BCORP) Century Textiles (CENT) Dalmia Bharat (DBEL) India Cements (ICEM) JK Cement (JKCE) JK Lakshmi Cement (JKLC) Madras Cements (MC) Orient Paper Industries (OPI) Prism Cement (PRSC) Prices as on 15 2

3 Update Cement Mid Caps: Ripe for re-rating Catalysts: Improving utilization, narrowing operating performance gap Our view on the Cement sector remains positive, driven by expected pick-up in demand and slowing capacity addition, thereby driving utilization, pricing and profitability. Mid Cap Cement stocks are trading at very attractive earnings valuations and significant discount to replacement cost and large peers. As the operating performance improves, the Mid Caps should see a re-rating. Pick-up in M&A activity is another potential re-rating trigger. Mid Caps offer base case upside of over 50%. We initiate coverage on seven Mid Cap Cement stocks. Buy BCORP, DBEL, JKCE, JKLC, OPI, MC and ICEM; Neutral on CENT and PRSC. Companies covered Pg Initiating Coverage Century Textiles 30 Dalmia Bharat 43 JK Cement 62 JK Lakshmi Cement 76 Madras Cements 88 Orient Paper Inds 100 Prism Cement 113 Existing Coverage Birla Corporation 25 India Cements 57 View on sector positive; reflected in re-rating of large caps Our view on the Cement sector remains positive. Short-term volatility notwithstanding, we expect sustained volume recovery (~9% CAGR over FY13-15), slowing capacity addition and higher opex/capex cost to result in strong pricing (INR15/ INR12/bag increase in FY14/FY15). This coupled with cost stabilization, albeit at higher levels, will drive profitability improvement and capital efficiencies. We expect the outperformance to continue (after 38% outperformance in CY12), driven by volume growth recovery, stabilizing cost and improving profitability. Mid Caps' operating performance to improve, driving re-rating We expect the profitability of our Mid Cap Cement Universe to improve by INR154/80 per ton in FY14/FY15 to INR1,033/INR1,113 per ton. We estimate EPS growth of ~42% CAGR (FY13-15E) for MOSL Mid Cap Universe, translating into ~550bp RoE improvement as against ~180bp RoE improvement for the Large Caps. Narrowing of the operating performance gap will drive re-rating. Applying 5-S scale to pick potential winners We have applied a 5-S scale to objectively evaluate 9 Mid Cap Cement companies on (1) size & scalability, (2) sales mix, (3) supply chain efficiencies, (4) strategic & other issues, and (5) strength of financials. While the 5-S score ranks these companies on relative attractiveness on operating parameters, we weigh the 5-S score against the valuation score to pick potential winners. Based on the 5-S / valuation score analysis, BCORP and DBEL are the most attractive. JKCE, OPI and MC offer favorable trade-off of quality and attractive valuations. Attractive valuations - base case returns of 50%+, bull case returns of 2-4x Our Mid Cap Cement Universe is currently trading at very attractive valuations of ~4.7x/3.9x FY14/FY15 EV/EBITDA and ~USD69/USD64 EV/Ton (FY14/FY15), considering improvement in operating performance and superior earnings growth. We believe the Mid Caps offer better risk-reward and initiate coverage on seven Mid Cap Cement stocks. We recommend Buy on BCORP, DBEL, JKCE, JKLC, OPI, MC, and ICEM and Neutral on CENT and PRSC. While base case return is over 50% (based on FY15 estimates), bull case returns could be 2-4x (see our Blue Sky Scenario). Cement upcycle, improvement in operating performance for Mid Caps, balance sheet deleveraging and increase in industry consolidation driven by M&A activity would be catalysts for re-rating. 3

4 Cement Operating matrix Capacity (MT) Volumes (MT) EBITDA (INR/Ton) EBITDA (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E ACC* Ambuja* ,121 1,146 1, UltraTech ,088 1,310 1, Shree Cement ,173 1,339 1, Large Caps ,048 1,181 1, Birla Corp India Cements ,001 1, Dalmia Bharat ,141 1,241 1, JK Cement ,134 1, JK Lakshmi , Madras Cements ,251 1,360 1, Orient Paper , Century Textiles Prism Cement Mid Caps , Aggregate ,108 1, Financial matrix EPS (INR) RoE (%) RoCE (%) Net Debt:Equity (x) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E ACC* Ambuja* UltraTech Shree Cement Large Caps Birla Corp India Cements Dalmia Bharat JK Cement JK Lakshmi Madras Cements Orient Paper Century Textiles Prism Cement Mid Caps Aggregate

5 Cement Valuations summary Reco CMP TP Up- PE EV/EBITDA EV/Ton (USD) EV/ Blue- Up- (INR) FY15 side (x) (x)* at CMP* Ton Sky side (INR) (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E at TP TP (%) ACC* Neutral 1,387 1, Ambuja* Buy UltraTech Buy 1,920 2, Shree Cement Buy 4,517 6, Large Caps Birla Corp Buy India Cements Buy Dalmia Bharat Buy JK Cement Buy JK Lakshmi Buy Madras Cements Buy Orient Paper Buy Century Textiles Neutral , Prism Cement Neutral Mid Caps Aggregate *EV adjusted for CWIP 5

6 Blue Sky Scenario Cement Birla Corp Birla Corp has the potential to double in two years, driven by: Resolution of the mining ban at its Rajasthan plant, resulting in cost savings of ~INR1b or ~INR150/ton. Further, the resolution of the mining ban would drive brownfield capacity addition of ~1.5mtpa. Captive coal block, with recoverable reserves of 9.4mt has the potential to drive savings of ~INR720m per year. Improvement in capital efficiency by ~200bp, led by savings in raw material cost. Any resolution of the dispute of ownership of the MP Birla group between the Lodha and Birla families would led to further re-rating, though this is not factored in our blue sky scenario. BCORP: Blue Sky Scenario (INR m) FY15E Catalyst EBITDA 8,439 Savings of ~INR1b p.a on resolution of mining ban & savings of ~INR720m from captive coal block EV/EBITDA Multiple (x) 5 Re-rating with valuations in-line with similar sized companies EV 42,196 Net Debt -9,147 Equity value 51,343 TP (INR) 667 Upside (%) 109 Century Textiles Century Textiles has potential the potential to multiply 2.5x, driven by Mr Kumar Mangalam Birla, the Chairman of the Aditya Birla Group, inheriting his grandfather, Mr BK Birla's interests in Century Textiles. Though a timeline cannot be assigned, such an event could lead to the following: Consolidation of Century Textiles' cement business with UltraTech. Hive-off of the paper business, as it would be non-core for the Aditya Birla Group. Sale of land bank, rather than own development, resulting in faster monetization. CENT: Blue Sky Scenario (INR m) Parameter Multiple FY15E Remarks Textile EV/Sales 0.4 8,937 No change in business fundamentals Cement EV/ton(US$) ,480 Merger of cement assets with A.V,Birla Group Paper EV/Sales 2 28,653 Paper business sale as part of restructuring on inheritance by A.V.Birla Group Others EV/Sales Total EV 122,766 Less: Net Debt 60,150 Add: Value of INR1.5/acre 33,000 Freehold land sale rather than own development on inheritance by A.V.Birla Group Market Cap 95,616 Fair Value (INR) 1,028 Upside (%) 140 6

7 Blue Sky Scenario Cement Dalmia Bharat Dalmia Bharat has the potential to be a 4-bagger in 2-3 years, driven by: Its being one of the top-4 cement producers in India, with capacity under control of ~22mtpa (~15mtpa based on economic interest). Ramp-up in North-East subsidiaries, resulting in higher profitability. Balance sheet deleveraging, driven by completion of ongoing capex and significant improvement in cash flow from operations during the upturn in the cement cycle. Improvement in capital efficiency, as capex incurred over last 2-3 years starts contributing. DBEL: Blue Sky Scenario (FY15) Parameter Multiple INR m Catalyst DBCL EV/Ton (USD) ,367 Scale-up of capacity to 11.5mt in an upcycle, improving utilization and beginning of balance sheet deleveraging OCL EV/Ton (USD) 100 8,527 Commissioning of new capacity at West Bengal, driving volumes and profitability Adhunik EV/Ton (USD) 100 6,961 Improving utilizations driven by strong growth in North East market, enjoying very high profitability Calcom EV/Ton (USD) 100 7,477 Commissioning of clinker capacity driving cost savings and high profitability Total EV 76,331 Less: Pro-rata Net Debt (adj for CWIP) 21,992 Total Equity Value 54,340 Fair value (INR/share) 669 Upside (%) 247 India Cements India Cements has the potential to multiply 2.5x in 2-3 years, driven by: Savings of ~INR850m (@ USD30/ton for 0.5m tons) from captive coal block in Indonesia. Valuing USD200m, if monetized. Re-rating, led by improvement in core profitability and monetization of IPL. ICEM: Blue Sky Scenario (FY15) Parameter INR m Remark S/A EBITDA 13,750 Assuming savings of ~INR850m from captive coal mine from Indonesia Trinetra EBITDA (pro-rata) 839 4x EBITDA 72,944 Value for IPL 11,023 Valuing IPL at USD200m Less: Net debt 21,644 Equity value 62,323 Target Price (INR) 217 Upside (%) 146 Implied EV/Ton (USD) 87 7

8 Blue Sky Scenario Cement JK Cement JK Cement can multiply 2.2x in two years, driven by: Commissioning of its white cement plant at UAE and be-bottlenecking of white cement capacities. Improving efficiency, driven by new gray cement plant in Karnataka and commissioning of new capacities in Rajasthan (including split grinding units). Balance sheet deleveraging, driven by completion of ongoing capex and significant increase in cash flow from operations due to higher utilization during the upturn in the cement cycle. Improvement in capital efficiency, as capex incurred starts contributing fully to P&L from FY15. JKCE: Blue Sky Scenario EV/EBITDA FY14E FY15E Target EV/EBITDA (x) Grey Cement White Cement UAE White Cement 8 1,523 9,846 EV (INR m) 54,419 74,543 Consol Net debt (INR m) 12,486 24,879 Equity value (INR m) 41,932 49,664 Equity value (INR/Shr) Implied EV/Ton (blended) 117 Implied EV/Ton (Grey) 68 Implied PE (White) 12.5 JK Lakshmi JK Lakshmi can potentially double in 2-3 years, driven by: Ramp-up at its new plant at Durg, which will commission by March 2014, marking JKLC's entry into East India. The Durg plant will be more efficient and profitable, thereby boosting overall profitability. Balance sheet deleveraging, driven by completion of ongoing capex and significant improvement in cash flow from operations during the upturn in the cement cycle. Improvement in capital efficiency, as capex incurred over the last 2-3 years starts contributing to P&L. JKLC: Blue Sky Scenario FY15E Remarks EBITDA (INR m) 8,595 Factoring for scale-up of Durg plant, will boost its overall profitability Target EV/EBITDA (x) 5 Target EV(INR m) 42,977 Net debt (INR m) 3,014 Target Equity value (INR m) 39,964 No of share (m) 118 Target Price (INR) 340 Doesn t include any value from UCW subsidiary Upside (%) 140 EV/Ton (USD) at TP 92 8

9 Blue Sky Scenario Cement Madras Cements Madras Cements has the potential to double in 2-3 years, driven by: Benefit of operating leverage, as it improves utilization from ~63% in FY13 to ~82% in FY16E. As a result, its balance sheet will turn net cash (~INR3b) by FY16 from current net debt (~INR25.3b). Likely improvement in RoE from 18% to 27%. MC: Blue Sky Scenario FY15E FY16E EBITDA (INR m) 16,062 18,119 Target EV/EBITDA (x) 6 6 Target EV(INR m) 96, ,714 Net debt (INR m) 7,284-4,560 Target Equity value (INR m) 89, ,274 No of share (m) Target Price (INR) Upside (%) EV/Ton at TP (USD) Orient Paper Orient Paper has the potential to be a 3-bagger in 2-3 years, driven by: Demerger of cement business (by March 2013). Scale-up of cement business to 8mtpa amidst the cement upcycle (by 2HFY15). Ramp-up in Electrical business, driven by continued strong growth in Fans and CFL business, and scale-up in nascent (started in 2HFY12) Home Appliances business (by FY15-16). Potential hive-off of Paper business to focus on Cement and Electrical Appliance business. OPI: Blue Sky Scenario (FY15) Parameter Multiple INR m Catalyst Cement EV/Ton (USD) ,676 Scale-up of capacity to 8mt during cement upcycle Electrical PE 20 14,990 Scale-up in home appliance business, with continous strong growth in fans and CFL business Paper EV/Sales 1.6 8,182 Hive-off of Paper business at 40% discount to AP Paper-International Paper deal valuations of 2.65x EV/Sales Total EV 66,848 Less: Net Debt 14,856 Equity Value 51,992 Equity Value (INR/sh) 254 Upside (%) 221 9

10 Blue Sky Scenario Cement Prism Cement Prism Cement has the potential to deliver ~86% returns over the next two years, driven by: Savings of INR1b from captive coal block, expected from 2HFY14, which is not factored in our base assumptions. Coal gasification at Andhra Pradesh plant and availability of LNG at Karnataka (in 6-9 month) driving cost savings, which are yet to be factored in. PRSC: Blue Sky Scenario (FY15) (INR m) Remarks Cement EV/EBITDA 5x To be driven by savings of INR1b from captive coal block, which is not factored in our base assumptions RMC EV/EBITDA 6x 4,232 TBK EV/EBITDA 6.5x Factoring in for EBITDA margin improvement to 15% driven by change in fuel mix Raheja QBE At BV 1,224 Norcros At BV 1,064 Total EV 61,463 Less: Net debt 10,386 Equity Value 51,076 Value/share (INR) 101 Upside (%) 109 Implied Cement EV/Ton (USD)

11 Cement View on sector remains positive Sustained volume recovery + slowing capacity addition = strong pricing, profitability We expect build-up in volume momentum of the last 12 months (6.8% growth), driven by (a) interest rate cuts, (b) multiple state/general elections over FY14-15, and (c) focus on reviving the investment cycle. Improving demand coupled with slowing capacity addition (~64m tons over FY13-16 v/s ~105m tons over FY09-12) should drive consistent improvement in utilization to 76%/ 78% in FY14/FY15. We expect cement prices to increase by ~INR15/bag in FY14 and ~INR12/bag in FY15. This coupled with cost stabilization, albeit at higher levels, will drive profitability improvement and capital efficiencies. Volume momentum to sustain The Cement industry has witnessed continued volume recovery in 9MFY13, with 6% YoY growth (v/s 5.6% YoY in 9MFY12) and ~6.8% TTM growth. We expect momentum to gather further steam, driven by (a) expected interest rate cuts in 4QFY13, positively impacting demand from the housing, infrastructure and industry segments, (b) multiple state/general elections in the next 18 months, (c) the government's focus on reviving investment demand, and (d) positive outlook on the Rabi crop rubbing off on rural housing demand. We estimate volume growth of 8% for FY13 and 10% for FY14, after 6% CAGR over FY Increasing demand, slowing capacity addition to drive up utilization Most of the capacity addition in the industry is behind - only ~64m tons are likely to be added over FY13-16 as against ~105m tons over FY Further, announcements of new capacity additions are far and few. We expect increasing demand and slowing capacity addition to drive gradual improvement in capacity utilization. With pick-up in demand from 2HFY12 and decline in the pace of capacity addition, we estimate capacity utilization to have bottomed out at 74% in FY12 and expect gradual, but consistent improvement to 76%/78% in FY14/FY15. Improving utilization, industry discipline and higher cost to support pricing, profitability Improvement in capacity utilization (by at least 350bp over three years), driven by pick-up in demand (9% CAGR over FY13-15) and slowdown in capacity addition would be the key drivers of cement prices. Further, higher capex and opex cost would necessitate further price increases. Based on the current variable cost and replacement cost of USD140/ton, cement prices need to improve by INR55/bag to earn new capacities 15% RoE. 11

12 Cement Volume growth to remain robust, short-term divergence notwithstanding Demand-supply equilibrium to turn favorable from FY13 Million tonnes FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E Cement Capacity (Year end) Growth Clinker Exports Cement Despatches Growth (%) Domestic Consumption Growth (%) Cement Exports Growth (%) Capacity Util (%) Effective Cap. (Qly add-up)* Effective Cap. Util. (%) Source: CMA, MOST;^ based on Year ending capacity; *Effective cap is adj for non-operative cap & is quarterly add-up of cap additions This coupled with slower capacity addition should drive gradual improvement in utilization translating into strong pricing and profitability 12

13 Cement Recovery in cement prices, stable costs to drive profitability from FY13 Cement prices have been volatile in the last 3-4 months due to the monsoon and then the festive season. We expect prices to improve from 4QFY13, translating into an increase of INR20/bag in the average price for FY13. Further, we estimate an increase of INR15/bag in FY14 and INR12/bag in FY15. Higher prices coupled with stabilizing costs post the recent impact on freight cost due to increase in diesel prices will drive profitability improvement. We expect EBITDA/ton to improve to ~INR1,156/1,242 in FY14/15E from INR1,010 in FY13E for our Cement Universe. We estimate ~28% EPS growth in FY14 and ~24% CAGR over FY This coupled with higher asset turnover and lower capex should drive ~350bp RoE improvement in FY15 to ~20.7%. Expect strong earnings growth and RoE improvement over the next two years 13

14 Cement Mid Caps' operating performance to improve Narrowing operating performance gap, possible M&A pick-up to trigger re-rating Trend in M&A deals (USD/ton) Acquirer Target Valn 1.Holcim Ambuja HeidelbergMysoreCem 98 3.Cimpor ShriDigvijay CRH MyHome Vicat Bharathi KKR DBEL 80 7.JP Group AndhraCem 68 8.DBEL Calcom DBEL Adhunik 130 We expect the profitability of our Mid Cap Cement Universe to improve by INR154/80 per ton in FY14/FY15 to INR1,033/INR1,113 per ton. We estimate EPS CAGR of ~42% (FY13-15E) for MOSL Mid Cap Universe, translating into ~550bp RoE expansion. Cement upcycle, improvement in operating performance for Mid Caps, balance sheet deleveraging and increase in industry consolidation driven by M&A activity would be catalysts for re-rating. Further, stock liquidity would gradually improve, as we enter the upcycle, driven by improvement in scale and operating performance, and increasing confidence in the management. Narrowing operating performance gap, possible M&A pick-up to drive stock performance We believe that the current cheap valuations of Mid Caps are unsustainable. Rerating would be driven by (a) improvement in the cement cycle, (b) narrowing of the operating performance gap, and (c) higher M&A activity. We expect the profitability of our Mid Cap Cement Universe to improve by INR154/80 per ton in FY14/FY15 to INR1,033/INR1,113 per ton. We estimate EPS growth of ~42% CAGR (FY13-15E) for MOSL Mid Cap Universe, translating into ~550bp RoE improvement for our Mid Cap Cement Universe (as against ~200bp RoE improvement for the Large Caps). Further, any increase in industry consolidation, driven by pick-up in M&A activity will also act as a re-rating trigger. Anecdotal evidence suggests that M&A activity results in an improvement in the valuations of Mid Caps. Market share of MOSL Mid Cap Cement Universe Trend in EBITDA/ton Trend in RoE (%) Re-rating to be driven by cement cycle upturn and revival in M&A (1) (3) (4) (2) (5) (6) (7) (8) (9) 14

15 Cement Liquidity for Mid Caps poor currently (INR m) 6m avg Freevol. float (%) Ambuja Cem ACC UltraTech Cem Century Textiles Grasim Inds India Cements Shree Cement Madras Cement J K Cements JK Lakshmi Cem Orient Paper Birla Corpn Prism Cement Dalmia Bharat Stock liquidity to follow improvement in operating fundamentals Current liquidity for Cement Mid Cap stocks is poor and results in high impact cost. However, we believe liquidity for these Mid Caps will improve as operating fundamentals continues to improve. Stock liquidity would gradually improve, driven by a) sector upcycle, b) improvement in their scale, c) improvement in operating performance, and d) increasing confidence in the management driven by deliverance/ execution capabilities. Poor liquidity notwithstanding, current valuations offers significant margin of safety and scope for very high returns even after incurring impact cost. Mid Caps trading at above average discount to large caps and replacement cost Mid Cap Cement stocks are trading at ~60% discount to Large Caps on the basis of EV/ ton and at ~44% discount on the basis of EV/EBITDA. They are available at ~52% discount to replacement cost against the long period average of ~25%. The long period average discount to Large Caps is 37% on EV/ton basis and 25% on EV/EBITDA basis. While some discount vis-à-vis large caps is justified on the basis of (a) size, (b) market concentration, (c) capital allocation, (d) management bandwidth, (e) balance sheet quality, and (f) liquidity, the current discounts are too steep and are unlikely to sustain. Trend in EV/ton (USD) Trend in discounts (%) Trend in EV/EBITDA 15

16 Cement Applying 5-S scale to pick potential winners BCORP and DBEL are the most attractive We have applied a 5-S scale to objectively evaluate 8 Mid Cap Cement companies on (1) size & scalability, (2) sales mix, (3) supply chain efficiencies, (4) strategic & other issues, and (5) strength of financials. While the 5-S score ranks these companies on their relative attractiveness on operating parameters, we weigh the 5-S score against the valuation score to pick potential winners. Based on the 5-S / valuation score analysis, Birla Corp (BCORP) and Dalmia Bharat (DBEL) are the most attractive. JK Cement (JKCE), JK Lakshmi (JKLC), Orient Paper (OPI) and Madras Cements (MC) offer favorable trade-off of quality and attractive valuations. 5-S scale - focus on key operating and financial parameters We have formulated a 5-S scale to objectively evaluate Mid Cap Cement companies on key operational and financial parameters. We have applied it to the 9 companies covered in this report - Birla Corp (BCORP), India Cements (ICEM), Century Textiles (CENT), Dalmia Bharat (DBEL), JK Cement (JKCE), JK Lakshmi (JKLC), Madras Cements (MC), Orient Paper (OPI) and Prism Cement (PRSC). We have evaluated these companies on (1) size & scalability, (2) sales mix, (3) supply chain efficiencies, (4) strategic & other issues, and (5) strength of financials. These parameters have been weighted in terms of their relative importance. While 5-S score ranks these companies on their relative attractiveness on operating parameters, we weigh the 5-S score against the valuation score to pick potential winners from the group. Based on the 5-S / valuation score analysis, BCORP and DBEL are the most attractive. JKCE, JKLC, OPI and MC offer favorable trade-off of quality and attractive valuations. On the other hand, PRSC and CENT do not offer favorable risk-reward, considering that their 5-S / valuation scores are the lowest. 5-S Matrix for Mid Cap Cement companies Ratings Scale [100] BCORP ICEM CENT DBEL JKCE JKLC MC OPI PRSC 1. Size & scalability [30] a. Existing capacity [15] b. Room for growth [15] Sales Mix [20] a. Quantitative [14] b. Qualitative [6] Supply chain efficiencies [20] a. Cost Structure [12] b. Cost saving potential [8] Strategic & Other issues [10] a. Other businesses/diversification b. Management/Strategic issues Strength of financials [20] a. Profit & earnings growth [12] EBITDA/Ton [4] PAT Growth (FY12-15E CAGR) [4] Dividend Payout (%) [4] b. Capital structure & efficiencies [8] Net Debt:Equity (x) [4] RoCE (%) [4] S Score

17 Cement Valuation score for Mid Cap Cement companies Valuations [100] BCORP ICEM CENT DBEL JKCE JKLC MC OPI PRSC - EV/ton [30] EV/EBITDA [30] PE [20] PB [20] Valuation Score S-Valuation score matrix We discuss each of the 5-S parameters and enlist the rationale behind the scores assigned. 1. Size & scalability [30] Existing Room for Total Remark capacity growth [15] [15] BCORP Current cap. at 9.3mt, with no visibility of new capacity addition ICEM Largest cap. with 15.1mt, with no further capacity addition till FY15 CENT Current cap. of 10mt, with additional 2.8mt by 2HFY14 DBEL Existing cap. of 11.8mt (~17mt under control) going up to 15mt by FY15 (~22mt under control) JKCE Existing capacity of 7.5mt, being expanded to 10.5% by 2HFY14 JKLC Current cap. of 5.2mt, with additional 2.7mt at Durg by Dec-13 MC No further cap. addition expected beyond 13.6mt OPI Current cap. of 5mt, with additional 3mt by 2HFY15 PRSC Among smallest player within the group with no new cap. expected till FY15, leaving limited headroom to grow Rated based on capacities as of FY13, with highest score for biggest company (based on economic interest). Also, qualitative assesment of adequacy of clinker capacity to meet grinding capacity. 17

18 Cement 2. Sales Mix [20] Quantitative Qualitative Total Remark [14] [6] BCORP Focus on North, Central & East ICEM Dominant in South, with smaller diversification to West and North. Even within South, higher contribution from AP. CENT Focus on East, Central and West, with new capacities coming in East and West DBEL South and East focused mix, but AP only ~8% of total volumes JKCE Focus on North with 50% contribution, with balance equally coming from West, Central and South JKLC Focus on North and Gujarat market, however, new plant at Durg to diversify in East MC South concentration, with small contribution from East. Enjoys best realizations within the group. OPI Maharashtra and AP focused player, with new plant at Karnataka to increase contribution from South PRSC Central and East focus play, resulting in above average realizations. Plans to set-up plant in AP. Focus on current market mix, based on demand-supply equilibrium. Further, qualitative assessment of state mix within regional mix, any potential mix change due to new capacities and pricing power. 3. Supply chain efficiencies [20] Cost Cost saving Total Remark Structure potential [12] [8] BCORP Cost efficient producer, being currently impacted by limestone mining ban at its Rajasthan plant. Any resolution of mining ban and operating leverage will help reducing cost. ICEM Highest cost structure within the group. However, increase in contribution from CPP, captive Indonesian coal and operating leverage to drive cost savings. CENT Higher dependence on linkage coal. New CPP and new plant to improve cost structure, but shrinking linkage coal & to hurt energy cost. DBEL Higher energy cost & -ve op. leverage resulting in high cost structure; Calcom clinker plant and OCL captive mine potential cost saving triggers. JKCE Newer plants to improve operating efficiencies;focus on increasing rail usage JKLC Cost efficient player, with no dependence on linkage coal. However, new plant to result in operating deleverage MC Average cost producer, with potential cost saving from new CPP & improving utilizations OPI Least cost producer currently due to higher dependence on linkage coal, which is expected to shrink PRSC Reconstruction of Silo at new plant to drive improvement in utilizations and save cost; Captive coal mine to start operations in 2HFY14 and drive savings of INR1b Evaluated based on current cost structure (FY13) and potential changes in cost structure 18

19 Cement 4. Strategic & Other issues [10] Other Management/ Total Remark businesses/ Strategic Diversification issues BCORP No significant other businesses; Professional management till ownership issue is resolved; Captive coal block offer option value; Future capacity growth constraint by litigation ICEM Capital allocation to shipping for ferrying own coal and investment in IPL; Further significant inter group company loans given; Treasury stock remains unutilized CENT Significant capital allocation to Textile and Papers; Real estate would drive value, although realization would be back ended; K.M.Birla to inherit this company DBEL Pure Cement play post demerger; However, recent open offer for DBSL for 26% stake is not consistent with demerger of cement to bring focus JKCE Allied White Cement business is cash cow with very high profitability JKLC Pure Cement company; Bought back shares; Acquiring defunct Udaipur Cement Works from the promoter group companies MC Has 15% of capital employed in Windpower, which has poor RoCE OPI Both paper and electrical businesses would witness cost savings/ improvement in margins in FY14-15; Cement being demerged into separate company PRSC Significant capital allocation to TBK and RMC; Investments in General Insurance business and merger of RMC & TBK at very high valuations for promoter companies Assigning higher score for companies with pure play on cement, attractiveness of other businesses for diversified players. Also, evaluating any management/ strategic issues influencing companies 5. Strength of financials [20] Profit & earnings growth [12] Capital structure & efficiencies [8] EBITDA PAT Gr. Dividend Net Debt: RoCE (%) Total /Ton (FY12-15E Payout (%) Equity (x) [4] [4] CAGR) [4] [4] [4] BCORP ICEM CENT DBEL JKCE JKLC MC OPI PRSC

20 Cement Recommend basket of BCORP, DBEL, JKCE and OPI Emulates large cap quality, but available at significant discount Our view on the Cement sector remains positive. We expect sustained volume recovery, slowing capacity addition and higher opex/capex cost to result in strong pricing. Large Cap Cement stocks have seen significant re-rating over the last 12 months and stock performance hereon should be a function of earnings growth. However, our Mid Cap Cement Universe is currently trading at very attractive valuations and returns would be driven by both strong earnings growth and re-rating. We believe Mid Caps offer base case upside of over 50% and initiate coverage on seven Mid Cap Cement stocks. Buy BCORP, DBEL, JKCE, JKLC, OPI, MC, and ICEM; Neutral on CENT and PRSC. View on sector positive We believe the worst is behind for the Cement sector and expect gradual improvement in operating performance. Though the sector will continue to be plagued by overcapacity, we expect gradual and consistent improvement in capacity utilization, driven by sustained volume recovery and slowing capacity addition. As a result, we expect cement prices to increase by ~INR15/bag in FY14 and ~INR12/bag in FY15. This coupled with cost stabilization, albeit at higher levels, will drive profitability improvement and capital efficiencies. Earnings growth to drive the large caps After the recent outperformance (34% to Sensex in the last 12 months), Large Cap Cement stocks have got re-rated (33% on EV/ton basis and 20% on EV/EBITDA basis). They are trading at premium to historical average valuations (~18% premium on EV/ EBITDA) and replacement cost (~20% premium), leaving limited room for further rerating. Hereon, we expect strong earnings growth to be the key driver of stock performance. Among Large Caps, we prefer UltraTech/Grasim and Shree Cements. Mid caps offers both growth and value While our Mid Cap Cement Universe has delivered performance similar to Large Cap Cement stocks, the re-rating in Mid Caps has been much smaller (6% on EV/EBITDA and 20% on EV/ton). Mid Cap Cement stocks are trading at ~60% discount to Large Caps on the basis of EV/ton and at ~44% discount on the basis of EV/EBITDA. They are available at ~52% discount to replacement cost against the long period average of ~25%. We believe cement Mid Caps superior returns would be function of strong earnings growth and re-ratings. In FY14, we expect earnings to grow ~52% for our Mid Cap Cement Universe as against 29% for our Large Cap Universe. RoE is likely to improve by ~550bp for our Mid Cap Cement Universe over FY13-15 v/s ~200bp improvement for the Large Caps. As the operating performance gap vis-à-vis Large Caps narrows, so will the discount. Further, any increase in industry consolidation, driven by pick-up in M&A activity will also act as a re-rating trigger for the Mid Caps. We initiate coverage on seven Mid Cap Cement stocks - Century Textiles (CENT, Neutral), Dalmia Bharat (DBEL, Buy), JK Cement (JKCE, Buy), JK Lakshmi (JKLC, Buy), Madras Cements (MC, Buy), Orient Paper (OPI, Buy) and Prism Cement (PRSC, Neutral). We maintain Buy on Birla Corp (BCORP) and India Cements (ICEM). 20

21 Cement Recommend 'basket' approach to emulate large cap quality at mid cap valuations Considering the diversity in our Mid Cap Cement Universe, we recommend a 'basket' approach. Based on our 5-S ratings and valuation scores, we have created a basket of four stocks - BCORP, DBEL, JKCE and OPI, which mimics Large Caps with respect to size, diversification and profitability, but at a deep discount to the Large Caps. Our basket represents total capacity of ~41m tons (based on economic interest), offers market mix similar to the industry mix, headroom to grow volumes (~70% utilization in FY15) and ~33% earnings growth. Despite this, it is trading at ~68% discount on EV/ton, ~60% discount on EV/EBITDA and ~75% on P/B vis-à-vis our Large Cap Universe (based on FY15 estimates). Basket offers diversified market mix, ~41m ton capacity and room to grow at ~75% utilization Capacity (MT) Capacity utilization (%) Lower realization and EBITDA (INR/ton) reflected in pricing discount 21

22 Cement EV/Ton (USD) EV/EBITDA (x) Operating matrix Capacity (MT) Volumes (MT) EBITDA (INR/Ton) EBITDA (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E ACC* Ambuja* ,121 1,146 1, UltraTech ,088 1,310 1, Shree Cement ,173 1,339 1, Large Caps ,048 1,181 1, Birla Corp India Cements ,001 1, Dalmia Bharat ,141 1,241 1, JK Cement ,134 1, JK Lakshmi , Madras Cements ,251 1,360 1, Orient Paper , Century Textiles Prism Cement Mid Caps , Aggregate ,108 1, Financial matrix EPS (INR) RoE (%) RoCE (%) Net Debt:Equity (x) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E ACC* Ambuja* UltraTech Shree Cement Large Caps Birla Corp India Cements Dalmia Bharat JK Cement JK Lakshmi Madras Cements Orient Paper Century Textiles Prism Cement Mid Caps Aggregate

23 Cement Valuations summary Reco CMP TP Up- PE EV/EBITDA EV/Ton (USD) EV/ Blue- Up- (INR) FY15 side (x) (x)* at CMP* Ton Sky side (INR) (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E at TP TP (%) ACC* Neutral 1,387 1, Ambuja* Buy UltraTech Buy 1,920 2, Shree Cement Buy 4,517 6, Large Caps Birla Corp Buy India Cements Buy Dalmia Bharat Buy JK Cement Buy JK Lakshmi Buy Madras Cements Buy Orient Paper Buy Century Textiles Neutral , Prism Cement Neutral Mid Caps Aggregate *EV adjusted for CWIP 23

24 Cement Companies Companies covered Pg Initiating Coverage Century Textiles 30 Dalmia Bharat 43 JK Cement 62 JK Lakshmi Cement 76 Madras Cements 88 Orient Paper Inds 100 Prism Cement 113 Existing Coverage Birla Corporation 25 India Cements 57 24

25 Update Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 67 4 Valuation score, Rank 94 2 Target price & upside Base case INR464 46% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj. EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations BCORP IN Equity Shares (m) Week Range (INR) 342/202 1,6,12 Rel. Perf. (%) 13/28/-7 M.Cap. (INR b) / (USD b) 25/0.4 P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (x) Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) Birla Corporation CMP: INR319 TP: INR464 Buy Cost efficient player Possible resolution of mining ban, a key trigger; Buy Birla Corp (BCORP) is one of the most cost efficient cement producers, with average cost of production being consistently 8-10% lower than the MOSL Cement Universe. We expect strong scale-up in BCORP's volumes over FY12-15 on the back of stabilization of recently added capacities and favorable market mix. The ban on limestone mining at its Rajasthan plant has impacted its volumes and cost adversely. Resolution of the mining ban would be a key trigger. Strong balance sheet renders flexibility to expansion as both expansion plans marred by litigation. We value BCORP at INR464/share (4x FY15E EV/EBITDA with implied EV/ ton of USD52). Maintain Buy; our target price implies 46% upside. Capacity addition, favorable market mix to aid volume growth BCORP has posted subdued dispatch growth (CAGR of 2.7%) over FY10-12 due to capacity constraints. However, we expect strong scale-up in volumes over FY13-15 (8.7% CAGR), despite mining ban on the back of stabilization of recently added capacities (1.7mtpa in Satna, 1.2mtpa in Chanderia and 0.6mtpa in Durgapur in 3QFY12) and favorable market mix. BCORP's sales mix is concentrated in North, Central and East India, where demand-supply outlook remains healthy. We expect favorable market mix to drive ~9.5% CAGR in average realization over FY13-15 (INR29/15/10 per bag increase in FY13/14/15). Cost efficient player; resolution of mining ban key trigger BCORP is highly cost efficient cement producers, with average cost of production being consistently 8-10% lower than the MOSL average. The cost advantage is attributable to high dependence on linkage coal (~65%), superior fuel efficiency and low cost power generation (captive power accounts for 66% of requirement). The recently imposed ban on limestone mining at its Rajasthan plant has impacted its volumes and cost adversely. Resolution of the mining ban would be critical for future volume growth and normalization of profitability. While BCORP is also in the process of setting up two CPPs at Chanderia (50MW) and Satna (35MW), we are yet to account for any benefit due to lack of visibility on the timeline. We expect EBITDA/ton to improve to INR1,019 in FY15 from INR660 in FY12 (16% CAGR). Strong balance sheet, FCF generation to support growth BCORP's both the expansion plans are marred by litigation. However its healthy cash surplus of ~INR5.1b as of FY14E, coupled with strong FCF visibility of ~INR9.2b over FY13-15 offers healthy growth potential here on. We model in for likely expansion in capital efficiencies(roce/roe by 4.3/3.8pp) on the back of deployment of surplus cash. Trading at steep discount; reiterate Buy BCORP trades at FY15E EV of USD32/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for MOSL Cement Universe) and 2.4x FY15E EBITDA (v/ 25

26 Birla Corporation 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for MOSL Cement Universe). We expect revenue/ebitda/pat CAGR of 16%/30%/31% over FY We value BCORP at INR464/share (4x FY15E EV/EBITDA with implied EV/ton of USD52). Maintain Buy; our target price implies 46% upside. About Birla Corp Birla Corp (BCORP) is a part of the MP Birla group. It has cement capacity of 9.3mtpa across plants located in Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal. BCORP's ownership is sub-judice, as the will of Late Mrs Priyamvada Birla bequeathing all M.P.Biral group property to Late Mr Rajendra Lodha is being contested by Birla family. Strong balance sheet, steady volume growth, cost leadership and attractive valuations position BCORP as one of our preferred bets in the mid cap universe. Blue Sky Scenario Birla Corp Birla Corp has the potential to double in two years, driven by: Resolution of the mining ban at its Rajasthan plant, resulting in cost savings of ~INR1b or ~INR150/ton. Further, the resolution of the mining ban would drive brownfield capacity addition of ~1.5mtpa. Captive coal block, with recoverable reserves of 9.4mt has the potential to drive savings of ~INR720m per year. Improvement in capital efficiency by ~200bp, led by savings in raw material cost. Any resolution of the dispute of ownership of the MP Birla group between the Lodha and Birla families would led to further re-rating, though this is not factored in our blue sky scenario. BCORP: Blue Sky Scenario (INR m) FY15E Catalyst EBITDA 8,439 Savings of ~INR1b p.a on resolution of mining ban & savings of ~INR720m from captive coal block EV/EBITDA Multiple (x) 5 Re-rating with valuations in-line with similar sized companies EV 42,196 Net Debt -9,147 Equity value 51,343 TP (INR) 667 Upside (%) 109 BCORP: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

27 Birla Corporation 5-S Analysis [Score 67 / 100] & [Rank 4] Size & Scalability [18 / 30] Has cement capacity of 9.3mtpa across plants located in Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal. Expect strong scale-up in volumes over FY12-15 (8.7% CAGR) on the back of stabilization of recently added capacities (1.7mtpa in Satna, 1.2mtpa in Chanderia and 0.6mtpa in Durgapur in 3QFY12) and favorable market mix. No major capacity addition in foreseable future, as both planned expnasion at Rajasthan & MP are impacted by litigation. Strategic & Other Issues [7 / 10] BCORP's ownership is sub-judice, as the will of Late Mrs Priyamvada Birla bequeathing all M.P.Biral group property to Late Mr Rajendra Lodha is being contested by Birla family. BCORP is largely a pure cement player, with insignificant contribution from Jute and other business to its revenue and profit. With regards to mining ban, High court has levied a compensation of INR45m. Currently, the matter is subjudice and resolution would be critical. Sales Mix [16 / 20] Sales mix concentrated in North, Central and East India, where demand-supply outlook remains healthy. Expect favorable market mix to drive ~9.5% CAGR in average realization over FY12-15 (INR29/15/10 per bag increase respectively). While its expansion at MP and Rajasthan are impacted by litigation, as and when it is cleared, it will strengthen presence in NEC market. Strength of Financials [12 / 20] Expect EBITDA/ton to improve to INR976 in FY15 from INR660/780 in FY12/13E (12% CAGR). Expect revenue/ebitda/pat CAGR of 16%/31%/30% over FY No major capacity addition in foreseable future, as both planned expnasion at Rajasthan & MP are impacted by litigation. Net cash of ~INR5.1b as on FY14E and strong operating cash flow visibility (INR15.7b over FY13-15) to address capex. Improvement in operating cycle to augment RoCE and RoE by 4.3pp and 3.8pp, respectively. Supply Chain Efficiencies [14 / 20] One of the most cost efficient cement producers, with average cost of production being consistently 8-10% lower than the MOSL average. Cost advantage attributable to high dependence on linkage coal (~65%), superior fuel efficiency and low cost power generation (captive power accounts for 66% of requirement). Ban on limestone mining at its Rajasthan plant has impacted its volumes and cost adversely (~INR1b of overall cost impact). While BCORP is also in the process of setting up two CPPs at Chanderia (50MW) and Satna (35MW), we are yet to account for any benefit due to lack of visibility on the timeline. Valuation & View [94 / 100] BCORP trades at an FY15E EV of USD32/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 2.3x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We value BCORP at INR464/share (4x FY15E EV/ EBITDA with implied EV/ton of USD52). Maintain Buy; our target price implies 46% upside. Our Blue Sky scenario analysis indicates that BCORP has potential to double in 2 years time, with target price of INR

28 Birla Corporation Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 21,570 21,238 22,469 25,660 29,747 34,305 Change (%) Total Expenditure 14,519 17,059 19,345 21,733 24,566 27,586 EBITDA 7,051 4,179 3,124 3,927 5,182 6,719 Change (%) Margin (%) Depreciation ,098 1,269 1,343 EBIT 6,495 3,530 2,324 2,829 3,913 5,376 Int. and Finance Charges Other Income - Rec. 1,383 1,372 1,662 1,620 1,551 1,722 PBT 7,608 4,376 3,461 3,549 4,564 6,198 Change (%) Tax 2,036 1,177 1, ,232 1,674 Tax Rate (%) PAT 5,572 3,199 2,392 2,671 3,332 4,525 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Reserves 17,142 19,809 21,664 23,659 26,270 29,984 Net Worth 17,912 20,579 22,434 24,429 27,040 30,754 Loans 7,092 10,158 11,243 11,243 11,243 11,243 Deferred Liabilities Capital Employed 25,799 31,862 35,210 37,267 39,969 43,807 Gross Block Less: Accum. Deprn Net Fixed Assets 6,987 9,754 13,482 19,523 19,754 20,411 Capital WIP Investments Curr. Assets 8,418 10,559 11,526 20,012 23,468 27,798 Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. 4,299 5,032 5,386 6,268 7,253 8,402 Account Payables 3,650 4,507 4,744 5,389 6,247 7,204 Provisions ,006 1,198 Net Current Assets 4,118 5,527 6,140 13,743 16,215 19,396 Appl. of Funds 25,799 31,862 35,210 37,267 39,969 43,807 E: MOSL Estimates 28

29 Birla Corporation Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton - Cap (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Inventory (Days) Debtor (Days) Working Capital Turnover (Days) Leverage Ratio Current ratio Debt/Equity (x) Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Op.Profit/(Loss) before Tax 7,301 4,456 3,124 3,927 5,182 6,719 Interest/Dividends Recd ,662 1,620 1,551 1,722 Direct Taxes Paid -1,913-1,089-1, ,141-1,550 (Inc)/Dec in WC CF from Operations 5,060 3,398 3,779 4,029 5,187 6,491 (inc)/dec in FA -2,795-4,927-4,778-3,000-1,500-2,000 (Pur)/Sale of Investments -5, ,244 7, CF from Investments -8,350-5,079-3,534 4,448-1,500-2,000 (Inc)/Dec in Debt 4,368 3,104 1, Interest Paid Dividend Paid CF from Fin. Activity 3,485 1, ,575-1,620-1,710 Inc/Dec of Cash ,902 2,066 2,781 Add: Beginning Balance 3,197 3,393 3,711 4,386 11,288 13,354 Closing Balance 3,393 3,711 4,385 11,288 13,354 16,135 29

30 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 63 7 Valuation score, Rank 42 9 Target price & upside Base case INR460 8% Blue Sky INR 1, % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) CENT IN Equity Shares (m) Week Range (INR) 470/238 1,6,12 Rel. Perf. (%) 1-1/24/51 M.Cap. (INR b) / (USD b) 40/0.7 Century Textiles CMP: INR427 TP: INR460 Neutral Cement poised for growth, performance improvement Delay in land value unlocking, high leverage to remain near-term drags Century Textiles (CENT) is likely to witness 11% CAGR in cement volumes over FY13-15, driven by 4.3mtpa expansion in Maharashtra and West Bengal by mid-fy14. Cost savings from upcoming CPP and new capacity with better operating efficiency will enhance operating margins of the cement business. However, acute margin pressure in non-cement segments, high leverage (net debt of INR62.5b in FY15E) and delay in real estate value unlocking would limit upside potential. We initiate coverage with a Neutral rating; our target price of INR460 implies 8% upside. Real estate value unlocking potential significant, but back-ended CENT has 40 acres of mill land in Worli, one of Mumbai s most attractive real estate micro-markets. Recent transactions/pe deals in Central Mumbai have materialized at a valuation of INR1.6b-1.8b/acre. We value CENT s mill land with ~5msf of leasable area at ~INR26b (FY15E NAV). Our valuation implies land value of ~INR1.2b/acre, 25-30% discount to the recent deals. We believe that the implied discount is attributable to (a) back-ended land monetization plan under commercial leasing model, and (b) prevailing challenges in the Central Mumbai commercial real estate market due to weak demand, threat of oversupply and high vacancy. Capacity additions, cost saving triggers to improve cement profitability After stagnancy in capacity growth over FY08-12, we expect CENT s 4.3mtpa expansion in Maharashtra and West Bengal by mid-fy14 to aid meaningful volume growth visibility (estimate 11% CAGR over FY13-15 v/s flat volume over FY10-12). Demand outlook is strong due to fundamentally sound market mix (West, Central and East India). Historically, CENT has posted lower cement profitability (EBITDA/ ton of INR456/516 v/s average INR894/1,010 for MOSL Cement Universe in FY12/ 13E) owing to lower realizations, high freight cost and vintage plants. Going ahead, we believe cost savings from upcoming CPP (would meet 80% requirement) and new cement plants with better operating efficiency will enhance operating margins, though it will be difficult to completely bridge the gap with peers. We expect 19% CAGR in cement EBITDA/ton over FY13-15 to INR734. Non-cement segments, high leverage to remain near-term drags Revival in textiles (revenue/ebitda contribution of 26%/4%) and paper (revenue/ EBITDA contribution of 17%/15%) hinges on demand recovery, softening of input costs (e.g. cotton) and its ability to tackle competitive pressure. We expect both the segments to continue with weak margins and subdued RoCE. Its spiraling debt (net debt of INR62.5b in FY15E) and high interest on the back of ongoing capex stoke further concerns. 30

31 Century Textiles Near-term upside potential limited; initiate with Neutral While the cement business is poised for steady improvement, acute margin pressure in non-cement segments, high leverage (FY15E net debt-equity of 4.9x) and delay in real estate value unlocking would limit upside potential. CENT trades at 11.1x FY15E EBITDA. For the cement business, this implies FY15E EV of USD72/ton v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe. Our SOTP-based valuation is INR460/share: (1) cement (USD75/ ton), (2) paper (1x FY15E sales), (3) textiles (0.4x FY15E sales), and (4) land (FY15E NAV). We initiate coverage with a Neutral rating; our target price implies 8% upside. About Century Textiles Blue Sky Scenario Century Textiles Century Textiles (CENT), BK Birla group s flagship, is a diversified company with presence in cement, textiles, paper & pulp, and chemicals. It has 8.5mtpa of cement capacity (to be expanded to 12.8mtpa by FY14) and has the largest market share in Central India. Given the near-term challenges in the textiles and paper businesses, the robust outlook on cement and significant value unlocking potential in real estate will be the key drivers. Century Textiles has potential the potential to multiply 2.5x, driven by Mr Kumar Mangalam Birla, the Chairman of the Aditya Birla Group, inheriting his grandfather, Mr BK Birla's interests in Century Textiles. Though a timeline cannot be assigned, such an event could lead to the following: Consolidation of Century Textiles' cement business with UltraTech. Hive-off of the paper business, as it would be non-core for the Aditya Birla Group. Sale of land bank, rather than own development, resulting in faster monetization. CENT: Blue Sky Scenario (INR m) Parameter Multiple FY15E Remarks Textile EV/Sales 0.4 8,937 No change in business fundamentals Cement EV/ton(US$) ,480 Merger of cement assets with A.V,Birla Group Paper EV/Sales 2 28,653 Paper business sale as part of restructuring on inheritance by A.V.Birla Group Others EV/Sales Total EV 122,766 Less: Net Debt 60,150 Add: Value of INR1.5/acre 33,000 Freehold land sale rather than own development on inheritance by A.V.Birla Group Market Cap 95,616 Fair Value (INR) 1,028 Upside (%) 140 CENT: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

32 Century Textiles 5-S Analysis [Score 63 / 100] & [Rank 7] Size & Scalability [22 / 30] Existing cement capacity of 8.5mt with no major expansion over FY Posted muted volume growth (1% CAGR) over FY09-12 at high utilization (95-99%). Ongoing greenfield expansion of 1.5mt in West Bengal (INR5.2b by March 2013) and 2.8mt fo brownfield expansion in Maharashtra (INR16b including 60MW power plant by September 2013) would be the key drivers of volume growth (estimate 11% CAGR) over FY13-15E. Strategic & Other Issues [5 / 10] CENT's 40-acre mill land in Worli offers significant value unlocking potential. However, given delayed monetization and subdued commercial demand, we value the land at 25-30% discount to recent transactions at INR26b (INR281/share). Textile (revenue/ebitda contribution of 26%/4%) and paper (17%/15%) businesses remain near-term drags on margins and capital efficiency. Sales Mix [18 / 20] Fundamentally sound market mix, with ~49% of dispatches to Central India, while East and West India account for 27% and 24% of dispatches, respectively. CENT commands 10-11% market share in Central India and 4-5% each in East and West India. The trade segment contributes ~90% of CENT's cement sales (v/s industry average of 65%), resulting in lower pricing volatility. We model INR15/15/10 per bag increase in realizations over FY13/FY14/15. Supply Chain Efficiencies [11 / 20] Cost of production at par with MOSL Cement Universe. High proportion (~60%) of coal linkages and high blending (1.43x) enable energy cost advantage. Freight cost to remain high due to high lead ( km) distance - 50% sold outside home markets. Vintage cement plants (average age of 24 years) have lower operating efficiencies. New plants with various subsidies to aid cost savings. Upcoming CPP to enable 80% self sufficiency at extended capacity (v/s 75% currently). Expect cost of cement production per ton to grow at a moderate 5% CAGR over FY13-15E. Strength of Financials [7 / 20] Profitability significantly lower than peers in cement (FY12/13E EBITDA/ton at INR456/ % discount to MOSL Cement Universe). Expect 19% CAGR in EBITDA/ton over FY13-15 to INR734, though it would be difficult to completely bridge the gap with peers. Expect revenue/ebitda CAGR of 18%/34% over FY High interest cost ( x EBIT) to dent FY13-14 PAT. Net debt to peak out in FY15. We estimate net debt of ~INR52.5b (net debt-equity of 4.9x) in FY15 on the back of INR28b capex over FY13-15E in cement and commercial construction. Valuation & View [42 / 100] ENT trades at 11.1x FY15E EBITDA. For the cement business, this implies Fy15E EV of USD72/ton v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe. Our SOTP-based valuation is INR460/share: (1) cement (USD75/ton), (2) paper (1x FY15E sales), (3) textiles (0.4x FY15E sales), and (4) land (FY15E NAV). We initiate coverage with a Neutral rating; our target price implies 8% upside. Our Blue Sky scenario analysis suggets that CENT has potential to be 2.5x, driven by inheritance of Century textile by A.V.Birla group, although timeline can't be assigned. 32

33 Century Textiles Expect ongoing expansion to revive volume growth hereon Size & Scalability: Ongoing expansion to aid healthy recovery Volume growth drivers in place for cement business CENT has cement capacity of 8.5mtpa, including (1) 2.1mtpa in Chhattisgarh, (2) 1.9mtpa in Maharashtra, and (3) 3.8mtpa in Madhya Pradesh plus recent upgradation of 0.8mtpa. It has not had any major expansions since FY08 and has posted muted volume growth (1% CAGR) over FY Capacity utilization has improved to 95-99%. The ongoing greenfield expansion of 1.5mtpa in West Bengal (capex INR5.2b; by March 2013) and 2.8mtpa split grinding capacity in Maharashtra (capex of INR16b including 60MW power plant by September 2013) would be the key driver of volume growth (estimate 11% CAGR over FY13-15). Sales Mix: Market mix favorable Favorable market mix aids resilience in cement demand CENT has a fundamentally sound market mix (West, Central and East India), where we foresee healthy demand-supply dynamics. Almost 49% of its dispatches cater to Central India, while East and West India account for 27% and 24%, respectively. It commands 10-11% market share in Central India and 4-5% each in East and West India. The trade segment contributes ~90% of CENT s cement sales (v/s industry average of 65%), rendering relatively low pricing volatility. CENT s blended cement realization has been historically lower than peers (5-10% lbelow MOSL Cement Universe average) due to relatively weaker brand equity. We model INR15/15/10 per bag YoY increase in realizations over FY13/14/15. Market mix skewed towards better performing states Historically, realizations have been lower than peers (INR/ton) 33

34 Century Textiles High freight cost to remain an overhang as ~50% of its production is sold outside home markets Supply Chain Efficiencies: Vintage plant, high lead distance remain overhangs Cost of production at par with MOSL Cement Universe average CENT s cost of cement production in FY12 was INR2,999/ton against INR2,959/ton for our Cement Universe. In FY12, CENT s total cost/ton had increased by 17.3%, led by sharp rise in energy cost (24% owing to price escalation) and ~22% hike in rail freight (freight mix is skewed towards railways: 68%). High dependence on linkage coal; vintage plant, high lead distance key overhangs Coal linkages account for 60% of CENT s fuel mix, while domestic open market purchases account for the balance 40%. While the high proportion of linkage coal gives CENT a cost advantage, currently, shrinking of coal linkage to result in increasing energy cost pressure. Its high blending at 1.43x clinker (~95% blended cement) has led to better than average power consumption (~78KWH/ton of cement v/s 77-90KWH/ ton for peers). However, we expect freight cost to remain an overhang, as ~50% of its production is sold outside home markets, resulting in higher lead distance ( km). Moreover, the average age of CENT s cement plants is 24 years; these vintage plants have comparatively lower operating efficiencies. Vintage plants: Average age 28years Established Capacity (mt) Age (years) Century Cement (Chattisgarh) Maihar Cement (MP) -I Manikgarh Cement (Maharashtra) Maihar Cement (MP) -II Total Upcoming CPP in Maharashtra would make it ~80% self sufficiency in power Additional CPP, new plants to aid cost savings Currently, CENT s 75MW captive power plant (CPP) fulfills 70-75% of its power requirement; it purchases the balance requirement from the grid. The average cost of power generation through the CPP is INR4.2/unit as compared to INR6.1/unit for grid purchases and INR15-16/unit for DG-set produced power. CENT is setting up a 60MW power plant at Manikgarh (Maharashtra) by September 2013, which would take total CPP capacity to 115MW. On its expanded capacity of 12.8mtpa, the CPP would be able to supply almost 80% of its requirement. This would help reduce power cost. Besides, its upcoming cement capacities in Maharashtra and West Bengal would reduce the average age of its plants. The new plants would also be eligible for various incentives such as capital/vat/electricity/cst subsidies. Expect cost pressure to moderate over FY12-15 On the back of moderation in energy cost escalation and higher efficiencies aided by new plants, we expect CENT s cost of cement production to grow at a moderate 5% CAGR over FY13-15E. However, shrinking cosl linkage would result in rise in energy cost. 34

35 Century Textiles CPP addresses significant energy requirement (%) Total cost/ton to witness 5% CAGR over FY13-15 Location of CENT s mill land at Worli Strategic & Other Issues: Value unlocking from real estate a key trigger Worli land offers huge value unlocking opportunity... CENT has 40 acres of mill land in Worli, which is one of Mumbai s most attractive real estate micro-markets. Recent transactions/pe deals in Central Mumbai have materialized at a valuation of INR1.6b-1.8b/acre, which indicates significant value unlocking potential. However, CENT plans to monetize the land only under commercial leasing so that it provides steady rental income to overcome the cyclicality of other businesses. 35

36 Century Textiles Value of Central Mumbai land transactions has been spiraling since FY05 Source: Industry, MOSL... but litigation overhangs limits developable potential Of the total 40 acres, CENT owns ~22 acres, while 10 acres is on lease from the Wadia family and 8 acres is occupied by the housing colony. The lease is for 999 years (~113 years lapsed), renewable for another 999 years. However, the leasehold portion is currently under litigation with the Wadia family and lacks monetization certainty. While the company is yet to freeze on a development plan (potential area, product mix, scheme of development, etc) for the balance land, it plans to undertake commercial development under lease model. We assume ~5msf of potential developable area considering 2.66x FSI (net of workers rehab and disputed area) under IT Park scheme. Due to back ended development plan, we value Worli land at almost 25-30% discount to recent transactions Valuing Worli mill land at ~INR26b (INR281/share) We value CENT s mill land with ~5msf of leasable area at ~INR26b (FY15E NAV). Our valuation implies land value of ~INR1.2b/acre, 25-30% discount to the recent deals. We believe the implied discount is attributable to (a) prolonged land monetization plan, and (b) prevailing challenges in Central Mumbai commercial real estate due to weak demand, oversupply threat and high vacancy. Albeit slower value unlocking, lease model aids steady annuity stream Currently, CENT has two commercial projects under construction (1) adjacent to Century Bhavan (0.3msf/0.58msf of leasable area/construction area at total cost of INR3.5b; to be completed by March 2013), and (2) on mill land (0.38msf/0.8msf of leasable area/construction area at total cost of INR4.3b; to be completed by June 2013). Both the projects have witnessed significant progress (INR2.8b yet to be incurred) and should begin yielding rent income from FY14. We estimate rent income of INR0.7b/1.2b/1.5b in FY14/15/16E from ongoing development. 36

37 Century Textiles Non-cement businesses remain a drag on capital efficiency CENT is a diversified company, with presence in cement, textiles, paper & pulp, and chemicals. Cement is the biggest contributor to CENT s sales (~56%) and EBITDA (~74%), while textiles (revenue/ebitda contribution of 26%/4%) and paper (revenue/ebitda contribution of 17%/15%) account for the balance. Historically, diversification has helped CENT to address the vagaries of cyclical industries. Nonetheless, on the back of recent operating performance, we believe paper (-2.1% RoCE against 52% of allocated capital) and textiles (-2.6% RoCE against 21% of allocated capital) remain a drag on overall capital efficiency. Segment-wise revenue mix Segment-wise EBITDA mix Capital allocation skewed towards non-cement businesses, yet RoCE low for paper and textiles The paper business has posted negative revenue CAGR of 3% over FY09-12 owing to stiff competition from China/ Indonesia, stringent forest norms, etc. Paper capacity stabilization to drive growth amidst margin pressure CENT offers a wide range of paper products catering to niche segments pulp, writing & printing paper, tissue paper, multi-layered packaging board, etc. The paper business has posted negative CAGR of 3% over FY09-12 (led by 21% drop in FY12) owing to stiff competition from China/Indonesia, stringent forest norms, etc. However, domestic demand outlook remains stable (7-8% CAGR), also led by the government s literacy drive. CENT has ramped up its paper capacity to 0.42mtpa v/s 0.24mtpa in FY11 with the commencement of its multi-layered packaging board plant (0.18mtpa). CENT has 0.16mtpa of pulp capacity, which would aid uninterrupted pulp supply for good quality production. The company has incurred capex of ~INR22.6b in the paper segment over FY We do not expect any major capex hereon, with focus on improving capital efficiency (RoCE at -2.1/-2.9% in FY12/1HFY13). 37

38 Century Textiles We model 22% revenue CAGR over FY12-15, which would be attributable to (a) stabilization of newly added capacity, (b) focus on speciality products, and (c) tapping of export markets (UK, Iran, UAE, South East Asia, etc). Declining paper realizations and sustained pressure of raw material (pulp) cost and supplies would keep margins under pressure. We expect PBIDT margin to recover from 5% in FY13 (9.2% in FY12) to 8-10% in FY Encouraging recovery in demand & soft cotton prices over 1HFY13 bodes well for 2-5pp margin expansion over FY13-15 Textiles weak demand, intense competition remain headwinds In the textiles segment, CENT has 25mtpa of capacity in Gujarat along with 21m meters of denim, 26,000 tons of viscose, and 24,960 spindles (yarn) in Indore. The key products include 100% cotton fabric, denim, viscose filament yarn (VFY), rayon yarn, etc. It has forward integrated into the ready-to-wear segment by introducing the brand Cottons by Century and has also developed export markets (Brazil, Chile and Bolivia) for VFY. Weak global demand, spiraling cotton prices and competition from Chinese/ Bangladeshi products have led to significant pressure on the segment, with muted PBDIT margin (negative to 2% over FY09-12), despite revenue CAGR of 24%. However, encouraging recovery in demand and soft cotton prices over 1HFY13 bodes well for margin recovery. We model 24% revenue CAGR over FY13-15, with 2-5pp margin expansion. Expect capacity addition to drive paper sales Expect moderate margin expansion in textiles Cement business profitability to improve over FY13-15 on account of cost saving triggers and improving pricing Strength of Financials: Sharp rise in leverage a concern Expect profitability to revive on the back of cost saving triggers The profitability of CENT s cement business has been significantly lower than the industry average, with FY12/13E cement EBITDA at INR456/516 per ton against INR850/ 1,010 per ton for MOSL Cement Universe. This is largely on account of lower realizations, vintage plants, and high lead distance. We expect cement business profitability to improve over FY13-15 on account of (a) pricing strengths in operating markets, (b) input cost moderation, and (c) benefit of upcoming CPP and new plants (with subsidy incentives and better efficiencies). The 1.5mtpa grinding unit in West Bengal would further increase blending. However, given its vintage plants, it would be difficult for the company to completely bridge the gap between its current profitability and the industry s average profitability. We estimate 19% CAGR in CENT s cement EBITDA/ton over FY13-15 to INR734 (discount with peers to narrow by 5pp), implying uptick in EBITDA margin from 13.2% in FY12 to 16-17% in FY13-15E. 38

39 Century Textiles Expect 34% EBITDA CAGR over FY13-15; high interest cost to drag PAT We expect CENT to post revenue/ebitda CAGR of 18%/34% over FY13-15E, as against 4%/-32% over FY10-12, on the back of steady volume growth and margin expansion in the cement business. However, high interest cost on the back of spiraling debt would eat away meaningful profit over FY13-14 (estimate interest cost at x EBIT). Expect cost saving triggers to improve profitability Interest cost to eat way significant profit (Interest/EBIT) Cement capacity expansion and ongoing commercial building would necessitate ~INR28b of capex over FY13-15 Net debt to increase further on the back of ~INR28b capex over FY13-15 We expect CENT s installed capacity to increase from 8.5mtpa to 12.8mtpa by September 2013, along with additional CPP of 60MW. The capex includes (1) greenfield capacity of 1.5mtpa in West Bengal (capex of INR5.2b by March 2013), and (2) brownfield expansion of 2.8mtpa in Manikgarh, Maharashtra (INR16b including 60MW of power plant by September 2013). Both the projects have been delayed on account of challenges relating to forest clearance, labor issues, etc. CENT has already incurred ~INR6b (of the total INR21b) till FY12; it plans to incur INR3.5b in FY13 and the balance in FY This coupled with INR2.5b-3b towards ongoing commercial building would necessitate ~INR28b of capex over FY We model minimal capex towards textiles and paper as per management guidance, since CENT has already heavily invested in these segments over FY09-12 (INR30b+). We expect CENT s net debt to peak out in mid-fy14. We estimate net debt of ~INR55b (net debt-equity of 3x) in FY14 as against INR39.8b (net debt-equity of 2.1x) in FY12. High leverage would remain an overhang for the company. Expect non-cement capex to moderate (INR b) High cement and real estate capex to dent FCF (INR b) 39

40 Century Textiles Net debt to peak out in FY15 (INR b) Capital efficiency to revive slowly over FY13-15 (%) Valuation & View Value unlocking in real estate could be back-ended While the cement business is poised for steady improvement, acute margin pressure in non-cement segments (textiles and paper) and high leverage (FY14E net debtequity of 3x) would remain drags in the near term. Though real estate offers meaningful value unlocking potential, slow monetization, coupled with the relatively weak outlook for commercial real estate in Mumbai would dilute upside potential. Initiating coverage with a Neutral rating CENT trades at 11.1x FY15E EBITDA. For the cement business, this implies FY15E EV of USD72/ton v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe. Our SOTP-based valuation is INR460/share: (1) cement (USD75/ton), (2) paper (1x FY15E sales), (3) textiles (0.4x FY15E sales), and (4) land (FY15E NAV). We initiate coverage with a Neutral rating; our target price implies 8% upside. SOTP Valuation (INR m) Parameter Multiple FY14E FY15E Remarks Textile EV/Sales 0.4 7,771 8,937 Valued at 20-30% discount to peers Cement EV/ton(USD) 75 52,800 52,800 Valued at 50% discount to replacement cost Implied EV/EBITDA Paper EV/Sales 1 12,735 14,327 Valued at 30-40% discount to peers Others EV/Sales Total EV 73,938 76,759 Less: Net Debt 59,009 60,150 Add: PV of Land 22,655 26,177 Valued at 30% discount to recent transaction Market Cap 37,585 42,787 Fair Value (INR) Upside (%) (5) 8 40

41 Century Textiles Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 44,529 46,772 47,892 58,017 68,854 80,634 Change (%) EBITDA 7,311 5,762 3,420 5,024 6,824 9,037 Margin (%) Depreciation 2,345 2,397 2,581 3,952 4,655 5,369 EBIT 4,966 3, ,072 2,169 3,668 Interest Expenses 1,005 1,183 1,721 3,363 4,055 4,511 Other Income - Rec ,254 1, ,110 1,314 PBT before EO Expense 4,864 3, , Extra Ordinary Expense/(Income) PBT after EO Expense 5,392 3, , Current Tax 2, Deferred Tax Tax Rate (%) Reported PAT 3,560 2, PAT Adj for EO items 3,211 2, Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Fully Dilute Eq Sh Cap Other Reserves 16,822 18,601 18,059 16,585 15,513 15,377 Total Reserves 16,822 18,601 18,059 16,585 15,513 15,377 Net Worth 17,752 19,531 18,989 17,515 16,444 16,307 Deferred Liabilities 3,576 3,577 4,633 4,633 4,633 4,633 Total Loans 23,668 31,115 40,344 50,544 60,544 63,044 Capital Employed 44,995 57,154 67,309 76,035 84,964 87,327 Gross Block 46,748 48,120 67,130 76, , ,891 Less: Accum. Deprn. 21,904 24,121 26,038 29,990 34,645 40,014 Net Fixed Assets 24,844 23,999 41,092 46,859 65,505 63,877 Capital WIP 12,874 19,976 11,119 11,800 1,000 2,392 Investments - Trade Curr. Assets, Loans and Advances 20,339 20,156 22,002 23,159 25,281 29,078 Inventory 8,684 10,707 10,952 11,444 12,639 14,359 Account Receivables 2,251 3,072 3,335 3,974 4,150 5,523 Cash and Bank Balance Loans and Advances 7,702 2,252 2,104 2,543 2,830 3,535 Others 1,128 3,720 5,110 5,096 5,126 5,158 Curr. Liability & Prov. 13,646 7,661 7,617 6,497 7,535 8,734 Account Payables 7,949 4,117 3,117 3,497 4,150 4,639 Other Current Liabilities 172 2,744 3,575 3,656 3,773 3,976 Provisions 5, Net Current Assets 6,694 12,496 14,385 16,662 17,745 20,344 Appl. of Funds 44,995 57,154 67,309 76,035 84,964 87,327 E: MOSt Estimates 41

42 Century Textiles Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (USD) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Asset Turnover (x) Debtor (Days of sales) Creditor (Days of sales) Inventory (Days of sales) Working Capital Turnover (Days of sales) Leverage Ratio (x) Debt/Equity Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 7,311 5,762 3,420 5,024 6,824 9,037 Interest/Dividends Recd ,254 1, ,110 1,314 Direct Taxes Paid -2,607-3, (Inc)/Dec in WC 130-3, , ,632 CF from Operations 5, ,772 3,653 7,479 7,602 EO Income/(Exp) 1,957 2, CF from Operating incl EO Expense 7,693 2,783 4,195 3,653 7,479 7,602 (inc)/dec in FA -11,982-8,654-10,818-10,400-12,500-5,134 (Pur)/Sale of Investments CF from Investments -12,101-8,753-10,848-10,400-12,500-5,134 (Inc)/Dec in Debt 6,085 7,447 9,229 10,200 10,000 2,500 Interest Paid -1,005-1,183-1,721-3,363-4,055-4,511 Dividend Paid CF from Fin. Activity 4,317 5,802 6,748 6,347 5,455-2,501 Inc/Dec of Cash Add: Beginning Balance Closing Balance

43 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 74 1 Valuation score, Rank 96 1 Target price & upside Base case INR % Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) DBEL IN Equity Shares (m) Week Range (INR) 204/92 1,6,12 Rel. Perf. (%) 5/54/19 M.Cap. (INR b) / (USD b) 15.6/0.3 Dalmia Bharat CMP: INR193 TP: INR427 Buy Poised for fast-track growth, with entry into top league De-risking market mix; initiating with Buy Dalmia Bharat (DBEL) is poised for strong scale-up, driven by sustained focus on capacity and market expansion through both organic and inorganic routes. DBEL to post 13% volume CAGR (FY13-15) on the back of (1) new expansion, (2) demand recovery in southern states, and (3) uptick in utilization in North East capacity. Strong operating cash flow (~INR23b over FY13-15, ex-subsidiaries) to support ongoing capex and later balance sheet de-leveraging. DBEL trades at attractive valuations of USD46/ton for 15mtpa of pro-rata capacity (~22mtpa capacity under control). We initiate coverage with a Buy rating; our target price of INR427 implies 122% upside. Capacity expansion to drive superior volume growth DBEL is poised for strong operational scale-up, driven by sustained focus on capacity and market expansion through both the organic and inorganic routes. We expect its recent acquisitions of 2.8mtpa capacity in the North East (Adhunik and Calcom), coupled with ongoing expansion (a) 2.5mtpa of greenfield plant in Karnataka (DCBL), (b) 1.5mtpa of grinding unit in West Bengal (OCL), and (c) 0.9mtpa of brownfield expansion at Calcom to place it among the top-4 cement groups in India in terms of capacity under management (21.9mtpa by FY15, with effective stake of 15mtpa). We expect DBEL to post 12.7% volume CAGR FY13-15 (v/s 8.3% for our Cement Universe) on the back of (1) new expansion, (2) demand recovery in southern states, and (3) uptick in utilization in North East capacities. Diversifying market mix not merely South-centered DBEL (standalone) is a dominant player in the South (fourth-largest by FY14), with the largest sales exposure in Tamil Nadu and Kerala (but with limited exposure to AP with ~13% contribution). While unfavorable market outlook in south and demand de-growth in Andhra Pradesh render near-term uncertainty, the company has de-risked itself through (a) entry into the fast-growing North East market, and (b) exposure to the better performing East market through OCL. Superior profitability to sustain; balance sheet strength offers comfort DBEL and OCL enjoy superior profitability on account of higher realizations and operational efficiency. We expect the trend to continue, with added benefits from (a) new CPP, (b) lower imported coal prices, and (c) positive operating leverage, with recovery in demand in southern states and uptick in utilization in newly acquired plants. We expect DBEL s EBITDA/ton (ex-subsidiaries) to improve from INR1,031 in FY12 to INR1,241/1,325 in FY14/15 (8% CAGR over FY12-15). Ongoing capex plan of ~INR26.5b (including subsidiaries) would drive up effective net debt to INR26b by FY14 as against INR8.7b in FY12. However, strong operating cash flow (~INR23b over FY13-15 in standalone operations) visibility gives healthy cushion to address capex need and future acquisitions. DBEL has maintained a dividend payout of 18-20% over FY

44 Dalmia Bharat Trading at steep discount for 4th larget player; initiating with Buy DBEL trades at an EV/EBITDA of 3.4x/3.1x FY14/FY15 and EV of USD46/ton, for highly efficient player who will evolve to be fourth largest player by FY15. Our SOTP value stands at INR427/share: (1) DCB and OCL at 5x FY15E EBITDA, and (2) Adhunik and Calcom at USD70/ton (FY15E capacity; as against acquisition cost of USD / ton), implying equity value of INR1.8b for Adhunik and a negative INR100m for Calcom (owing to high debt and lower utilization till FY14). We initiate coverage with a Buy rating; our target price of INR427 implies 122% upside. About Dalmia Bharat (DBEL) Blue Sky Scenario Dalmia Bharat DBEL is a holding company (85% stake) for in Dalmia Cement Bharat (DCBL) - a SPV owning all cement assets, with Kohlberg Kravis Roberts (KKR) holding the balance 15%. DCBL has cement capacity of 9mtpa in Tamil Nadu and Andhra Pradesh. DCBL also holds 45.37% stake in OCL India (5.4mtpa capacity in Orissa), 100% stake in Adhunik Cement (1.5mt capacity in Meghalaya) and 76% stake in Calcom (1.3mt capacity in Assam). DBEL holds effective stake of 96.1% in DCB Power Venture, which has thermal power generation capacity of 72MW. Dalmia Bharat has the potential to be a 4-bagger in 2-3 years, driven by: Its being one of the top-4 cement producers in India, with capacity under control of ~22mtpa (~15mtpa based on economic interest). Ramp-up in North-East subsidiaries, resulting in higher profitability. Deleveraging, driven by completion of ongoing capex and significant improvement in cash flow from operations during the upturn in the cement cycle. Improvement in capital efficiency, as capex over last 2-3 years starts contributing. DBEL: Blue Sky Scenario (FY15) Parameter Multiple INR m Catalyst DBCL EV/Ton (USD) ,367 Scale-up of capacity to 11.5mt in an upcycle, improving utilization and beginning of balance sheet deleveraging OCL EV/Ton (USD) 100 8,527 Commissioning of new capacity at West Bengal, driving volumes and profitability Adhunik EV/Ton (USD) 100 6,961 Improving utilizations driven by strong growth in North East market, enjoying very high profitability Calcom EV/Ton (USD) 100 7,477 Commissioning of clinker capacity driving cost savings and high profitability Total EV 76,331 Less: Pro-rata Net Debt (adj for CWIP) 21,992 Total Equity Value 54,340 Fair value (INR/share) 669 Upside (%) 247 DBEL: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

45 Dalmia Bharat 5-S Analysis [Score 74 / 100] & [Rank 1] Size & Scalability [29 / 30] Existing capacity of 9mtpa in DCBL, along with 5.35mtpa in associate, OCL (stake of 38.6%). Recently acquired (a) 76% stake in Assam-based Calcom Cement (1.3mtpa), and (b) 100% in Meghalaya-based Adhunik Cement (1.5mtpa). Strong expansion plans: (1) DCBL: 2.5mtpa at Karnataka with 45MW CPP by 4QFY14, (2) OCL: 1.5mtpa grinding unit in West Bengal by 3QFY14, and (3) Calcom: 0.9mtpa brownfield expansion. Capacity to reach 21.9mtpa (~15mtpa pro-rata) in FY15, placing DBEL among the top-4 in India. We model 12.7% volume CAGR for DCBL (including acquisitions) over FY Sales Mix [14 / 20] Dominant player in South India (fourth largest in India by FY15), with largest sales exposure to Tamil Nadu and Kerala, but limited contribution from AP. Unfavorable Andhra Pradesh (~13% of standalone volumes) market renders near-term uncertainty. Has de-risked market mix with (a) entry into fast growing North East market, and (b) exposure in better performing East market through OCL. We model price uptick of INR12.5/12.5 per bag in FY13/14/15 for DCBL - 5.5% CAGR over FY For OCL, we assume INR15/12.5 per bag price uptick, implying 6% CAGR over FY Strategic & Other Issues [9 / 10] In the refractories segment, DBEL has installed capacity of 0.08mtpa, while OCL has 0.11mtpa. The total industry capacity is 2.5mtpa. Most of the production capacity is underutilized (current capacity utilization of 65%). Growth in the steel industry (which accounts for 75% of the demand for refractories) will be critical for demand uptick in the refractories segment. For DBEL's refractories business, we model 4% volume CAGR and 9% revenue CAGR over FY Recent open offer for Dalmia Bharat Sugar Ltd (DBSL) for 26% stake is not consistent with demerger of cement to bring focus. Strength of Financials [12 / 20] Expect DBEL's (standalone) EBITDA/ton to improve from INR1,031 in FY12 to INR1,325 in FY15 (8% CAGR). Revenue/EBITDA to post 17%/20% CAGR over FY13-15 (ex subsidiaries). Capex of ~INR26.5b (includng subsidiaries) likely to augment effective net debt to INR26.4b by FY14 as against INR8.7b in FY12. Strong standalone operating cash flow (~INR23b over FY13-15) visibility to support on-going capex and later drive balance sheet de-leveraging. Has maintained dividend payout 18-20% over FY11-12). Supply Chain Efficiencies [10 / 20] DBEL enjoys superior profitability due to higher realizations and operational efficiency. Expect the trend to continue, with added benefits from (a) new CPP, (b) lower imported coal prices, and (c) positive operating leverage. Limited clinker capacity to be drag on raw material cost or volume growth for OCL and Calcom in short term. Higher lead distance due to rising dispatches outside Andhra Pradesh to impact freight cost. We model 4% CAGR in cost per ton over FY Its recent acquisitions, Calcom and Adhunik, will enjoy superior profitability due to subsidies offered in North East and favorable demand-supply. Valuation & View [96 / 100] DBEL trades at an EV/EBITDA of 3.4x/3.1x FY14/FY15 and EV of USD46/ton, for highly efficient player who will evolve to be fourth largest player by FY15. Our SOTP value stands at INR427/share: (1) DCB and OCL at 5x FY15E EBITDA, and (2) Adhunik and Calcom at USD70/ton (FY15E capacity; as against acquisition cost of USD /ton), implying equity value of INR1.8b for Adhunik and a negative INR100m for Calcom (owing to high debt and lower utilization till FY14). We initiate coverage with a Buy; our target price of INR427 implies 122% upside. Our Blue-sky scenario suggests fair value of ~INR669, an upside of 247%. 45

46 Dalmia Bharat DBEL is expected to be among the top 4 cement players in India by FY15 in terms of capacity under management Size & Scalability: Organic and inorganic expansion to aid strong scale-up Organic/inorganic expansion to aid strong operational scale-up DBEL has existing capacity of 9mtpa in DCBL, along with 5.35mtpa in associate, OCL (effective stake of 38.6%). It has recently acquired (a) 76% stake in Assam-based Calcom Cement (1.3mtpa), and (b) 100% in Meghalaya-based Adhunik Cement (1.5mtpa), which will enhance its footprint in the fast growing North East market. Besides strategic acquisitions, DBEL also has strong organic expansion plans: DCBL: 2.5mtpa greenfield plant in Karnataka with 45MW CPP (INR13b ex CPP) by 4QFY14, OCL: 1.5mtpa grinding unit in West Bengal (INR5-5.5b) by 3QFY14 Calcom: 0.9mtpa brownfield expansion (clinker capacity expansion of 1mtpa) We expect capacity to reach 21.9mtpa (effective stake of 15mtpa) in FY15 as against the current 17.1mtpa (effective stake of 11.8mtpa), placing DBEL among the top-4 cement groups in India in terms of capacity under management. Strong scale-up in cement capacity would place DBEL among the top 4 cement groups in India We expect healthy volume growth trend to continue, led by steady expansion, debottlenecking of North East capacity, and demand recovery south. Expect 13% volume CAGR over FY13-15 DCB has been operating at low capacity utilization owing to weaker business dynamics in the southern states. OCL s operations were impacted due to the mining ban in Orissa in 4QFY12. DCB s recent acquisitions in the North East are also witnessing subdued utilization (25-35%) on account of various operational bottlenecks. Hence, demand recovery coupled with easing of bottlenecks will drive volume growth. DBEL has posted 15% CAGR in dispatch volumes over FY10-12 (v/s industry CAGR of 6%), led by stabilization of capacity added over FY We expect the healthy growth trend to continue, led by (1) steady expansion through organic and inorganic routes, (2) debottlenecking of North East capacity, and (3) demand recovery in the southern states. We model 13% volume CAGR for DCBL (pro-rata) and 7% for OCL (despite weaker FY13) over FY12-15 v/s 8.3% for our Cement Universe. Lower utilization offers huge scope for uptick in operating leverage Utilization FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E DCBL OCL Calcom* Adhunik*

47 Dalmia Bharat We model 13% volume CAGR for DCBL (including acquisitions), including 8.5% CAGR for OCL * including recent acquisitions DCB's market mix is skewed towards non-ap southern states (TN and Kerala), where growth has been largely stable De-risking of market concentration is in line with DBEL s objective of a Pan India presence Sales Mix: Diversification to de-risk market-mix Core market unfavorable at present - de-risking strategy a positive direction DBEL (through DCBL) is the sixth-largest cement player in the South and is likely to be the fourth-largest by FY15, post the commissioning of its 2.5mtpa greenfield expansion in Karnataka. Its plants are located near limestone reserves in Tamil Nadu and Andhra Pradesh, and are strategically positioned to cater to all the southern states. The southern region has been a major underperformer on account of prevailing oversupply scenario, subdued demand and political crisis in key cement consuming state- Andhra Pradesh (demand de-growth of 9%/5% in FY12/YTDFY13). However, DCBL has posted steady volume growth of 16%/7.2% in FY12/9MFY13, given that its market mix is skewed towards non-ap southern states, where growth has been largely stable. Nonetheless, recovery in Andhra Pradesh would be a definite trigger, hereon. OCL s market mix remains steady due to favorable demand-supply dynamics at the eastern region (demand growth of 7%). Additionally, upcoming elections in the key demand-driving states like Karnataka, Andhra Pradesh and Orissa should boost infrastructure commitments. Steady market diversification to balance out southern headwinds While unfavorable market outlook in south and sustained demand de-growth in Andhra Pradesh render near-term uncertainty, the company has de-risked itself through (a) exposure to the better performing East market through OCL, and (b) entry into the fast-growing North East market. OCL India is focused on Orissa, West Bengal, Bihar and Jharkhand. The company has ~23% market share in Orissa. DCB s recent acquisition of (a) 76% stake in Assam-based Calcom Cement, and (b) 100% stake in Meghalaya-based Adhunik Cement would strengthen its footprint in the fast growing North East market, where it will manage 2.8mtpa out of the total 7mtpa existing capacity. De-risking of market concentration is in line with DBEL s objective of a Pan India presence. The North East market is attractive, with cement demand growing at 10-15% per year. Also, DCB s local manufacturing presence will give it a strong substitution opportunity, as ~30% of the cement demand in the North East is currently being addressed by mainland sources. 47

48 Dalmia Bharat DCB s market mix suggests lower exposure in AP DCB has leading market share in major southern states OCL s market mix OCL has the largest market share in Orissa Expect realization CAGR of 5% over FY13-15 Historically, both DCB and OCL have enjoyed higher realizations than our Cement Universe (10-15% premium), owing to its market mix. The supply overhang and lower capacity utilization in the South could lead to pricing volatility in the region. We model price uptick of INR12.5/12.5 per bag in FY14/15 for DCBL 5% CAGR over FY For OCL, we assume INR15/12.5 per bag price uptick, implying 6% CAGR over FY13-15 on the back of healthy outlook for the East market. Supply Chain Efficiencies: CPP offers meaningful self sufficiency in power Cost structure at par with MOSL Cement Universe DCB s cost of production is broadly in line with the industry average. It has installed thermal power capacity of 72MW in DCBL Power Venture (effective stake of 96.1%), which makes it ~60% self sufficient in energy at full capacity. Fuel mix is skewed towards imported coal/pet coke from Indonesia (85%). The lower proportion (15%) of linkage coal leads to higher energy cost for DCBL, despite superior energy efficiencies power utilization at 73kwh/ton (v/s 79-93kwh/ton for MOSL Cement Universe) and coal requirement of <100kg/ton (v/s kg/ton for MOSL Cement Universe). 48

49 Dalmia Bharat OCL sources almost 45% of its fuel through linkage coal, 20-25% from open market and the rest from imported coal. The higher proportion of linkage coal aids energy efficiency for OCL. The management has indicated that due to no major linkage option, its North East plants are likely to source fuel through open market purchases, which could be a drag on overall energy cost. We model 4% CAGR in cost of production over FY DBEL s energy cost structure Fuel mix skewed towards imported coal Increase in CPP capacity to lower OCL s energy cost While DCB is ~60% self sufficient in energy requirement, OCL has commenced a 54MW coal-based CPP (second unit of 27MW completed in April 2012) in Rajgangpur, Orissa. This will significantly improve OCL s cost efficiency, as ~90% of its power requirement was earlier met through purchased power. Given that DCB s upcoming plants will be together with 45MW CPP, it will be able to meet ~75% of its power requirement inhouse by FY15. DCB to benefit from softening of imported coal prices Prices of imported coal and pet coke have softened meaningfully down 13% in YTDFY13 in INR terms. We expect this to translate into significant moderation in energy cost, as imported coal accounts for ~85% of DCB s fuel mix. Limited clinker expansion in OCL a concern; expect synergies in North East Limited expansion in clinker capacity (leading to higher purchased clinker) would be drag on volume growth/ raw material cost for OCL. At its expanded capacity, cement: clinker ratio would stand at 1.4x for DCBL and 2.3x for OCL. While clinker capacity is a constraint at its recently acquired Calcom plant, we believe (1) 1mtpa of clinker expansion by FY14-end, and (2) synergy with Adhunik plant (excess clinker) would partially mitigate the concern. Lower clinker capacity could be a drag on raw material cost / cement volume growth Capacities (MT) Current Expansion Total Clinker Cement Clinker Cement Clinker Cement DCBL OCL Calcom Adhunik Total

50 Dalmia Bharat Freight cost impacted by higher lead distance DBEL s freight cost grew at ~14% CAGR over FY09-12, driven by diversification of its market mix outside Andhra Pradesh. Given that its logistics mix is skewed towards road transport (81%), we factor in ~10% increase in freight cost in FY13 to capture the recent INR5/liter (+12.5%) hike in diesel prices. DBCL has set up a railway siding at Andhra Pradesh plant, resulting in deeper market reach and lower logistics costs. Acquisition of Calcom and Adhunik would make DBEL the only large player in the North East with substantial logistics synergies. Strategic & Other Issues: Steel Industry key to refractory demand growth Fortunes of steel industry key to demand for refractories DBEL has installed capacity of 0.08mtpa, while OCL has 0.11mtpa. The industry capacity is 2.5mtpa, which is largely underutilized at 65% utilization. Growth in the steel industry will be critical for growth in the refractories segment. For DBEL s refractories business, we model 4% volume CAGR and 9% revenue CAGR over FY Ongoing open offer for DBSL for 26% stake is not consistent with demerger of cement, although cash outflow would be insignificant at less than INR500m. Strength of Financials: Leverage to increase led by ~INR29b over FY13-14 Superior profitability to continue with cost benefits Both DCB and OCL enjoy superior profitability on account of higher realizations and operational efficiency. However, higher raw material cost owing to purchased clinker (further aggravated in case of OCL due to mining ban in Orissa) and spiraling energy cost resulted in subdued EBITDA over FY We expect steady uptick in DCBL s profitability on the back of (a) improvement in realizations (expect increase of INR12.5/ bag in FY14 and INR12.5/bag in FY15), (b) moderating input cost inflation and benefit of softening imported coal prices, and (c) positive operating leverage. We expect DCBL s cement EBITDA/ton to increase from INR1,031 in FY12 to INR1,325 in FY15 (9% CAGR over FY12-15). OCL is likely to post a sharp uptick in profitability over FY13-15, led by (1) INR15/12.5 per bag increase in realizations in FY14/15, and (2) cost savings following the commencement of mining operations and full benefit of captive power plants. We expect EBITDA/ton of INR1,363 in FY15 (v/s INR596 in FY12 and INR899 in FY11). Capital efficiency to improve with uptick Expect above par profitability to sustain (EBITDA/ton) in utilization and profitability (%) 50

51 Dalmia Bharat Premium profitability at North East plants DBCL s North East acquisitions (Calcom and Adhunik) are expected to enjoy multiple subsidies such as VAT subsidy (INR /ton for 10 years), transport subsidy (INR /ton for 5 years), and excise subsidy (~INR300/ton for 10 years). These translate into total potential subsidy of INR1,000-1,200/ton, which should augment profitability, despite poor capacity utilization (25-35%). While the management has not shared the financials of recent acquisitions, we model EBITDA/ton of INR1,540 for Adhunik and INR531 for Calcom (due to high clinker purchase) in FY13. Calcom is likely to witness uptick in profitability once its clinker facility commences operations by early FY15. We believe that strengthening of profitability hinges on (1) synergistic benefits in logistics and clinker (excess clinker in Adhunik can be sourced by Calcom), (2) higher realizations on account of branding, and (3) operating leverage. Undergoing strong operational scale-up DBEL is undergoing a strong capex cycle comprising both organic and inorganic expansion to achieve its objective of Pan India footprints. Since January 2012, it has acquired (a) 76% stake in Assam-based Calcom Cement with existing capacity of 1.3mtpa for INR3.15b, and (2) 100% stake in Meghalaya-based Adhunik Cement with 1.5mtpa capacity for INR5.6b. Its ongoing 0.9mtpa brownfield expansion at Calcom plant (clinker capacity expansion of 1mtpa) will be operational by FY14-end, necessitating capex of INR4b-5b. Moreover, DCB has 2.5mtpa of upcoming greenfield expansion in Karnataka along with 45MW CPP for total capex of INR16b, which is expected to be completed towards the end of FY14. OCL is setting up a 1.5mtpa grinding unit at Medinipur, West Bengal at a cost of INR5b. The project has already received most approvals and is expected to get commissioned by November The company has recently commissioned a 10km conveyor belt for transportation of limestone from mines to plant. Major expansion to conclude over FY13-15 (MT) Current Expansion Total Clinker Cement Clinker Cement Clinker Cement Capex Time line DCBL QFY14/1QFY15 OCL QFY14 Calcom FY14-end Adhunik NA 4QFY14/1QFY15 Total OCL has obtained environment clearance for production of 2.7mtpa cement at its Kapilas Cement Manufacturing Works, which currently has installed capacity of 1.35mtpa, although there are no immediate plans for expansion. It is also in the process of obtaining requisite approvals and acquiring land for its captive coal block in Orissa (14.7% stake with OCL Iron & Steel). 51

52 Dalmia Bharat Net debt (pro-rata) to peak in FY14 at INR27b We expect the company to incur capex of ~INR26b (DBEL s effective economic interest of ~INR19b) across all entities over FY The funding will be done through a mix of internal accruals and debt, with debt contributing ~70% of the capex. This, along with ~INR8b of recent acquisitions, is expected to increase effective net debt to INR27b by FY14 v/s INR8.7b in FY12. Expect effective net debt to increase by ~INR18b over FY13-14 Net Debt Eff. Stake (%) FY12 FY13E FY14E FY15E DBCL 85 8,233 16,102 18,705 17,589 OCL ,295 3,394 4,757 1,667 Adhunik ,250 4,511 3,610 Calcom ,000 8,000 8,250 Total Net Debt 12,528 29,746 35,974 31,116 Net Debt based on Eco. Interest 8,654 22,688 26,737 23,992 Healthy operating cash flow offers strong cushion DBEL (standalone) is likely to generate ~INR23b of cash flow from operations over FY13-15, which renders strong cushion to its capex outflow. However, we expect the company to fund a meaningful portion of the capex through debt, as its inorganic growth strategy would necessitate surplus funds. Despite its ambitious growth plan, DBEL has maintained a dividend payout of 18-20% over FY11-12). DBEL to post 17% revenue and 20% EBITDA CAGR over FY13-15 (ex subsidiaries) DBEL to generate operating cash flow of INR23b over FY13-15, limiting rise in leverage, despite huge capex 52

53 Dalmia Bharat Valuation & View Trading at very attractive valuation for fourth largest player DBEL trades at very attractive valuations for highly efficient player who will evolve to be fourth largest player by FY15. DBEL trades at an EV/ton of USD49/46 ton (v/s USD64/ 56 for our Mid Cap Cement Universe and USD125/115 for our Full Cement Universe) and 3.4x/4.1x FY14E/FY15E EBITDA (v/s 4.4x/3.5x EBITDA for our Mid Cap Cement Universe and 7.4x/6.1x EBITDA for our Full Cement Universe). Our target price implies 122% upside Our SOTP value stands at INR427/share: (1) DCB and OCL at 5x FY15E EBITDA, and (2) Adhunik and Calcom at USD70/ton (FY15E capacity; as against acquisition cost of USD /ton), implying equity value of INR1.8b for Adhunik and a negative INR100m for Calcom (owing to high debt and lower utilization till FY14). We initiate coverage with a Buy rating; our target price of INR427 implies 122% upside. DBEL: Sum of the Parts valuations INR m Valuation method Multiple FY13E FY14E FY15E DBCL EV/EBITDA (x) 5 27,826 33,304 40,011 OCL EV/EBITDA (x) & 40% hold-co discount 5 4,734 5,665 6,573 Adhunik EV/Ton 70 4,871 4,871 4,871 Calcom EV/Ton 70 3,110 3,110 5,232 Total EV 40,540 46,949 56,687 Less: Pro-rata Net Debt 19,688 17,737 21,992 Total Equity Value 20,852 29,212 34,695 Fair value (INR/share) Upside (%) Implied EV/Ton (on pro-rata capacity)

54 Dalmia Bharat Dalmia Bharat Ltd - Business structure 54

55 Dalmia Bharat Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 21,543 17,459 23,304 26,470 30,673 36,235 Change (%) Total Expenditure 16,947 13,811 17,748 19,923 22,836 26,821 % of Sales EBITDA 4,596 3,648 5,556 6,547 7,836 9,414 Margin (%) Depreciation 1,320 1,753 1,817 1,817 1,901 2,605 EBIT 3,276 1,895 3,739 4,730 5,936 6,809 Int. and Finance Charges 1,757 1,724 1,513 1,709 1,867 2,445 Other Income - Rec PBT bef. EO Exp. 2, ,099 3,775 4,887 5,162 EO Expense/(Income) PBT after EO Exp. 1, ,704 3,775 4,887 5,162 Current Tax ,510 1,955 2,065 Deferred Tax Tax Rate (%) Reported PAT 1, ,476 2,265 2,932 3,097 PAT Adj for EO items 1, ,691 2,265 2,932 3,097 Change (%) , Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Total Reserves 14,098 27,615 28,746 30,965 33,893 37,049 Net Worth 14,260 27,777 28,908 31,127 34,056 37,212 Deferred Liabilities 3, Total Loans 28,961 18,890 16,008 22,608 29,608 26,608 Capital Employed 46,295 47,381 45,905 54,724 64,652 64,809 Gross Block 34,587 37,765 38,208 40,373 41,373 53,373 Less: Accum. Deprn. 7,896 1,846 3,659 5,476 7,377 9,982 Net Fixed Assets 26,691 35,919 34,549 34,896 33,996 43,390 Capital WIP 3,846 1,167 1,165 3,000 9,000 2,000 Total Investments 7,248 6,592 11,935 21,077 21,077 21,077 Curr. Assets, Loans&Adv. 13,404 10,179 6,925 7,448 13,123 12,932 Inventory 7,074 2,976 2,615 3,321 3,848 4,546 Account Receivables 2,138 1,008 1,355 2,076 2,405 2,841 Cash and Bank Balance 2,203 4, ,792 1,907 Loans and Advances 1,989 1,651 2,292 2,657 3,079 3,637 Curr. Liability & Prov. 5,077 3,965 6,328 8,907 9,170 10,589 Account Payables 4,923 3,774 6,000 6,642 7,215 8,524 Provisions ,265 1,955 2,065 Net Current Assets 8,327 6, ,459 3,953 2,343 Appl. of Funds 46,295 51,467 50,177 59,445 69,957 70,741 E: MOSL Estimates; * Adjusted for treasury stocks 55

56 Dalmia Bharat Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) * P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 3,276 1,895 3,883 5,464 6,893 7,897 Interest/Dividends Recd Depreciation 1,320 1,753 1,817 1,817 1,901 2,605 Direct Taxes Paid -77-2, ,510-1,955-2,065 (Inc)/Dec in WC -3,038 4,454 1, , CF from Operations 1,968 5,674 7,479 7,312 6,641 8,962 EO expense CF from Operating incl EO 2,423 5,622 7,479 7,312 6,641 8,962 (inc)/dec in FA -3, ,000-7,000-5,000 (Pur)/Sale of Investments -1, ,343-9, CF from investments -4, ,784-13,142-7,000-5,000 Issue of Shares -19 8, (Inc)/Dec in Debt 5,572-10,072-2,882 6,600 7,000-3,000 Interest Paid -1,757-1,724-1,513-1,709-1,867-2,445 Dividend Paid CF from Fin. Activity 3,607-3,439-5,575 4,561 4,756-5,846 Inc/Dec of Cash 1,278 2,340-3,880-1,269 4,397-1,884 Add: Beginning Balance 925 2,203 4, ,792 Closing Balance 2,203 4, ,792 1,907 56

57 Update Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 58 8 Valuation score, Rank 89 3 Target price & upside Base case INR119 35% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj. EPS (INR) EPS Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) ICEM IN Equity Shares (m) Week Range (INR) 119/69 1,6,12 Rel. Perf. (%) -3/-8/0 M.Cap. (INR b) / (USD b) 27/0.5 India Cements CMP: INR88 TP: INR119 Buy Cost saving triggers to enhance profitability Trading at steep discount; maintain Buy India Cements (ICEM) is poised to benefit from multiple cost saving triggers, resulting in an improvement in EBITDA/ton from INR948 in FY12 to INR1,078 by FY15. It is likely to witness meaningful balance deleveraging - from net debt/equity of 0.8x in FY13 to 0.5x in FY15. We expect net debt to decline from INR31.3b in FY13 to INR21.6b in FY15. ICEM trades at an EV of USD56/ton v/s USD64/ton for MOSL Mid Cap Cement Universe. Maintain Buy; our target price of INR119 implies 35% upside. Volume growth hinges on market recovery While there are concerns of oversupply in the South, capacity addition is slowing down significantly. We expect ICEM to post volume CAGR of 8% over FY12-15, driven by pick-up in demand in the South (especially in Andhra Pradesh, which accounts for 18% of its sales) and in the North (Trinetra Cement). Given the weak market dynamics and lower prevailing utilization level (~68%), however, the southern region will remain susceptible to pricing volatility. We have assumed INR13/12 per bag increase in realizations in FY14/15. Multiple cost saving triggers to enhance profitability ICEM has the highest cost structure in our Mid Cap Cement Universe due to (1) higher energy cost (high dependence on grid power which has been unreliable off-late), (2) rise in freight cost (increase in lead distance), and (3) negative operating leverage (low utilization). However, from FY14, we expect it to derive meaningful benefits from multiple cost saving triggers such as (1) commencement of the Andhra Pradesh CPP (48MW) by March 2013, coupled with ramp-up in TN CPP (captive power plants to account for ~80% of power requirement, and help save INR1/unit), (2) stabilization of the recently commenced Indonesian coal mine (to help save USD10-15/ton on cost of imported coal), and (3) softening of imported coal prices (60% of fuel mix). We expect ICEM's EBITDA/ton to improve from INR948 in FY12 to INR1,078 by FY15. IPL offers option value; yet, non-core capital allocation a concern While we do not assign any value to its IPL team, based on the floor valuation of USD225m for the auction of the last two IPL teams, ICEM's IPL team can be valued at INR38/share (~43% of the CMP). However, its investments in non-core activities - capital allocation to shipping for ferrying own coal, investment in IPL, significant inter-group company loans, and potential diversification into the infrastructure business raise concerns of suboptimal capital efficiency. Moderating capex, strong CFO to result in deleveraging ICEM is likely to witness meaningful balance deleveraging - from net debt/equity of 0.8x in FY13 to 0.5x in FY15, driven by no meaningful capex (INR11b over FY13-15) and strong cash flow from operations (INR28.6b). We expect net debt to decline from INR31.3b in FY13 to INR21.6b in FY15. 57

58 India Cements Trading at steep discount; maintain Buy ICEM trades at an FY15E EV of USD56/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We expect cost saving catalysts and steady demand recovery to drive revenue/ebitda/pat CAGR of 16%/21%/54% over FY We value ICEM at INR119/share (4x FY15E consolidated cement EBITDA). Maintain Buy; our target price implies 35% upside. About India Cements (ICEM) India Cements (ICEM) is India's fifth largest cement company in terms of existing capacity. It has 14.1mtpa in the South and owns 61% stake in Trinetra Cement (INR7b investment in June 2011), which has a 1.5mtpa plant in the North (Rajasthan). The South accounts for ~80% of its dispatches (ICEM is the dominant player in the South, with ~12% volume share), with the West and the East accounting for the balance. ICEM also owns Chennai Super Kings, a cricket team in the Indian Premier League (IPL). Blue Sky Scenario India Cements India Cements has the potential to multiply 2.5x in 2-3 years, driven by: Savings of ~INR850m (@ USD30/ton for 0.5m tons) from captive coal block in Indonesia. Valuing USD200m, if monetized. Re-rating, led by improvement in core profitability and monetization of IPL. ICEM: Blue Sky Scenario (FY15) Parameter INR m Remark S/A EBITDA 13,750 Assuming savings of ~INR850m from captive coal mine from Indonesia Trinetra EBITDA (pro-rata) 839 4x EBITDA 72,944 Value for IPL 11,023 Valuing IPL at USD200m Less: Net debt 21,644 Equity value 62,323 Target Price (INR) 217 Upside (%) 146 Implied EV/Ton (USD) 87 ICEM: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

59 India Cements 5-S Analysis [Score 58 / 100] & [Rank 8] Size & Scalability [23 / 30] ICEM has existing capacity of 14.1mtpa across 7 plants in Tamil Nadu and Andhra Pradesh. It owns 61% stake in Trinetra Cement, which has a 1.5mtpa plant in the North (Rajasthan). It is operating at lower utilization of 67% owing to weak market dynamics. While there are concerns of oversupply in the South, capacity addition is slowing down significantly. We expect ICEM to post moderate volume CAGR of 8% over FY Sales Mix [12 / 20] The South accounts for ~80% of its dispatches (ICEM is the dominant player in the South, with ~12% volume share), with the West and the East accounting for the balance. Andhra Pradesh accounts for 18% of its sales. Given the weak market dynamics and lower prevailing utilization level (~68%), the southern region will remain susceptible to pricing volatility. We have assumed INR13/12 per bag increase in realizations in FY14/15. Strategic & Other Issues [3 / 10] While we do not assign any value to its IPL team, based on the floor valuation of USD225m for the auction of the last two IPL teams, ICEM's IPL team can be valued at INR38/share (~43% of the CMP). However, its investments in non-core activities - capital allocation to shipping for ferrying own coal, investment in IPL, significant inter-group company loans, unutilized treasury stocks, and potential diversification into the infrastructure business raise concerns of suboptimal capital efficiency. CCI has levied a penalty of INR1.9b on ICEM along with other cement companies on alleged cartelization. Strength of Financials [10 / 20] EBITDA/ton should improve from INR948 in FY12 to INR1,078 by FY15. Expect cost saving catalysts and steady demand recovery to drive revenue/ebitda/pat CAGR of 16%/ 21%/54% over FY Net debt/equity likely to decline from 0.8x in FY13 to 0.5x in FY15, driven by no meaningful capex (INR11b over FY13-15) and strong cash flow from operations (INR29b). Expect ~570bp uptick in RoE to 10.8% over FY Supply Chain Efficiencies [10 / 20] ICEM has the highest cost structure in our Mid Cap Cement Universe due to (1) higher energy cost (high dependence on grid power which has been unreliable off-late), (2) rise in freight cost (increase in lead distance), and (3) negative operating leverage (low utilization). However, from FY14, we expect it to derive benefits from multiple cost saving triggers such as (1) commencement of the Andhra Pradesh CPP (48MW) by March 2013 (CPP to account for ~80% of power requirement v/s ~40% in FY12, and help save INR1/ unit), (2) stabilization of the recently commenced Indonesian coal mine (to help save USD10-15/ton on cost of imported coal), and (3) softening of imported coal prices (60% of fuel mix). Valuation & View [89 / 100] ICEM trades at an EV of USD56/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ ton for overall Cement Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for our Full Cement Universe). We value ICEM at INR119/share (4x FY15E consolidated cement EBITDA). Maintain Buy; our target price implies 35% upside. We do not ascribe any value to the IPL team and Indonesian captive coal mine. Our Blue Sky scenario analysis indiactes for potential 2.5x in 2-3 years time with target price of INR

60 India Cements Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 37,711 35,007 42,034 45,343 52,448 60,863 Change (%) Total Expenditure 29,445 30,670 33,001 36,568 41,617 47,963 % of Sales EBITDA 8,265 4,337 9,034 8,775 10,831 12,900 Margin (%) Depreciation 2,331 2,440 2,513 2,847 3,156 3,245 EBIT 5,934 1,897 6,521 5,928 7,675 9,655 Int. and Finance Charges 1,426 1,417 2,867 2,971 3,154 3,121 Other Income - Rec PBT bef. EO Exp. 4, ,846 3,182 4,871 7,184 EO Expense/(Income) PBT after EO Exp. 5, ,810 2,982 4,871 7,184 Current Tax 1, ,364 2,012 Deferred Tax Tax Rate (%) PAT Adj for EO items 3, ,958 2,100 3,361 4,957 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital 3,072 3,072 3,072 3,072 3,072 3,072 Fully Diluted excl Treasury stock 2,872 2,872 2,872 2,872 2,872 2,872 Total Reserves 38,286 37,826 37,604 38,674 40,957 44,836 Net Worth 41,358 40,898 40,676 41,746 44,029 47,907 Deferred Liabilities 2,693 2,743 3,245 3,364 3,511 3,726 Total Loans 21,327 24,561 27,010 35,429 35,279 35,129 Capital Employed 65,378 68,201 70,931 80,538 82,818 86,762 Gross Block 57,102 59,277 65,019 68,970 74,470 76,470 Less: Accum. Deprn. 17,916 20,932 23,690 26,537 29,693 32,938 Net Fixed Assets 39,186 38,345 41,329 42,433 44,777 43,532 Capital WIP 7,029 3,088 1,451 2,000 1,000 1,000 Total Investments 3,140 1,603 8,520 8,520 8,520 8,520 Curr. Assets, Loans&Adv. 26,446 36,349 31,202 41,305 44,757 52,808 Inventory 4,478 4,973 5,258 5,901 6,610 7,670 Account Receivables 2,534 2,544 2,098 3,416 3,736 4,335 Cash and Bank Balance ,170 7,094 13,485 Loans and Advances 18,692 28,296 23,613 27,613 27,113 27,113 Real Estate Projects WIP Curr. Liability & Prov. 10,422 11,184 11,571 13,719 16,237 19,098 Account Payables 7,296 5,425 6,330 6,957 8,047 9,338 Other Current Liabilities 2,028 4,493 3,916 4,969 5,748 6,670 Provisions 1,099 1,265 1,325 1,793 2,442 3,090 Net Current Assets 16,023 25,165 19,631 27,586 28,521 33,710 Appl. of Funds 65,378 68,201 70,931 80,538 82,818 86,762 E: MOSL Estimates; * Adjusted for treasury stocks 60

61 India Cements Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * Consol EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) * P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 8,398 4,337 9,034 8,775 10,831 12,900 Interest/Dividends Recd Direct Taxes Paid -1, ,364-2,012 (Inc)/Dec in WC -4,867-9,349 5,232-3,813 1,989 1,201 CF from Operations 2,422-4,783 14,080 4,292 11,806 12,739 EO expense CF from Operating incl EO 2,422-4,760 14,044 4,092 11,806 12,739 (inc)/dec in FA -2,961 2,342-3,860-4,500-4,500-2,000 (Pur)/Sale of Investments -1,990 1,537-6, CF from investments -4,952 3,878-10,777-4,500-4,500-2,000 Issue of Shares 2, , (Inc)/Dec in Debt 1,878 3,233 2,449 8, Interest Paid -1,833-1,417-2,867-2,971-3,154-3,121 Dividend Paid ,078-1,078 CF from Fin. Activity 2, ,570 4,549-4,382-4,349 Inc/Dec of Cash ,142 2,924 6,390 Add: Beginning Balance ,170 7,094 Closing Balance ,170 7,094 13,485 61

62 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 69 2 Valuation score, Rank 81 5 Target price & upside Base case INR554 64% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuation P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Stock performance (1 year) JKCE IN Equity Shares (m) Week Range (INR) 370/108 1,6,12 Rel. Perf. (%) 13/28/-7 M.Cap. (INR b) / (USD b) 24/0.4 Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others JK Cement CMP: INR337 TP: INR554 Buy Expansion to aid volume growth; white cement a cash cow SOTP-based target price of INR554 implies 64% upside; Buy JK Cement (JKCE) has a favorable market mix, with North and West India accounting for ~70% of dispatches. It has no exposure to the underperforming Andhra Pradesh market. Its North India plants are operating at over 90% capacity and ongoing brownfield capacity expansion, which is likely to be completed by 2Q/3QFY15, would aid volume growth. Its white cement business is a cash cow. The stable operating income of INR2.5b-3b per year from white cement would render meaningful cushion to JKCE's debt servicing during the capex cycle. We estimate 26% revenue CAGR over FY13-15 and expect an uptick in gray cement profitability with (1) increasing contribution from new plants, and (2) improving operating leverage. JKCE currently trades at 4.3x FY15E EBITDA. Our SOTP-based target price is INR554-64% upside. We initiate coverage with a Buy rating. Ongoing expansion, operating leverage to drive up volumes, profitability JKCE has a favorable market mix, with North and West India accounting for ~70% of its dispatches. Its Karnataka plant also supplies mainly to the West (Maharashtra) and to relatively better placed states (Karnataka) in the South. It has no exposure to the underperforming Andhra Pradesh market. The company's North India (Rajasthan) plants are operating at over 90% capacity and there is limited scope for production growth until the commissioning of the ongoing brownfield expansion in 2Q/3QFY15. However, ramp up in the Karnataka plant (operating at 52%/67% in FY12/2QFY13) renders meaningful cushion to volume growth till FY14. We estimate 26% revenue CAGR over FY13-15 and expect an uptick in gray cement profitability with (1) increasing contribution from the more efficient new plants, and (2) improving operating leverage. We model ~24% CAGR in EBITDA/ton to INR1,134/1,395 (INR813/896 for gray cement) in FY14/15E as against INR914 (INR653 for gray cement) in FY13E. White cement business a cash cow JKCE is the second largest player in the duopolistic white cement industry in India, with 40% market share. It has a production capacity of 0.4mtpa in India, which will increase to 0.6mtpa by FY14. It is also adding a 0.6mtpa white cement plant in UAE by December 2014 to address huge international demand. We expect JKCE's white cement volumes to grow at 20% CAGR over FY We estimate 25% revenue/ebitda CAGR for its white cement division over FY13-15, taking EBITDA to INR3.2b in FY15 (v/s INR1.6b/INR2.1 in FY12/13E). The stable operating income of INR2.5b-3b per year from white cement would render meaningful cushion to JKCE's debt servicing during the capex cycle. Expect de-leveraging from FY15 We expect JKCE's net debt to increase from INR8.5b (net debt-equity of 0.6x) in FY12 to ~INR25.7b (net debt-equity of 1.1x) by FY15 on the back of ~INR27.6b capex over FY However, FCF generation from FY15 should trigger deleveraging. Currently, there are no meaningful capex plans beyond FY15. 62

63 JK Cement Capital efficiency to improve JKCE's capital efficiency is superior compared to its mid-cap peers, largely due to (1) old plants, (2) high utilization, and (3) robust profitability of its white cement business. We expect its capital efficiency to improve by 3-6pp over FY13-15 to ~19%. Full benefit of new capacities would drive further capital efficiency improvement. SOTP-based target price of INR554 implies 64% upside; Buy JKCE currently trades at 4.3x FY15E EBITDA. We value its gray cement business at 5x FY15E EBITDA and white cement business (both domestic and UAE) at 7x FY15E EBITDA. Our SOTP-based target price is INR554-64% upside. At our SOTP-based target price, the stock would trade at an EV of USD57/ton on gray cement capacity and USD100/ton on blended capacity. We initiate coverage with a Buy rating. About JK Cement JKCE is one of India's leading cement producers, with 7.5mtpa of gray cement capacity - 4.5mtpa in the North (Rajasthan) and 3mtpa in the South (Karnataka). It is the second largest white cement manufacturer in India, with a capacity of 0.4mtpa (0.6mtpa by FY14). Its ongoing 3mtpa split grinding expansion in the North would take its gray cement capacity to 10.5mtpa by FY15. JKCE is also expanding its international footprint through a 0.6mtpa Greenfield white cement plant in UAE to address rising international demand. Blue Sky Scenario JK Cement JK Cement can multiply 2.2x in two years, driven by: Commissioning of white cement plant at UAE and be-bottlenecking. Improving efficiency, driven by new gray cement plant in Karnataka and commissioning of new capacities in Rajasthan (including split grinding units). Deleveraging, driven by completion of capex and increase in cash flow from operations due to higher utilization during the upturn in the cement cycle. Improvement in capital efficiency, as capex starts contributing fully from FY15. JKCE: Blue Sky Scenario EV/EBITDA FY14E FY15E Target EV/EBITDA (x) Grey Cement White Cement UAE White Cement 8 1,523 9,846 EV (INR m) 54,419 74,543 Consol Net debt (INR m) 12,486 24,879 Equity value (INR m) 41,932 49,664 Equity value (INR/Shr) Implied EV/Ton (blended) 117 Implied EV/Ton (Grey) 68 Implied PE (White) 12.5 JKCE: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

64 JK Cement 5-S Analysis [Score 69 / 100] & [Rank 2] Size & Scalability [23 / 30] Gray cement capacity of 7.5mtpa: (1) 4.5mtpa in the Rajasthan, and (2) 3mtpa in the Karnataka. Adding two split grinding units of 1.5mtpa each in Jhajjar, Haryana (by September 2014) and Mangrol, Rajasthan (by December 2014). North-based capacity is operating at 90%+ utilization. Ongoing brownfield capacity addition of 3mtpa kicks in over 2Q/3QFY15. The South plant, which has seen utilization increasing from ~52% in FY12 to 67% in 2QFY13, would aid volume growth till FY14. Volumes grew 17.6% YoY in 1HFY13. We have modeled 10% CAGR over FY13-15; the full impact of planned addition would be evident in FY16. Sales Mix [16 / 20] Dispatch mix: North (~49%), Central (18%), West (~18%) and South (15%). Due to the proximity of its southern plant to the relatively superior West India market, 55-60% of its dispatches are to this region - mainly Maharashtra. It has no exposure to the underperforming Andhra Pradesh market. JKCE witnessed weak realization growth over 1HFY13. We model in INR9/13/10 per bag increase in average realizations over FY13/14/15. The rising proportion of dispatches to South and West India markets from the Karnataka plant would also have a positive impact on overall realizations. Supply Chain Efficiencies [10 / 20] Sub-par cost structure due to old plants (lower operating efficiency) and higher lead distance/ freight cost (absence of split grinding). Has captive power capacity of 106MW, addressing ~80% of its total requirement. Fuel mix is skewed towards pet coke and imported coal (~60%). Freight mix is skewed towards road transport (~80%), though the company is focusing on increasing the share of rail transport. We model a modest ~3% cost CAGR in gray cement over FY13-15, led by (1) better operating efficiency in new plants, and (2) lower lead distance. Strategic & Other Issues [10 / 10] Second-largest white cement player, with ~0.4mtpa capacity (0.6mtpa by FY14) and ~40% market share. It also manufacturers putty (0.3mtpa capacity). Access to high quality limestone reserves gives a strong competitive edge. It is installing 0.6mtpa of white cement capacity in UAE to cater to the rising export demand. Volume growth has been strong %/11% for white cement and 39%/28% for putty in 1HFY13/FY12. We model 20% CAGR for white cement over FY13-15 (ex UAE plant), taking EBITDA to INR3.2b in FY15. CCI has levied a penalty of INR1.3b on JKCE along with other cement companies on alleged cartelization. Strength of Financials [10 / 20] We expect 26%/37%/40% CAGR in JKCE's revenue/ EBITDA/PAT over FY We model ~24% CAGR in EBITDA/ton to INR1,134/1,395 (INR813/896 for gray cement) in FY14/15E as against INR914 (INR653 for gray cement) in FY13E. Net debt would increase to ~INR25.7b (net debtequity of 1.1x) by FY15 on the back of ~INR27.6b capex over FY FCF generation from FY15 should trigger deleveraging. JKCE's capital efficiency is superior compared to its mid-cap peers. We estimate further expansion of 3-6pp over FY Valuation & View [81 / 100] JKCE currently trades at 4.3x FY15E EBITDA and USD76/ ton. We value its gray cement business at 5x FY15E EBITDA and white cement business at 7x FY15E EBITDA. Our SOTP-based target price is INR554-64% upside. Our blue sky scenario suggests that JKCE can deliver over 100% returns in two years, led by (a) commissioning of its white cement plant at UAE, (b) improving efficiency, driven by new plant in Rajasthan, (c) balance sheet deleveraging, driven by completion of ongoing capex and significant increase in cash flows from operations due to higher utilization during the upturn in the cement cycle, and (d) improvement in capital efficiency, as capex incurred starts contributing fully to P&L from FY15. 64

65 JK Cement Size & Scalability: Expansion in the North to boost volumes from FY15E Currently has gray cement capacity of 7.5mtpa JKCE has existing gray cement capacity of 7.5mtpa across (1) three integrated cement plants with an aggregate capacity of 4.5mtpa in the North (Rajasthan) - 3.3mtpa in Nimbahera, 0.75mtpa in Mangrol, and 0.47mtpa in Gotan, and (2) a 3mtpa plant in the South (Mudhol, Karnataka). JKCE has 5.6mtpa of clinker capacity - 2.2mtpa in the South and the balance in the North. Limited scope to enhance production in the North until brownfield expansion Its North-based capacity is operating at 90%+ utilization. The scope to enhance production is limited until the ongoing brownfield capacity addition of 3mtpa kicks in over 2Q/3QFY15. The capacity addition will be distributed between two split grinding units of 1.5mtpa each in Jhajjar, Haryana (to be operational by September 2014) and Mangrol, Rajasthan (to be operational by December 2014). Immediate volume growth hinges on ramp-up of production in the South JKCE's Karnataka plant is currently operating at ~65%, in line with the industry capacity utilization in South India. It has scaled up from ~52% utilization in FY12 to 67% in 2QFY13. We expect the utilization of JKCE's Karnataka plant to increase further, as 55-60% of its dispatches cater to the superior western markets like Maharashtra. The company has no exposure to Andhra Pradesh. Utilization of northern plants at over 90%; Volume growth to be driven by ramp-up in southern plant southern plant operating at ~65% Expect 10% CAGR in gray cement volumes over FY13-15 JKCE posted strong volume growth of 17.6% YoY in 1HFY13, led by steady demand in the North and ramp-up of its Karnataka plant. We have modeled 10% volume CAGR over FY We expect the full impact of the ongoing capacity addition to benefit volume growth in FY16. 65

66 JK Cement Sales Mix: Market mix favorable with 70% from North and West India Market mix favorable; no exposure to Andhra Pradesh JKCE has a favorable market mix, with North and West India accounting for ~70% of its dispatches. The break-up of its dispatches is as follows: North (~49%), Central (~18%), West (~18%) and South (~15%). The key contributing states are Rajasthan (21%), Haryana (17%), Maharashtra (16%), Karnataka (13%), Madhya Pradesh (9%) and Uttar Pradesh (9%). It has no exposure to the underperforming Andhra Pradesh market. To benefit from better demand-supply outlook in the North JKCE should benefit from better demand-supply outlook in the North over the next 2-3 years. Due to the proximity of its southern plant to the relatively superior West India market, 55-60% of its dispatches are to this region - mainly Maharashtra and Gujarat. Its dispatches within South India are to better performing states like Karnataka and it has no exposure to the subdued Andhra Pradesh market. Sustenance of pricing discipline a key factor in the South Sustenance of pricing discipline would be a key factor in South India, especially given the (1) low utilization, and (2) depressed outlook for the largest cement consuming state, Andhra Pradesh. Any negative cascading effect could disturb the stability of the West and Central India markets. Expect INR9/13/10 per bag increase in average realizations over FY13/14/15 JKCE witnessed weak realization growth over 1HFY13, with moderate rise of INR222/ bag since March 2012, followed by a sharp INR10-15/bag price drop in the North in 3QFY13. However, ex-andhra Pradesh, the price decline in the southern states has been relatively moderate. We expect cement prices to recover in the North in 4QFY13 along with volume uptick. We model in INR9/13/10 per bag increase in average realizations over FY13/14/15. The rising proportion of dispatches to South and West India markets from the Karnataka plant would also have a positive impact on overall realizations. Rising proportion of dispatches to West and South India to improve realizations Market mix evenly distributed; no exposure to Andhra Pradesh 66

67 JK Cement Realizations historically lower than peers' average Better demand dynamics in North and West India (utilization; %) Supply Chain Efficiencies: High cost structure; new plants to enhance efficiency Sub-par cost structure due to old plants JKCE operates at sub-industry level cost structure, disadvantaged by (1) older plants, with inferior operating efficiency, and (2) absence of split grinding units, which augments freight cost, given high lead distance of km. Weaker operating efficiencies are signified by (1) JKCE's electricity consumption of ~90Kwh/ton v/s 77-85Kwh/ton for its midcap peers, and (2) fuel consumption of ~900Kcal/kg v/s ~750Kcal/ kg for efficient peers. JKCE's cost of production higher than MOSL average (INR/ton) High lead distance, weak energy efficiency results in high freight and energy costs JKCE has captive power capacity of 106MW (thermal: 93MW; waste heat recovery: 13MW) across four locations, addressing ~80% of its total requirement. Almost 60% of fuel requirement is met with pet coke and imported coal. Its southern plant's proximity to ports gives it easy access to imported coal. Its current freight mix is skewed towards road transport (80%), though the management is focusing on increasing the share of rail transport. 67

68 JK Cement Fuel mix skewed towards pet coke Energy efficiency lower than peers (Kwh/ton) Captive power plants Location Capacity (MW) Type Gotan 7.5 Thermal Nimbhera 20 Thermal Bamania 15 Thermal Muddapur 50 Thermal Nimbahera 13 Waste Heat recovery Total Limited strategic cost triggers JKCE's total cost per ton escalated ~7% YoY in 1HFY13 and increased at a similar CAGR over FY10-12, led by industry-wide escalation across cost factors. Given the continued operating overhangs for its older plants, we do not see any major cost saving catalysts in the near term. However, new plants and split grinding units to enhance efficiency As the contribution of its 3mtpa southern plant (commissioned in FY10) and two upcoming split grinding facilities (total capacity of 3mtpa) in Rajasthan increases, overall operating efficiencies should improve. Currently, JKCE's lead distance is 650km in the North and 450km in the South. With split grinding units in Rajasthan, its average lead distance and resultantly, freight cost should moderate. It should also benefit from the declining trend in imported coal / pet coke parity prices (down ~13% YTD FY13 in INR terms). Expect moderate growth in cost of gray cement production We model a moderate ~3% CAGR in cost of gray cement production over FY13-15, which is attributable to (1) moderation in cost inflation, (2) benefit of new plants as discussed above, and (3) operating leverage in the southern plant, which is ramping up. 68

69 JK Cement White cement offers strong demand potential Strategic & Other Issues: Number 2 in duopolistic white cement market Leadership in high potential white cement market JKCE is the second-largest player in the domestic white cement market, which is a duopoly, with UltraTech (0.55mtpa capacity) being the leader. JKCE enjoys ~40% market share in this segment, with 0.4mtpa of existing capacity at Gotan (Rajasthan). Ongoing brownfield expansion of 0.2mtpa will take its total white cement capacity to 0.6mtpa by FY14. While access to high quality limestone reserves gives JKCE a strong competitive edge, the prevailing strong demand (both domestic and export markets) renders huge growth visibility. It also manufacturers putty and has an installed capacity of 0.3mtpa. Market Size & Supply Installed capacity: 1mtpa Only two major producers: UltraTech Cement and JK Cement Domestic sales: 0.8mtpa Export quantity: 0.15mtpa Export markets: South Asia, Middle East and Africa Entry of new players remote as: Special quality limestone required High investment costs Problems in mine allocation Growth Drivers White cement demand growing at 10% per year; growth drivers: Higher per-capita consumption Demand from wall putty, which is growing at 30% per year Higher demand from infrastructure development in Qatar and the Middle East JK Cements Current market share: 40% Pan-India reach with established brand White cement contributes 20-25% of sales and 30-35% of profitability White cement contribution sufficient to service JKCE's overall interest liability and dividend payout Capacity expansion to aid strong growth JKCE's white cement business has posted strong growth over the last five years (FY07-10 CAGR of 4% improving to 15% over FY10-13). White cement volumes grew 17.5%/ 11% while putty volumes grew 39%/28% in 1HFY13/FY12. Currently, JKCE is operating at 94%/60% capacity utilization in white cement/putty. We expect JKCE's white cement business to continue registering strong growth on the back of (1) steady domestic demand growth of 10%+, (2) ongoing capacity expansion of 0.1mtpa in each of FY13 and FY14, taking its total white cement capacity to 0.6mtpa and putty capacity to 0.5mtpa, (3) higher export market boost, and (4) strong brand equity and distribution network. We model 20% CAGR for white cement and 25% CAGR for putty over FY13-15 (ex UAE plant). The segment enjoys ~30% EBITDA margin (white cement and putty combined). We expect JKCE's white cement division to post 25% revenue/ebitda CAGR over FY13-15, taking EBITDA to INR3.2b in FY15 (v/s INR1.6b/INR2.1 in FY12/13E), which would render meaningful cushion to its debt servicing during the capex cycle. 69

70 JK Cement Strong historical growth to continue in white cement Expect 25% EBITDA CAGR over FY13-15 Expanding overseas footprint to augment export market pie Strong demand for white cement in both the domestic and overseas markets (especially SAARC countries, Middle East, South Africa, Kenya, Tanzania, etc) has been the key driver for JKCE's overseas greenfield project at Fujaira (UAE) in a 90:10 JV with the Government of Fujaira. It is installing 0.6mtpa of white cement capacity (flexible dual process, with potential 0.9mtpa of gray cement capacity) to equip itself to cater to the rising export demand. The management's strategy would be to keep existing capacity in India to entirely focus on domestic demand. The UAE plant is likely to commence operations by December Assuming 50% utilization in FY15 and investment of USD147m, we estimate ~17% RoCE and ~30%+ RoE for the UAE venture (we have assumed zero income tax and ~7% cost of USD-denominated loan of USD97m). Strength of Financials: Net debt to peak at ~INR25b over capex cycle Ongoing expansion to help scale up growth We expect 26%/37%/40% CAGR in JKCE's revenue/ebitda/pat over FY13-15 as against 19%/10%/-1.6% CAGR over FY The healthy scale up would largely be attributable to sustained volume growth, driven by added capacity and growing contribution from white cement. Moreover, the full impact of upcoming gray cement capacity would aid further growth in FY16; we model only partial benefit of spilt grinding expansion in FY15. Profitability to witness steady improvement JKCE is witnessing steady growth in profitability after bottoming out in FY11, with blended EBITDA/ton of INR511 (INR306 in gray cement). Its white cement business, with steady sales growth and robust margins, adds meaningful resilience to profitability. The segment contributes 20-25% of overall sales and 30-35% of EBITDA. In the gray cement segment, despite no major cost saving trigger, we expect an uptick in profitability on account of (1) rising sales contribution from the Karnataka plant, with higher realizations and profitability, (2) improving operating leverage through scale-up in utilization, (3) higher operating efficiency in newer plants, and (4) expected moderation in variable cost inflation. We model ~24% CAGR in EBITDA/ton to INR1,134/ 1,395 (INR813/896 for gray cement) in FY14/15E as against INR914 (INR653 for gray cement) in FY13E. 70

71 JK Cement EBITDA/ton to increase with cost moderation, profitable sales mix and higher utilization Ongoing capex to drive peak net debt to ~INR26b JKCE's split grinding units of 1.5mtpa each in Jhajjar (to be operational by September 2014) and Mangrol (to be operational by December 2014) involve a capex of ~INR17.3b (~USD105/ton) over FY The project would also include 25MW coal-based thermal power plant, 9MW waste heat recovery-based power plant and railway siding at each unit. JKCE is also undertaking brownfield expansion of 0.2mtpa in white cement, with total capex of ~INR2.5b (~INR1.5b already incurred; balance to be incurred in FY14). Both the expansions would reduce lead distance while catering to northern states. The company has acquired land, obtained mining leases, and placed orders for the plant and equipment % of the capex would be debt-funded. JKCE's UAE expansion would involve a capital expenditure of ~USD147m by December 2014, and it has already tied up for 2/3rd of the funding through debt (~USD97m). Till date, it has incurred ~USD30m of total equity contribution of USD49m. EPC contract has been awarded and civil and mechanical work is progressing on schedule. The expansion will be key to cater to the Middle East and North African white cement demand and infrastructure development projects. Capex schedule over FY13-15 (INR b) to augment net debt significantly 71

72 JK Cement Expect deleveraging from 2HFY15 We model capex of ~INR17.8b over FY14-15, following ~INR9.8b in FY13, which would augment JKCE's net debt to ~INR25.7b (net debt-equity of 1.1x) by FY15 v/s INR8.5b (net debt-equity of 0.6x) in FY12. The company is likely to generate FCF from FY15, once the current capex cycle gets completed and operations at new plants begin, triggering de-leveraging. Currently, there are no meaningful capex plans beyond FY15. Expect JKCE to generate FCF from FY15 (INR b) Payout ratio healthy, with 1.9% yield (%) Capital efficiency to improve 3-6pp over FY13-15 JKCE's capital efficiency is superior compared to its mid-cap peers, largely due to (1) old plants, (2) high utilization, and (3) robust profitability of its white cement business. We expect its capital efficiency to improve by 3-6pp over FY13-15 to ~19% on the back of a steady volume growth driven by ongoing expansion. Full benefit of expanded capacities could result in further improvement in capital efficiency in FY16. We have modeled only a partial benefit of upcoming capacity in FY15. Superior RoCE among mid-cap peers (%) Capital efficiency to improve 3-6pp over FY

73 JK Cement Valuation & View SOTP-based target price of INR554 implies 64% upside JKCE currently trades at 4.3x FY15E EBITDA. We value its gray cement business at 5x FY15E EBITDA and white cement business (both domestic and UAE) at 7x FY15E EBITDA. Our SOTP-based target price is INR554-64% upside. At our SOTP-based target price, the stock would trade at an EV of USD57/ton on gray cement capacity and USD100/ton on blended capacity. JK Cement: SOTP EV/EBITDA FY14E FY15E Target EV/EBITDA (x) Grey Cement White Cement UAE White Cement 7 1,333 8,615 EV (INR m) 46,273 63,596 Consol Net debt (INR m) 12,486 24,879 Equity value (INR m) 33,786 38,717 Equity value (INR/Shr) Implied EV/Ton (blended) 100 Implied EV/Ton (Grey) 57 Implied PE (White)

74 JK Cement Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 18,268 20,831 25,379 30,648 37,534 48,300 Change (%) Total Expenditure 13,891 18,180 20,329 24,774 29,467 37,317 % of Sales EBITDA 4,377 2,651 5,050 5,874 8,068 10,983 Margin (%) Depreciation 855 1,128 1,256 1,328 1,583 2,196 EBIT 3,522 1,523 3,794 4,546 6,484 8,787 Int. and Finance Charges 616 1,185 1,443 1,966 2,611 3,269 Other Income - Rec PBT bef. EO Exp. 3, ,908 3,146 4,404 6,202 EO Expense/(Income) PBT after EO Exp. 3, ,830 3,146 4,404 6,202 Current Tax ,007 1,409 1,985 Deferred Tax Tax Rate (%) Reported PAT 2, ,746 2,139 2,995 4,218 PAT Adj for EO items 2, ,794 2,139 2,995 4,218 Change (%) Margin (%) Less: Mionrity Interest Net Profit 2, ,794 2,139 2,993 4,131 Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Total Reserves 12,813 13,250 14,522 16,214 18,719 22,363 Net Worth 13,513 13,949 15,221 16,913 19,419 23,062 Deferred Liabilities 2,169 2,109 2,291 2,291 2,291 2,291 Total Loans 10,737 13,808 12,963 18,488 26,928 29,928 Capital Employed 26,419 29,866 30,475 37,692 48,638 55,281 Gross Block 23,772 27,450 29,013 30,667 40,502 58,202 Less: Accum. Deprn. 3,245 4,481 5,845 7,173 8,756 10,952 Net Fixed Assets 20,526 22,969 23,167 23,494 31,745 47,249 Capital WIP 2,296 1, ,800 12, Total Investments Curr. Assets, Loans&Adv. 6,791 9,948 11,596 11,646 12,280 17,424 Inventory 2,376 3,210 3,628 4,469 5,334 6,784 Account Receivables ,030 1,185 1,508 Cash and Bank Balance 1,318 3,215 4,332 2,941 1,849 4,157 Loans and Advances 2,278 2,916 2,799 3,206 3,911 4,975 Curr. Liability & Prov. 3,579 2,188 2,916 3,425 4,424 5,761 Account Payables 3,294 1,753 2,286 2,720 3,437 4,372 Provisions ,389 Net Current Assets 3,212 7,761 8,680 8,221 7,856 11,662 Appl. of Funds 26,418 31,799 32,844 40,607 52,194 59,804 E: MOSL Estimates; * Adjusted for treasury stocks 74

75 JK Cement Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * Consol EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) * P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 3,522 1,523 3,794 4,546 6,484 8,787 Interest/Dividends Recd Depreciation 855 1,128 1,256 1,328 1,583 2,196 Direct Taxes Paid ,007-1,409-1,985 (Inc)/Dec in WC -1, CF from Operations 3,192 2,398 5,338 5,047 7,104 9,151 EO expense CF from Operating incl EO 3,391 2,606 5,368 5,046 7,108 9,070 (inc)/dec in FA -2,329-2,411-1,439-9,550-13,535-6,000 (Pur)/Sale of Investments CF from investments -2,334-2,405-1,489-9,550-13,535-6,000 Issue of Shares (Inc)/Dec in Debt 7 3, ,525 8,440 3,000 Interest Paid ,185-1,443-1,966-2,611-3,269 Dividend Paid CF from Fin. Activity -1,196 1,695-2,761 3,112 5, Inc/Dec of Cash ,896 1,117-1,391-1,086 2,313 Add: Beginning Balance 1,457 1,318 3,215 4,332 2,941 1,849 Closing Balance 1,318 3,214 4,332 2,941 1,855 4,163 75

76 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 66 6 Valuation score, Rank 85 4 Target price & upside Base case INR249 76% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) JKLC IN Equity Shares (m) Week Range (INR) 172/42 1,6,12 Rel. Perf. (%) 2/60/205 M.Cap. (INR b) / (USD b)17.3/0.3 P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) JK Lakshmi Cement CMP: INR141 TP: INR249 Buy Favorable market mix, expansion to drive volumes To outperform peers on profitability growth; Buy JK Lakshmi Cement (JKLC) has no exposure to the South Indian market and has been operating at 100% capacity utilization. We expect 12% volume CAGR over FY13-15, on the back of debottlenecking of clinker capacity, expansion of cement capacity and favorable market mix. Superior cost structure coupled with 7% CAGR in realizations over FY13-15 will drive 14% CAGR in cement EBITDA/ton. We believe JKLC will outperform peers on profitability growth. JKLC trades at an FY15E EV of USD50/ton v/s USD64/ton for MOSL Mid Cap Cement Universe. We initiate coverage with Buy, with target price of INR249 (upside 76%) Sailing on favorable market mix JKLC's dispatch mix is skewed towards the North (~65%) and the West (~35%). Commencement of the greenfield plant at Durg in Chhattisgarh and two split grinding units in Bengal and Orissa by 4QFY14 would help it to diversify into the better performing markets of East and Central India. Due to no exposure to the under-performing South India market and healthy demand-supply equation in other regions, JKLC has been operating at 100% utilization. Favorable market mix renders stronger visibility of realization growth and profitability. We model INR15/ bag increase in realizations in FY14 and INR12 per bag in FY15. Ongoing expansion and de-bottlenecking to scale up volume growth JKLC is operating at maximum utilization. It has posted muted volume CAGR of 5% over FY10-13 due to limited scope to improve production. We expect meaningful scale up in volume growth (modeling 12% CAGR over FY13-15) on the back of (a) debottlenecking of clinker capacity by 0.33mtpa in exiting plant by 4QFY13, (b) expansion of cement capacity by 3.2mtpa by 4QFY14 (2.7mtpa of greenfield at Durg and 0.5mtpa grinding unit at Surat), and (c) favorable market mix. JKLC also plans to revive the defunct 1.2mtpa plant at Udaipur by FY15. Self-sufficiency in power, softening imported coal prices to drive profitability We expect JKLC to maintain superior cost structure owing to (a) higher fuel efficiency, (b) 100% self-sufficiency in power (lower generation cost of INR3.4/ unit; ~15% discount to MOSL Cement Universe average), and (c) softening pet coke prices (85% of fuel mix). This, coupled with healthy uptick in realizations (expect 7% CAGR over FY13-15) is likely to drive 14% CAGR in cement EBITDA/ton over FY13-15 (model overall EBITDA margin of % over FY13-15 v/s 18.8% in FY12). Potential sale of surplus power would be additional driver. JKLC will outperform peers on profitability growth here on, leading to narrowing of existing discount on EBITDA/ton with MOSL average over FY13-15 (15% v/s 22% in FY12). 76

77 JK Lakshmi Cement Steady OCF to limit leverage despite high capex requirement We expect steady operating cash flow (INR4-6 annually over FY13-15) to restrict JKLC's leverage despite high capex requirement of ~INR12b over FY Net debt is estimated to peak out at INR10.6b (net debt-equity of 0.7x) in mid-fy14, before the Durg plant commences and JKLC begins generating free cash flow. Initiating coverage with a Buy rating JKLC trades at FY15E EV of USD50/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 3.3x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We value JKLC at INR249/share (5x FY15E EBITDA), implying an EV of USD76/ton of cement. We initiate coverage with Buy (76% upside). About JK Lakshmi Cement Blue Sky Scenario JK Lakshmi JK Lakshmi Cement (JKLC), promoted by the HS Singhania group, is a North India-based cement company. It has a cement capacity of 5.3mtpa and a CPP capacity of 66MW, which makes it self-sufficient in energy. While the North and the West account for 90-95% of its current dispatch mix, ongoing greenfield expansion of 2.7mtpa at Durg in Chhattisgarh would enhance its presence in the central and eastern markets, raising total capacity to 8.5mtpa by FY14. JK Lakshmi can potentially double in 2-3 years, driven by: Ramp-up at its new plant at Durg, which will commission by March 2014, marking JKLC's entry into East India. Durg plant will be more efficient and profitable, boosting overall profitability. Deleveraging, driven by completion ofcapex and significant improvement in cash flow from operations during the upturn in the cement cycle. Improvement in capital efficiency, as ongoing capex starts contributing. JKLC: Blue Sky Scenario FY15E Remarks EBITDA (INR m) 8,595 Factoring for scale-up of Durg plant, will boost its overall profitability Target EV/EBITDA (x) 5 Target EV(INR m) 42,977 Net debt (INR m) 3,014 Target Equity value (INR m) 39,964 No of share (m) 118 Target Price (INR) 340 Doesn t include any value from UCW subsidiary Upside (%) 140 EV/Ton (USD) at TP 92 JKLC: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

78 JK Lakshmi Cement 5-S Analysis [Score 66 / 100] & [Rank 6] Size & Scalability [17 / 30] North India based cement company, with a capacity of 5.3mt: (1) 4.2mt in Rajasthan, (2) 0.55mt in Gujarat, and (3) 0.55mt in Haryana. Is enhancing clinker capacity in Rajasthan by 0.33mt to 4.29mt. 2.7mtpa greenfield expansion at Durg (Chhattisgarh) and 0.5mt grinding unit at Surat (Gujarat) to enhance cement/clinker capacity to 8.5mt/5.8mt by 4QFY14. Planning to revive group company, Udaipur Cement Works' 1.2mt plant by June Currently operating at 100%+ utilization. Expect 12% volume CAGR over FY13-15 (v/s 15% growth in 1HFY13). Strategic & Other Issues [9 / 10] Has diversified into RMC, with total capacity of 0.7m cubic meters across 14 plants. RMC business accounts for ~7% of JKLC's revenue and enjoys operating margin of 4.5-5%. Plans to increase presence in value-added products like Aerated Autoclaved Concrete (AAC) - first plant in Haryana by mid-fy14. Monetization of surplus power of 20MW offers additional revenue stream potential. Bought back shares; Acquiring defunct Udaipur Cement Works from the promoter group Sales Mix [15 / 20] JKLC's dispatch mix is skewed towards the North (~65%) and the West (~35%), with (1) Rajasthan (30%), (2) Gujarat (30%), and (3) other northern states being the key contributors. Ongoing expansion to help diversify into better performing East and Central India markets. Market mix favorable due to no exposure to the South and healthy utilization (75-85%) in other regions. Model INR15/bag increase in realizations in FY14 and INR12/bag in FY15 (7% CAGR over FY13-15). Strength of Financials [13 / 20] Profitability bottomed out in 2QFY12; expect 14% CAGR in cement EBITDA/ton over FY13-15 to INR1,034 in FY15. Expect revenue/ebitda/pat CAGR of 20%/28%/26% over FY13-15 (v/s 7%/-13%/-24% over FY10-12). To outperform peers on profitability, with discount vis-à-vis MOSL Cement Universe narrowing over FY13-15 (15% v/s 22% in FY12). Steady operating cash flow (INR4-6b annually over FY13-15) to restrict leverage, despite heavy capex need of ~INR12b over FY Net debt to peak out at INR10.6b (net debt-equity at 0.7x) in mid-fy14. Supply Chain Efficiencies [12 / 20] Superior cost structure, with total cost at 10-15% lower than MOSL Cement Universe. Expect cost advantage to sustain, owing to (a) higher fuel efficiency, (b) 100% CPP-based power selfsufficiency, and (c) softening pet coke prices (85% of fuel mix). Freight cost to inch up due to (a) increase in rail freight and diesel price, and (b) increase in lead distance to km. Model 4% CAGR in cost of production per ton over FY Valuation & View [85 / 100] JKLC trades at an EV of USD50/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ ton for overall Cement Universe) and 3.3x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We value JKLC at INR249/share (5x FY15E EBITDA), implying an EV of USD76/ton of cement. We initiate coverage with Buy. Our target price implies 76% upside. Our Blue Sky scenario analysis indiactes for potential 140% return over 2-3 years time with target price of INR

79 JK Lakshmi Cement Debottlenecking of clinker capacity and expansion of cement capacity to aid meaningful uptick in volume growth Size & Scalability: Expansion and de-bottlenecking to drive volume Ongoing capacity expansion JKLC has existing capacity of 5.3mtpa across three integrated cement plants: (1) 4.2mtpa at Sirohi (Rajasthan), (2) 0.55mtpa at Kalol (Gujarat), and (3) 0.55mtpa at Jhajjar (Haryana). It is increasing clinker capacity at Jaykaypuram (Rajasthan) by 0.33mtpa (0.165mtpa already commissioned, rest by 4QFY13) from 3.96mtpa to 4.29mtpa, enhancing cement capacity by 0.5mtpa. Besides this, it is currently putting up a 2.7mtpa greenfield capacity at Durg (Chhattisgarh) and 0.5mtpa of grinding units at Surat (Gujarat). The ongoing expansion will take its cement/clinker capacity to 8.5mtpa/ 5.8mtpa by 4QFY14. JKLC is also planning to revive its group company, Udaipur Cement Works' 1.2mtpa cement plant by June 2014, in which it plans to take up majority stake (not yet factored in our model). to help drive volume growth JKLC is operating at maximum capacity utilization. It posted muted volume CAGR of 3% over FY10-12 due to limited scope to improve operating leverage. Nonetheless, on the back of debottlenecking of its clinker capacity by 0.33mtpa and expansion of cement capacity by 3.2mtpa (Durg and Surat), we expect it witness meaningful uptick in volume growth (modeling 12% CAGR over FY13-15). JKLC is operating at 100%+ utilization Expect capacity addition to drive volume growth Favorable demandsupply dynamics in the North and West regions to render resilience to JKLC's capacity utilization and realizations Sales Mix: North and West account for 90-95% of dispatches Market mix offers favorable outlook JKLC's dispatch mix is skewed towards the North (~65%) and the West (~35%). Its key markets are (1) Rajasthan (30%), (2) Gujarat (30%), (3) other northern states - Jammu & Kashmir, Himachal Pradesh, Punjab, Haryana, Delhi and western Uttar Pradesh (35%), and (4) Maharashtra (5%). We expect favorable demand-supply dynamics in the North and West regions to render resilience to JKLC's capacity utilization and realizations. Cement demand in the northern and western regions grew by 10% each in FY12, compared to the Pan-India demand growth of 6.9%. With the commencement of greenfield plant at Durg (Chhattisgarh) and two split grinding units (Bengal and Orissa) by 4QFY14, JKLC would diversify into the even better performing markets of East and Central India. 79

80 JK Lakshmi Cement JKLC's average realizations have been lower than our Cement Universe largely owing to market mix. It has witnessed encouraging uptick over 1HFY13 (up INR28/bag over FY12 average). We model INR23/15/12 per bag increase in FY13/14/15 and 7% CAGR over FY13-15E. Better demand dynamics in the North and the West (utilization; %) Demand growth in the North and the West v/s Pan India (%) The North and the West account for 90-95% dispatches Maharashtra, 5% Realizations historically lower than MOSL Cement Universe The cost advantage is primarily attributable to lower energy cost and fuel efficiency Supply Chain Efficiencies: Energy efficiency, 100% CPP Superior cost structure JKLC enjoys superior cost structure, with cost of production at 10-15% lower than MOSL Cement Universe average. The cost advantage is primarily attributable to lower energy cost and fuel efficiency. Going ahead, we expect further cost savings on account of 100% self-sufficiency in power and softening pet coke prices. However, freight cost is likely to inch up, following the full impact of the hike in diesel prices and rail freights. We model 4% CAGR in cost of production per ton over FY13-15E. 80

81 JK Lakshmi Cement Cost of production lower than MOSL Cement Universe (INR/ton) Energy cost escalation to soften, freight cost to inch up 100% captive power to translate into further savings in energy cost JKLC's energy cost stood at INR3.4/unit in FY12, which is almost ~15% lower than MOSL Cement Universe. This is attributable to its 100% self-sufficiency in power (Durg expansion will also have a CPP). The company added 30MW of power capacity in FY11, by setting up (1) a waste heat recovery plant (12MW), and (2) a thermal power plant (18MW), taking total CPP capacity to self-sufficient level of 66MW (v/s total power requirement of 67MW). JKLC also has a tie-up with VS Lignite to source 21MW power at INR3.94/unit. The combined supply leaves ~20MW of surplus power available for merchant sales. JKLC enjoys efficient energy utilization (78units/ton of cement v/s 79-93units/ton for our Cement Universe). Cost of power (INR/unit) at discount to industry average largely attributable to 100% captive power (%) Softening of pet coke prices a key positive Almost 85% of JKLC's fuel requirement is addressed by pet coke, while the balance is through a mix of biomass (9-12% in 1HFY13) and domestic coal. Imported coal price has declined ~13% in YTDFY13 (in INR terms), which led to a moderation in pet coke prices as well. Softening of pet coke prices is expected to benefit JKLC's fuel cost. 81

82 JK Lakshmi Cement Imported coal prices moderated by 13% in YTD FY13 (INR/ton) Trend in pet coke prices (INR/ton) Source: Industry, MOSL Freight cost impacted by higher lead distance JKLC's freight cost increased by 11% annually over FY10-12, which is largely attributable to (a) increase in rail freight, and (b) rise in lead distance to km owing to entry into new markers. Its logistics mix is almost evenly distributed between rail (45%) and road (55%). After the recent hike in diesel prices by INR5/liter (+12.5%), we factor in 21% growth in freight cost in FY13 followed by 5% CAGR over FY13-15E. Revenue from RMC business accounts for 7% of revenue at present Strategic & Other Issues: Surplus power to offer additional earning stream Minimal contribution from allied businesses (RMC, AAC blocks) JKLC has diversified into RMC, with total capacity of 0.7m cubic meters across 14 plants. Revenue from the RMC business is ~INR1.3b, ~7% of JKLC's overall revenue (v/ s ~2% in FY08) and enjoys operating margin of 4.5-5%. It also plans to increase presence in value-added products like Aerated Autoclaved Concrete (AAC) - the first plant is likely to commence by mid-fy14 in Haryana. This product will help the construction industry to save on labor cost and reduce construction time, thus bringing down overall cost. Segmental revenue mix trend (%) 82

83 JK Lakshmi Cement Monetization of surplus power offers upside to EBITDA JKLC added 30MW of captive power (CPP) in FY11: (1) 12MW waste heat recovery plant, and (2) 18MW thermal power plant, taking its total CPP capacity to 66MW. It also has a long-term agreement with VS Lignite for souring 21MW of power annually at a fixed cost of INR3.9/unit for a period of 20 years. Combining both sources (87MW against annual requirement of 67MW), JKLC will be left with 20MW of surplus power capacity (upcoming Durg plant will have captive power), which can be sold in the market at attractive rates. Assuming a selling price of INR4/unit (v/s cost of production of INR3/unit), we estimate ~3% potential upside to our FY14E EBITDA. Strength of Financials: Capex to drive peak debt to INR15b-16b Profitability has bottomed out in 2QFY12 JKLC's profitability was severely impacted over FY10-12 due to (1) weak realization growth (3% CAGR), and (2) sustained input cost pressure - particularly coal and power - (12% CAGR in variable cost). EBITDA margin declined from 28.5% (EBITDA/ton of INR915, 14% discount to MOSL average) in FY10 to 18.8% (EBITDA/ton of INR643, 23% discount to MOSL average) in FY12. We believe profitability has bottomed out in 2QFY12 and a steady recovery in realization, coupled with moderation in cost factors and better utilization has resulted in an encouraging revival in EBITDA/ton in 1HFY13 to INR900/ton. JKLC will outperform peers on profitability growth here on, leading to narrowing of existing discount on EBITDA/ton with MOSL average over FY13-15 (9-10% v/s 22% in FY12). EBITDA/ton witnessing steady revival since 2QFY12 Revenue to post 20% CAGR over FY12-15 Expect steady recovery in margins PAT to post 26% CAGR over FY

84 JK Lakshmi Cement Expect 14% CAGR in cement EBITDA/ton over FY12-15 We model 14% CAGR in cement EBITDA/ton over FY13-15E to INR1,034 (v/s INR643/ 790 in FY1213E). Revenue/EBITDA/PAT are likely to post 20%/28%/26% CAGR over FY13-15 (v/s 7%/-13%/-24% over FY10-12), while EBITDA margin is likely to expand by 3.1pp over FY13-15E. Leverage to increase with ongoing capex cycle, but steady OCF aid meaningful cushion Significant capex plan till FY14... JKLC has almost ~INR16b of investment plan over FY11-15 to (a) augment clinker capacity by 1.8mtpa to 5.8mtpa, and (b) cement capacity by 3.2mtpa to 8.5mtpa by FY14. It has already incurred ~INR6b, and we expect the annual capex over FY13-14 of INR5-7b. the company is also planning to revive its group company Udaipur Cement Works' 1.2mtpa cement plant at an estimated capex of INR5.5b. JKLC will take majority stake, with ~INR1.5b equity contribution. This plant is expected to start operations by June 2014, albeit we are yet to factor in any contribution from it. Key capex plans Capex Plan Plant type Capacity Capex Commissioning (mt) (INR m) by Jaykaypuram, Rajasthan Clinker ,000 4QFY13 Durg, Chattishgarh Greenfield Cement ,500 3QFY14 with CPP (includes 2 split grinding units at WB and Orissa). Clinker capcity of 1.5mt Surat/Jajjar Grinding unit 0.5 NA 4QFY14 RMC 3 plants 500 FY14 Haryana AAC Block 1.32 Lac Cub mt 500 4QFY13 Udaipur * Renovating old 1.2 1,500 FY15 cement plant Total 16,000 FY12-15 * Total capex of ~INR5.5b, with JKLC's equity contribution of INR1.5b...but steady OCF offers cushion to leverage growth On the back of scale up in capacity and profitability, we expect JKLC to witness uptick in its operating cash flow (OCF) here on. We estimate annual OCF of INR4-6b over FY13-15E (v/s INR3-3.5b at present), which should restrict any sharp increase in leverage during capex cycle. JKLC's net debt is likely to peak out at INR10.6b (net debt-equity of 0.7x) in FY14 on the back of estimated capex of ~INR12b over FY Post FY14, we expect moderation in leverage, with free cash flow generation following the commencement of the Durg plant. Payout ratio healthy despite capex cycle JKLC has maintained healthy payout of 15-25% (dividend yield of 1.5%) in the recent past despite steady capex cycle. It has also made a buy-back offer to acquire shares up to INR975m (13.9m equity shares), which is equivalent to 8.3% of net worth at the end of 31 March 2012, at a price not exceeding INR70/share. It bought back 4.7m (3.8%) equity shares. However, with the current market price being higher than the offer price, JKLC may not be able to buy back more shares in the near future. 84

85 JK Lakshmi Cement Leverage to peak out in 1HFY15 (INR m) Steady OCF to limit leverage despite significant capex RoCE/RoE to improve from 13% in FY12 to 18% in FY15 Has maintained a payout of 15-30% despite capex (yield 1.5%) Valuation & View To outperform peers on profitability We expect JKLC to outperform peers on profitability, with discount vis-à-vis MOSL Cement Universe narrowing over FY13-15 (15% v/s 22% in FY12). We estimate revenue/ EBITDA/PAT CAGR of 20%/28%/26% over FY13-15E (v/s 7%/-13%/-24% over FY10-12). Initiating coverage with a Buy rating JKLC trades at FY15E EV of USD50/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 3.3x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for oevrall Cement Universe). We value JKLC at INR249/share (5x FY15E EBITDA), implying an EV of USD76/ton of cement. We initiate coverage with Buy (upside of 76%) 85

86 JK Lakshmi Cement Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 14,905 13,168 17,111 21,191 25,022 30,344 Change (%) Total Expenditure 10,659 11,314 13,901 16,870 19,359 23,230 % of Sales EBITDA 4,246 1,854 3,209 4,321 5,663 7,115 Margin (%) Depreciation ,297 1,325 1,586 2,095 EBIT 3,446 1,008 1,912 2,996 4,077 5,020 Int. and Finance Charges ,233 1,378 Other Income - Rec PBT bef. EO Exp. 3, ,820 2,720 3,445 4,262 EO Expense/(Income) PBT after EO Exp. 3, ,427 2,720 3,445 4,262 Current Tax ,236 Deferred Tax Tax Rate (%) Reported PAT 2, ,088 1,877 2,377 2,941 PAT Adj for EO items 2, ,387 1,877 2,377 2,941 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Total Reserves 9,595 9,851 11,140 12,675 14,641 17,104 Net Worth 10,207 10,463 11,752 13,263 15,230 17,692 Deferred Liabilities 1,111 1,458 1,512 1,566 1,635 1,720 Total Loans 9,217 8,483 9,429 11,429 15,229 13,029 Capital Employed 20,536 20,404 22,692 26,258 32,093 32,441 Gross Block 19,036 23,186 24,500 25,500 35,500 38,000 Less: Accum. Deprn. 8,407 9,376 11,207 12,531 14,117 16,212 Net Fixed Assets 10,630 13,810 13,293 12,968 21,382 21,788 Capital WIP 1, ,941 5,941 2,941 1,941 Total Investments 4,805 5,278 4,538 5,538 6,038 6,038 Curr. Assets, Loans&Adv. 6,656 4,880 7,085 8,183 9,143 11,093 Inventory 748 1,199 1,201 1,433 1,692 2,145 Account Receivables Cash and Bank Balance 2, Loans and Advances 3,415 2,514 4,612 5,861 6,767 7,926 Curr. Liability & Prov. 3,566 4,359 5,443 6,650 7,689 8,696 Account Payables 2,202 4,127 5,127 5,861 6,690 7,460 Provisions 1, ,236 Net Current Assets 3, ,642 1,533 1,455 2,397 Appl. of Funds 20,536 20,404 22,692 26,258 32,093 32,441 E: MOSL Estimates; * Adjusted for treasury stocks 86

87 JK Lakshmi Cement Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * EPS Cash EPS BV/Share DPS Payout (%) Valuation (x)* P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (USD) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 4,246 1,854 3,209 4,321 5,663 7,115 Interest/Dividends Recd Depreciation Direct Taxes Paid ,236 (Inc)/Dec in WC ,253-1, CF from Operations 3,558 3,446 2,617 3,753 5,053 5,774 EO expense CF from Operating incl EO 3,690 3,569 2,758 3,753 5,053 5,774 (inc)/dec in FA -2,281-2,739-3,845-4,000-7,000-1,500 (Pur)/Sale of Investments -3, , CF from investments -6,197-3,212-3,105-5,000-7,500-1,500 Issue of Shares (Inc)/Dec in Debt 2, ,000 3,800-2,200 Interest Paid ,233-1,378 Dividend Paid CF from Fin. Activity 1,444-1, ,157-4,056 Inc/Dec of Cash -1,063-1, Add: Beginning Balance 3,267 2, Closing Balance 2,

88 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 68 3 Valuation score, Rank 65 7 Target price & upside Base case INR374 61% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) MC IN Equity Shares (m) Week Range (INR) 253/103 1,6,12 Rel. Perf. (%) 5/32/99 M.Cap. (INR b) / (USD b) 55/1 P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Madras Cements CMP: INR233 TP: INR374 Buy Best in class, with superior profitability Moderating capex, strong operations to aid healthy FCF visibility; Buy Madras Cements (MC) is likely to post ~10% volume CAGR over FY12-15 on the back of steady uptick in utilization of newly added capacities. It enjoys premium profitability (cement EBITDA/ton was INR1,125/1,251 v/s INR850/ 1,010 for our Cement Universe in FY12/13E) due to superior realizations and operational efficiencies. MC is likely to generate ~INR26b of FCF over FY13-15, which should lead to meaningful reduction in net debt by FY14/15 - we model net debt-equity of 0.2x by FY15. MC offers an attractive play on superior operating efficiency, premium profitability and strong FCF visibility. We initiate coverage with Buy with target price of INR374 (upside of 61%). Stabilizing capacity to aid industry leading volume growth MC has expanded its cement capacity by 6.5mtpa over the past five years. Despite unfavorable dynamics in the southern market, we expect it to post ~10% volume CAGR over FY13-15E, led by (1) stabilization of added capacity, (2) healthy growth in south (ex-ap), and (3) ramp-up in dealer network in east coupled with increase in capacity utilization at the West Bengal plant (improved to 55% from 30-35% in FY12). We model improvement in total utilization from 61% in 1HFY13 to 76% in FY15. Operational efficiency, captive power drives superior profitability MC enjoys premium profitability (cement EBITDA/ton was INR1,125/1,251 v/s INR8501,010 for our Cement Universe in FY12/13E) due to superior realizations and operational efficiencies. With the recent addition of captive power plants of 45MW in 1HFY13, and softening of imported coal (~75% of its fuel mix) prices, we expect savings in energy cost. However, overall margin is likely to remain stable at 29-30% (v/s 28-29% in FY12/13E), due to expectation of a moderate uptick in realizations in south, which would be just enough to compensate for the cost push from increase in rail freight, diesel price and lead distance. We model EBITDA/ton of INR1,557 (cement EBITDA/ton of INR1,461) in FY15 v/s INR1,357 (cement EBITDA/ton of INR1,251) in FY13. MC has shown encouraging trend in realizations and profitability over 1HFY13, which offers limited downside risks to our estimates. Moderating capex, FCF visibility to trigger de-leveraging MC underwent huge capex of ~INR44b over the last five years as a result of which net debt spiraled to INR26.6b (net debt-equity of 1.3x). Given the lower prevailing capacity utilization, we do not expect any major expansion in the near term, barring the grinding capacity at Salem (0.4mtpa) and RR Nagar (1.1mtpa), which are expected to be operational by March 2013 (INR1.7b). MC is likely to generate ~INR26b of FCF over FY13-15, which should lead to meaningful reduction in net debt by FY14/15 (modeling net debt of INR18.9b (net debt-equity of 0.6x) in FY14 and INR8.8b (0.2x) in FY15). 88

89 Madras Cements Superior profitability justifies premium; initiating with Buy rating MC has maintained a relatively low dividend payout (13-16%), which should improve with the capex cycle nearing completion. The stock trades at FY15E EV of USD84/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We value MC at INR374/share (6x FY15E EBITDA) owing to its superior profitability and size. We initiate coverage with a Buy rating; our target price implies 61% upside. About Madras Cements Madras Cements (MC) is one of the top three cement producers in South India with total nameplate capacity of 12.5mtpa (0.95mtpa in West Bengal and the balance in the South). It also has operational wind farm capacity of 159MW and 157MW of CPP capacity. Despite the unfavorable southern market, MC offers an attractive play due to superior operating efficiency, premium profitability and strong FCF visibility. Blue Sky Scenario Madras Cements Madras Cements has the potential to double in 2-3 years, driven by: Benefit of operating leverage, as it improves utilization from ~63% in FY13 to ~82% in FY16E. As a result, its balance sheet will turn net cash (~INR3b) by FY16 from current net debt (~INR25.3b). Likely improvement in RoE from 18% to 27%. MC: Blue Sky Scenario FY15E FY16E EBITDA (INR m) 16,062 18,119 Target EV/EBITDA (x) 6 6 Target EV(INR m) 96, ,714 Net debt (INR m) 7,284-4,560 Target Equity value (INR m) 89, ,274 No of share (m) Target Price (INR) Upside (%) EV/Ton at TP (USD) MC: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

90 Madras Cements 5-S Analysis [Score 68 / 100] & [Rank 3] Size & Scalability [24 / 30] MC has expanded its cement capacity by 6.5mtpa (in June 2012, it added 2mtpa at Ariyalur) over the last five years. Along with grinding capacity at Salem (0.4mtpa) and RR Nagar (1.1mtpa), this will augment MC's overall cement capacity by 13.6mtpa by FY13. No major expansion in the near term, as current utilization is 61% (as at 1HFY13). MC to post ~10% volume CAGR over FY13-15 (13% growth in FY13), on the back of stabilization of added capacities (17% YoY in 1HFY13). Strategic & Other Issues [9 / 10] Windmill segment (15% of capital allocation) has posted ~6% revenue CAGR over FY09-12 and accounts for 2-3% of overall net revenue. The sgement has seen steady margin deterioration from 91% in FY10 to 76% in FY12, with high receivables from TNEB (INR980m). Power RoCE at 4.2% (FY12) remains a drag on overall capital efficiency (v/s cement RoCE of 22.4% and overall RoCE of 15.4%). CCI has levied a penalty of INR2.6b on MC along with other cement companies on charges of alleged cartelization. Sales Mix [13 / 20] Market mix broadly tilted towards South accounting for 90% of total dispatches. However, market mix is skewed towards better performing states - Tamil Nadu, Karnataka and Kerala (~10% in Andhra Pradesh). The recent shift towards east market, driven by split grinding unit at West Bengal would be favorable. Lower utilization (65%) in the South will keep nearterm pricing trend volatile. Expect realizations to increase by INR21/bag in FY13 and INR12 per bag each in FY14/15 (5.3% CAGR over FY13-15). In 1HFY13, it posted a strong INR26/bag increase. Supply Chain Efficiencies [8 / 20] Softening pet coke prices (75% of fuel mix) and recently commissioned power plants of 45MW (taking CPP capacity to 157MW) will reduce grid power dependence to negligible levels. Energy efficient operations : (1) power consumption to 78KWH/ton (v/s 83KWH/ton in FY11), and (2) coal usage to 12% (v/s 14% in FY11). Other expenses to remain high due to spending on branding, dealer network and advertisement in the newly entered eastern region, albeit benefit of operating leverage will dilute impact. Rise in capacity utilization to lend positive operating leverage hereon. We model 4% CAGR in total cost over FY Strength of Financials [14 / 20] Superior realizations and operating efficiencies to continue to aid premium profitability (25-20% premium to MOSL Cement Universe average). EBITDA/ton to witness 8% CAGR over FY13-15 to INR1,461/1,557 (cement EBITDA/ton: INR1,360/ 1,461) in FY14/15. Revenue/EBITDA/PAT to post CAGR of 16%/18%/29% over FY13-15, amidst stable margin of 29-30%. Moderating capex and strong OCF to help generate ~IN26b of FCF over FY13-15, which should lead to meaningful reduction in net debt by FY14/15 (modeling in net debt of INR18.9b (0.6x) in FY14 and INR8.8b (0.2x) in FY15). Valuation & View [65 / 100] MC has maintained a relatively low dividend payout (13-16%), which should improve with the capex cycle nearing completion. The stock trades at FY15E EV of USD84/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for overall Cement Universe). We value MC at INR374/share (6x FY15E EBITDA) owing to its superior profitability and size. We initiate coverage with a Buy rating; our target price implies 61% upside. Our Blue Sky valuation indiactes for potential 105% return in 2-3 years time. 90

91 Madras Cements Size & Scalability: Stabilization of added capacity to aid volume growth Enjoys 10% capacity market share in South India Madras Cements (MC) is one of the top three cement producers in South India, with total nameplate capacity of 12.5mtpa (0.95mtpa in West Bengal and the balance in the South), implying ~10% capacity market share in South India. It has five manufacturing units along with three grinding units and has almost ~61% capacity located in Tamil Nadu. It has operational wind farm capacity of 159MW and 157MW of CPP capacity. Despite mix tilted towards southern market, MC offers an attractive play on superior volume growth, operating efficiency, premium profitability and strong FCF visibility. Leading cement producer in the South with largest exposure to Tamil Nadu Utilization ramp-up in recently added capacity MC has expanded its cement capacity by 6.5mtpa over the last five years, with a recent addition being 2mtpa at Ariyalur (June 2012). Given the unfavorable demandsupply dynamics in the southern market, the company is operating at subdued utilization 65-70%, with its Andhra Pradesh plant being the worst affected (44% capacity utilization). Strong ramp-up in capacity over the last five years Utilization muted due to demand-supply imbalance in south Grinding units at TN and WB Ariyalur Unit I Ariyalur Unit II RR Nagar upgradation 91

92 Madras Cements We model improvement in total utilization from 61% in 1HFY13 to 76% in FY15. to aid industry leading volume growth South India has been the worst performing cement market in the recent past, largely due to sustained de-growth in the largest consuming Andhra Pradesh market. Nonetheless, we expect MC to post ~10% volume CAGR over FY13-15 (15% in FY13) on the back of (1) uptick in utilization of new capacities, (2) steady demand improvement in Andhra Pradesh, and (3) ramp-up in dealer network in east and increase in capacity utilization at the West Bengal plant (improved to 55% from 30-35% in FY12). We model improvement in total utilization from 61% in 1HFY13 to 76% in FY15. Recovery in demand, stabilizing utilization to strengthen volume growth Volume pick-up since 3QFY13 has been encouraging MC's market mix in the South (90% of total dispatches) is skewed towards better performing states with ~10% exposure to AP Sales Mix: Pricing outlook hinges on market recovery Southern market plagued with overcapacity The southern market witnessed overcapacity coupled with muted demand growth over FY Slowdown in demand was largely due to political turmoil in the major consuming state, Andhra Pradesh. MC's market mix in the South (90% of total dispatches) is skewed towards better performing states like Tamil Nadu, Karnataka and Kerala, with only ~10% exposure to Andhra Pradesh. While Andhra Pradesh has posted demand de-growth of 9%/5% in FY12/YTDFY13, the growth has been largely stable (5-10%) in other southern states. Yet, we believe excess supply from Andhra Pradesh would keep overall utilization of south-dependent players under pressure in the near term. Going forward, demand recovery in Andhra Pradesh ahead of the state elections will be a key factor to watch. 92

93 Madras Cements MC's sales mix skewed towards states other than Andhra Pradesh (%) Expect realizations to strengthen amidst demand uptick (INR/ton) Healthy realization growth in 1HFY13, albeit subdued utilization may induce volatility In 1HFY13, MC posted a strong INR26/bag increase in cement realizations compared to the FY12 average. However, we expect cement prices in the southern market to remain volatile on the back of subdued utilization (expect ~65% over FY13-14). We expect realizations to increase by INR21/bag in FY13 and by INR12/bag each in FY14/15 (5.3% CAGR over FY13-15) on the back of slowing capacity addition and demand improvement. Post Recent expansion MC's CPP capacity will educe dependence on grid power to negligible levels Supply Chain Efficiencies: Added CPP to aid energy cost savings CPP capacity addition, favorable fuel cost trend MC has witnessed substantial increase in energy cost/ton over FY11-12 (CAGR of 14%) due to sharp jump in the prices of imported coal and pet coke, which constitute ~75% of its fuel mix. Going forward, we expect savings in fuel cost, led by (a) softening of imported coal price (declined ~13% in YTDFY13 in INR terms), and (b) further CPP contribtuion from its recently commissioned power plants of 45MW (25MW in RR Nagar in 1QFY13 and 20MW in Ariyalur), which makes CPP capacity to 157MW, besides its operational wind farm capacity of 159MW. This will reduce dependence on grid power to negligible levels. coupled with operating efficiency to aid savings in energy cost MC has posted encouraging improvement in power and fuel consumption over time. In FY12, it reduced power consumption to 78KWH/ton from 83KWH/ton in FY11. Coal usage as a percentage of cement production declined from 14% in FY11 to 12% in FY12. We expect MC to maintain its energy efficiency and CPP contribution would increase hereon to almost the maximum level (v/s 73% in FY12). 93

94 Madras Cements Post expansion CPP capacity distribution Power Plant Capacity MW R.R.Nagar, Tamil Nadu 25 Alathiyur, Tamil Nadu 36 Ariyalur, Tamil Nadu 60 Jayanthipuram, AP 36 Total 157 MC has posted improvement in operating efficiency Freight cost to remain an overhang; other expenses high on new market spends MC's freight mix is skewed towards road transport, which accounts for ~60% of its volumes. Over 1Q/2QFY13, its freight cost went up by 22-27% YoY on account of (a) increase in rail freight (by ~22%), (b) hike in diesel price by INR5/liter (~12%), and (c) jump in lead distance due to higher dispatches outside Andhra Pradesh. We expect the uptrend in freight cost to remain an overhang in the near term - we model 8% CAGR in freight cost/ton over FY However, we expect some transportation cost savings from new grinding units, which are located close to areas where fly ash is readily available or in major cement consumption areas. Other expenses also increased sharply in FY12 and are likely to remain high on account of higher spending on branding, dealer network creation and advertisement in the eastern region, and increase in packaging expenses. Freight cost to remain high over near-term, albeit new grinding units may reduce lead distance Cost escalation to moderate; positive operating leverage to render support We expect moderation in total variable cost escalation on the back of savings in energy cost and softening of input costs, though freight cost would remain under pressure in the near term. We model in 4% CAGR in total cost over FY13-15 as against 12% over FY With the increase in capacity utilization, we expect favorable impact of positive operating leverage. Expect moderation in cost factors over FY12-15 (INR/ton) 94

95 Madras Cements Margin pressure and high receivables have resulted in deterioration in power RoCE to 4.2% in FY12. Strategic & Other Issues: Windmill business offers additional revenue stream Wind power - additional revenue stream, but drag on overall RoCE MC has operational wind farm capacity of 159.2MW and 157MW of CPP capacity. Its power capacity has not only reduced dependence on grid power for cement operations, but has also become an additional source of revenue. Its windmill segment has posted ~6% revenue CAGR over FY09-12 and accounts for 2-3% of overall net revenue. However, MC has witnessed steady margin deterioration from 91% in FY10 to 76% in FY12. Tamil Nadu Electricity Board (TNEB) is the primarily consumer (accounting for ~75% of units generated). Total receivables from TNEB stand at INR980m, with collection cycle of months. Margin pressure and high receivables have resulted in deterioration in power RoCE to 4.2% in FY12. Our current valuation does not capture any contribution from the power segment. Capital allocation mix (%) Inferior power RoCE a drag on overall capital efficiency CCI penalty an overhang CCI has levied a penalty of INR2.6b on MC along with other cement companies on charges of alleged cartelization. Any adverse outcome of the case could impact MC's cash flows. However, MC believes it has a strong case and has not made any provision for this. Strength of Financials: Profit leadership, moderating capex Sustained profit leadership MC has enjoyed superior realizations on account of its market/product mix. This coupled with operational efficiencies has resulted in superior profitability, with EBITDA/ton at INR1,125 (v/s INR850/ton for our Cement Universe). It has maintained EBITDA margin at 24-38% over the last six years. We believe its operating efficienies renders strong resilience against potential pricing volatility in southern region. 95

96 Madras Cements Prevailing weakness in southern market offers potential pricing volatility, and curbs any major margin expansion to drive 18% EBITDA CAGR over FY13-15 On the back the industry-leading volume growth outlook and discipline in realization trend, we estimate revenue/ebitda CAGR of 16%/18% over FY13-15, amidst stable margins of 29-30% (v/s 28/29% in FY12/13E). We assume only a moderate margin expansion, which captures our belief that higher realizations would largely be diluted by cost push. This implies cement EBITDA/ton of INR1,360/1,461 in FY14/15E v/s INR1,125/1,251 in FY12/13E. Given the encouraging trend in realizations and profitability over 1HFY13, we see limited downside risks to our estimates. Expect MC to post 16% revenue and 18% EBITDA CAGR over FY13-15E Estimate 8% CAGR in EBITDA/ton over FY12-15 PAT to grow at 30% CAGR owing to moderating interest expense FCF visibility offers strong potential to reduce debt Moderating capex to trigger de-leveraging MC underwent huge capex of ~INR44b over the last five years to augment its capacity by 6.5mtpa, as a result of which, net debt spiraled to INR26.6b (net debt-equity of 1.3x). Given the lower prevailing capacity utilization, we do not expect any major expansion in the near term, barring the grinding capacity at Salem (0.4mtpa) and RR Nagar (1.1mtpa), which are expected to be operational by March 2013 (INR1.7b). We believe leverage has peaked out in 2HFY12. MC is likely to generate ~INR26b of FCF over FY13-15, which should lead to meaningful reduction in net debt by FY14/15 (modeling net debt of INR18.9b (net debt-equity of 0.6x) in FY14 and INR8.8b (0.2x) in FY15). 96

97 Madras Cements Strong FCF potential (due to lower capex) to cut down debt significantly over FY13-15 Dividend payout to increase with FCF (%) RoCE and RoE to improve on the back of higher utilization (%) Valuation & View Superior profitability justifies premium; initiating with Buy rating MC has maintained a relatively low dividend payout (13-16%), which should improve with the capex cycle nearing completion. The stock trades at FY15E EV of USD84/ton (v/s USD64/ton for MOSL Mid Cap Cement Universe and USD111/ton for overall Cement Universe) and 3.9x FY15E EBITDA (v/s 3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for our Full Cement Universe). We value MC at INR374/ share (6x FY15E EBITDA) owing to its superior profitability and size. We initiate coverage with a Buy rating; our target price implies 61% upside. 97

98 Madras Cements Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 28,009 26,049 32,361 40,353 46,677 53,864 Change (%) Total Expenditure 19,433 19,868 23,173 28,789 32,979 37,802 % of Sales EBITDA 8,576 6,181 9,188 11,564 13,698 16,062 Margin (%) Depreciation 1,961 2,208 2,539 3,115 3,447 3,569 EBIT 6,615 3,973 6,649 8,449 10,251 12,493 Int. and Finance Charges 1,515 1,399 1,592 2,065 2,016 1,903 Other Income - Rec ,087 PBT bef. EO Exp. 5,305 2,973 5,574 6,939 9,041 11,676 EO Expense/(Income) PBT after EO Exp. 5,304 2,957 5,569 6,939 9,041 11,676 Current Tax ,121 1,700 2,260 2,919 Deferred Tax Tax Rate (%) Reported PAT 3,536 2,094 3,846 4,684 6,103 7,882 PAT Adj for EO items 3,537 2,105 3,850 4,684 6,103 7,882 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Total Reserves 15,344 17,107 20,266 24,354 29,743 36,792 Net Worth 15,582 17,345 20,504 24,592 29,981 37,030 Deferred Liabilities 5,918 5,890 6,492 7,047 7,725 8,601 Total Loans 25,665 27,912 27,104 26,604 24,104 18,604 Capital Employed 47,164 51,147 54,100 58,243 61,810 64,235 Gross Block 48,111 51,105 56,704 65,680 69,480 70,480 Less: Accum. Deprn. 11,186 13,175 15,553 18,668 22,115 25,684 Net Fixed Assets 36,925 37,930 41,152 47,012 47,365 44,796 Capital WIP 3,177 5,457 5,276 2,300 1,500 1,500 Total Investments 887 2,673 2,665 2,665 2,665 2,665 Curr. Assets, Loans&Adv. 11,357 10,988 11,491 14,710 20,413 27,355 Inventory 4,125 3,923 4,911 6,065 7,015 8,095 Account Receivables 1,555 1,751 2,079 2,653 3,069 3,542 Cash and Bank Balance ,316 5,214 9,815 Loans and Advances 5,320 4,913 4,026 4,675 5,115 5,903 Curr. Liability & Prov. 5,462 5,900 6,483 8,443 10,133 12,082 Account Payables 4,265 4,564 4,892 6,318 7,307 8,433 Provisions 1,198 1,335 1,591 2,125 2,825 3,649 Net Current Assets 5,894 5,088 5,008 6,267 10,281 15,274 Appl. of Funds 47,164 51,147 54,100 58,243 61,810 64,235 E: MOSL Estimates; * Adjusted for treasury stocks 98

99 Madras Cements Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * Consol EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 6,615 3,973 6,649 8,449 10,251 12,493 Interest/Dividends Recd ,087 Depreciation 1,961 2,208 2,539 3,115 3,447 3,569 Direct Taxes Paid ,121-1,700-2,260-2,919 (Inc)/Dec in WC -1, CF from Operations 6,775 6,606 8,739 10,001 12,127 13,838 EO expense CF from Operating incl EO 6,771 6,585 8,573 10,002 12,127 13,838 (inc)/dec in FA -5,759-5,273-5,419-6,000-3,000-1,000 (Pur)/Sale of Investments -1-1, CF from investments -5,760-7,058-5,411-6,000-3,000-1,000 Issue of Shares (Inc)/Dec in Debt 1,031 2, ,500-5,500 Interest Paid -1,515-1,399-1,592-2,065-2,016-1,903 Dividend Paid CF from Fin. Activity -1, ,087-3,160-5,230-8,236 Inc/Dec of Cash ,897 4,602 Add: Beginning Balance ,316 5,214 Closing Balance ,317 5,214 9,815 99

100 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 66 5 Valuation score, Rank 79 6 Target price & upside Base case INR115 45% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) OPI IN Equity Shares (m) Week Range (INR) 102/48 1,6,12 Rel. Perf. (%) -9/10/32 M.Cap. (INR b) / (USD b) 16/0.3 Orient Paper Industries CMP: INR79 TP: INR115 Buy Demerger of cement business to unlock value SOTP-based target price of INR115 implies 45% upside; Buy Orient Paper Industries (OPI) is poised for meaningful value unlocking through the ongoing demerger of the cement business into Orient Cement. Though its paper business is loss-making, we expect steady product diversification to propel robust growth in its electrical goods business. We expect OPI's cement business to witness 11% volume CAGR and 19%/28% revenue/ EBITDA CAGR over FY We initiate coverage with Buy; our SOTP-based target price of INR115 implies 45% upside. Cost leadership in cement eclipsed by rise in energy cost OPI is one of the lowest cost cement manufacturers in India. Its cost of production is ~15% lower than peers (INR2,538/ton v/s INR2,959/ton for our Cement Universe in FY12), enabling it to achieve superior profitability (EBITDA/ton of INR1,092 v/ s INR850 for our Cement Universe in FY12). We expect a dilution in OPI s historical energy cost advantage impacted by shrinkage in linkage coal from Singareni Mines (65% of its coal requirement). We model 15% CAGR in cement EBITDA/ton over FY13-15 to INR1,007 in FY15 despite (a) elevated cost structure, and (b) volatile prices in Andhra Pradesh (~24% of dispatches). Revival of demand in the core market and commencement of 3mtpa greenfield capacity in Karnataka by early FY15 would drive volume growth. We expect OPI s cement business to witness 11% volume CAGR and 19%/28% revenue/ebitda CAGR over FY Steady product diversification to propel robust growth in electrical goods OPI has posted healthy growth in the electrical goods segment (28% revenue CAGR over FY09-12 and 22% YoY in 1HFY13) on the back of strong outlook for CFLs and luminaires (growing at 20%+ per annum), and its superior brand recall. We expect the trend to continue (model 23% revenue CAGR over FY13-15), as the company has recently diversified into higher margin home appliances, which are likely to witness robust growth from FY14. Nonetheless, we expect segment EBIDT margins to remain under pressure ( % over FY13-15 v/s 10%+ pre- FY11) owing to higher cost of raw material such as copper, zinc and aluminum, increasing fuel prices and higher marketing expenses for new product categories. Paper business unlikely to break even in near term Despite steady sales growth (revenue CAGR of 15.6% over FY09-12), we expect OPI s paper business to continue witnessing losses in the near term owing to (1) declining realization, and (2) unprecedented escalation in pulp and coal prices. However, its recently added (a) water reservoir, and (b) 55MW CPP at Amlai are likely to resolve certain operational bottlenecks and enable cost savings (INR300m-350m savings at stabilization), helping to reduce EBITDA loss. 100

101 Orient Paper Industries De-merger to trigger value unlocking; initiate with Buy Impending demerger and subsequent listing of the cement business is a key nearterm value unlocking trigger. We expect the de-merged cement business to witness re-rating owing to its superior cost efficiency and greater efficiency in capital allocation. OPI trades at 5.5x FY14E EBITDA (implied EV of USD53/ton and 3.3x FY14E EBITDA for cement business). Our SOTP valuation stands at INR115/share: (1) cement (5x FY15E EBITDA), (2) electrical goods (6x FY15E EBITDA), and (3) paper (1x FY15E sales). We initiate coverage with a Buy rating; our target price implies 45% upside. About Orient Paper Blue Sky Scenario Orient Paper Orient Paper Industries (OPI) is part of the CK Birla Group company and is engaged in diversified businesses including cement, paper and electrical goods. It has cement capacity of 5mtpa in Andhra Pradesh and Maharashtra, along with captive power plants of 50MW. It has the largest tissue paper capacity in India and enjoys strong brand recall in the electrical goods (fans and lighting) business. OPI is poised for meaningful value unlocking through the ongoing demerger of the cement business into Orient Cement, which is expected to conclude in 2HFY13. Orient Paper has the potential to be a 3-bagger in 2-3 years, driven by: Demerger of cement business (by March 2013). Scale-up of cement business to 8mtpa amidst the cement upcycle (by 2HFY15). Ramp-up in Electrical business, driven by continued strong growth in Fans and CFL business, and scale-up in nascent (started in 2HFY12) Home Appliances business (by FY15-16). Potential hive-off of Paper business to focus on Cement and Electrical Appliances. OPI: Blue Sky Scenario (FY15) Parameter Multiple INR m Catalyst Cement EV/Ton (USD) ,676 Scale-up of capacity to 8mt during cement upcycle Electrical PE 20 14,990 Scale-up in home appliance business, with continous strong growth in fans and CFL business Paper EV/Sales 1.6 8,182 Hive-off of Paper business at 40% discount to AP Paper-International Paper deal valuations of 2.65x EV/Sales Total EV 66,848 Less: Net Debt 14,856 Equity Value 51,992 Equity Value (INR/sh) 254 Upside (%) 221 OPI: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

102 Orient Paper Industries 5-S Analysis [Score 66 / 100] & [Rank 5] Size & Scalability [22 / 30] Existing cement capacity of 5mtpa across two plants in Maharashtra (2mtpa) and Andhra Pradesh (3mtpa) along with 50MW of captive power plant (CPP) capacity. Ongoing expansion to add 3mtpa in Karnataka (capex of INR16b) by end-fy14/early-fy15. Operating at higher than industry average utilization - 76% v/s 65% for peers in South India. Expect volume CAGR of 11% over FY13-15 (v/s 11.5% over FY10-12 and 16% YoY in 1HFY13). Strategic & Other Issues [8 / 10] Besides cement, OPI is exposed to (a) electrical goods (~30% of FY12 revenue), and (b) paper (~14% of FY12 revenue). Its electrical goods business has historically posted above average RoCE (25-35%). However, sustained EBITDA loss in its paper business remains a drag on overall capital efficiency (-16% RoCE in FY12). OPI awaits final approval for the demerger of its cement business into Orient Cement. We expect this to aid value unlocking, better capital efficiency and re-rating for the cement business. Sales Mix [15 / 20] Maharashtra (65%) and Andhra Pradesh (24%) account for ~90% of its dispatches. Lower utilization in core markets may induce pricing volatility. Has historically posted 10-15% lower realizations than peers (MC, ICEM and DBEL). Expected price recovery in Andhra Pradesh from 4QFY13 should improve realizations. We factor in comparatively lower YoY uptick in realizations (INR15/INR12 per bag in FY14/15), implying 7% CAGR over FY Strength of Financials [9 / 20] Owing to cost leadership, OPI commands superior EBITDA/ton in cement (INR1,092 in FY12 v/s INR894 for MOSL Cement Universe). We expect profitability to decline 30% YoY to INR893/ton in FY13 due to elevated cost structure, before posting 153% CAGR over FY Cost saving measures in non-cement businesses (new CPP, water reservoir, etc) are likely to render resilience. We expect overall revenue /EBITDA/PAT to witness 20%/51%/45% CAGR over FY Ongoing capex towards Karnataka plant to augment net debt to INR15.7b by FY15 Supply Chain Efficiencies [12 / 20] Lowest cost cement manufacturer, with total cost of production 15-20% lower than our Cement Universe (INR2,538/ton in FY12). Cost advantage emerges from energy cost efficiency due to higher proportion of (60-65%) low cost linkage coal from Singareni Mines, and power and fuel consumption efficiency. Increasing possibility of shrinkage in linkage coal supply would reduce cost advantage, going ahead. However, stabilization of 50MW CPP (meet 60% of power requirement) may aid some cost savings. We model in ~10% CAGR in energy cost and 5% CAGR in total cost per ton over FY Valuation & View [79 / 100] OPI trades at 5.7x FY15E EBITDA. Cement business implied valuations are EV of USD43/ton (v/s USD64/ ton for our Mid Cap Cement Universe and USD111/ ton for our entire Cement Universe) and 3.6x FY15E EBITDA (v/s 3.9x FY15E EBITDA for our Mid Cap Cement Universe and 5.9x FY15E EBITDA for our entire Cement Universe). Our SOTP valuation stands at INR115/share: (1) cement (5x FY15E EBITDA), (2) electrical goods (6x FY15E EBITDA), and (3) paper (1x FY15E sales). Cement, electrical goods and paper respectively account for 68%, 18% and 13% of the SOTP value. We initiate coverage with a Buy rating; our target price implies 45% upside. Blue-sky scenario analysis indicates fair value of ~INR

103 Orient Paper Industries OPI is operating at higher than industry average utilization of 76% (v/s 65% in South India) Size & Scalability: Strong dispatch growth to continue Superior dispatch growth to continue on the back of market recovery Cement accounts for ~56% of OPI s revenue and 90%+ of EBITDA. It has 5mtpa of cement capacity at Devapur, Andhra Pradesh (3mtpa) and Jalgaon, Maharashtra (2mtpa), along with 50MW of captive power plant (CPP) capacity. It sells cement under two brands, Orient Gold and Birla A1 Premium. The company is in the process of adding 3mtpa capacity (clinker capacity of 2mtpa) at Gulburga, Karnataka (total capex of INR16b) by FY15. Currently, OPI is operating at higher than industry average utilization of 76% (v/s 65% in South India), despite severe underperformance in its key Andhra Pradesh market. It has posted superior dispatch growth of 11.5% CAGR over FY10-12 and we expect the trend to continue, led by demand recovery in Andhra Pradesh and Maharashtra, and upcoming greenfield capacity in Karnataka (by FY15). We model in volume CAGR of 11% over FY13-15 (v/s 9.5% for our Cement Universe). Expect OPI to continue witnessing steady volume growth over FY12-15 Market Mix is skewed towards west - aiding resilience to better volume growth Sales Mix: Historically lower realization than market peers Market mix unfavorable in recent past Our channel checks suggest that OPI s key markets, Maharashtra (65%) and Andhra Pradesh (24%), which account for ~90% of its dispatches, are plagued with overcapacity and muted demand recovery. Political turmoil has impacted cement demand in Andhra Pradesh de-growth of 9%/5% in FY12/YTDFY13. However, OPI has posted encouraging dispatch growth of ~16% YoY in 1HFY13, which strengthens near-term volume growth outlook. We believe recovery in demand in the South and the West from 4QFY13 would be a key upside for OPI. Realizations lower than southern peers Historically, OPI s realizations have been 10-15% lower than its major regional peers (MC, ICEM and DBEL). While the significant correction in cement prices in Andhra Pradesh (INR65-70/bag) resulted in a QoQ decline of ~INR14/bag in OPI s realizations in 2QFY13, expected recovery from 3QFY13 should improve its blended realizations. Nonetheless, cement prices in the southern market are likely to remain volatile in the near-term on the back of subdued utilization (~65% over FY13-14). We expect realizations to increase by INR2/bag in FY13 and by INR15/INR12 per bag in FY14/FY15 (7.2% CAGR over FY13-15). 103

104 Orient Paper Industries Maharashtra and Andhra Pradesh account for ~90% of OCI s volumes Higher proportion of linkage coal renders cost leadership and superior profitability despite lower realization Supply Chain Efficiencies: Cost leadership owing to linkage coal advantage Energy cost advantage enables cost leadership OPI is one of the lowest cost cement manufacturers in India. Its cost of production is ~15% lower than peers (INR2,538/ton v/s INR2,959/ton for our Cement Universe in FY12), enabling it to achieve superior profitability (EBITDA/ton of INR1,092 v/s INR850 for our Cement Universe in FY12). Its cost advantage largely emerges from the edge that it enjoys in energy cost efficiency. OPI is one of the few cement companies enjoying the advantage of high proportion of low cost linkage coal, which it receives primarily from Sigareni Coal Mines. Linkage coal accounts for 60-65% of its fuel mix as compared to 30-60% for some of the energy efficient players. This not only shields OPI against the energy price volatility in the Andhra Pradesh market, but also positions it as the lowest energy cost player in our Cement Universe (INR784/ton in FY12; ~20% discount to MOSL Cement Universe). OPI has also maintained efficiency in power and fuel consumption. It has reduced power consumption to 78kwh/ton from 81kwh/ton in FY11, and has maintained coal usage as a percentage of cement production at 14% v/s 12-16% for peers. Fuel mix skewed towards linkage coal Proportion of linkage coal highest among peers 104

105 Orient Paper Industries Low cost linkage coal availability key to energy cost advantage; makes OPI cost leader (INR/ton) Linakage coal availability issue may dilute cost advantage here on but eclipsed by deterioration in linkage coal availability Lately, availability of linkage coal from Singareni Coal Mines has been constrained. This has increased OPI s reliance on high cost imported coal and open market coal purchases, in turn leading to an escalation in its energy cost by 20-25% YoY in 1HFY13 to INR942/ton. We believe availability of linkage coal would shrink and at expanded capacity, the proportion of linkage coal would be even lower, elevating its overall production cost. However, stabilization of the 50MW CPP in Andhra Pradesh should trigger some cost savings, as its generation cost is INR1.5/unit lower than the price it has to pay for power purchases. At full capacity, the CPP would be able to meet ~60% of its power requirement. We model ~10% CAGR in energy cost over FY Expect dilution in OPI s energy cost advantage, leading to ~8% CAGR in total cost over FY12-15 Expect moderate escalation in freight cost OPI s fright mix is skewed towards road transport, which accounts for ~75% of its volumes. In 1HFY13, its freight cost posted increase of 7.8% YoY on account of (a) increase in rail freight (by ~22%), (b) INR5/liter hike (up ~12%) in diesel prices, and (c) jump in lead distance due to higher dispatches outside Andhra Pradesh. We model 7.5% CAGR in freight cost over FY OPI s recently commissioned 12ktpa artificial gypsum plant would offer uninterrupted supply, though we do not expect any major cost savings. 105

106 Orient Paper Industries Strategic & Other Issues: Electrical division steady, paper remains a drag Diversification aimed at de-risking business model Besides cement, OPI has (a) electrical goods business (~30% of FY12 revenue), and (b) paper business (~14% of FY12 revenue). The electrical goods division (15% capital allocation) has historically posted above average RoCE (25-35%). However, the paper division (26% capital allocation) has been making losses at the EBITDA level since FY10 and remains a drag on overall capital efficiency (RoCE of -16% in FY12). Capital allocation across segments (%) Paper business a drag on overall RoCE (%) Robust growth trend to continue in electrical segment with strong outlook in CFLs and recent diversification into home electrical appliances Electrical goods business to continue witnessing robust growth OPI has established strong brand equity and is a leading player in the fans business (under the brand, Orient PSPO), with an annual capacity of 8m units. In the lighting division, it enjoys 4.2% market share and has entered into CFLs and several new SKUs over the past few years. The segment has consistently augmented its revenue contribution from 23% in FY09 to 30% in FY12. OPIL has posted 23%/39% volume CAGR over FY09-12 in fans/cfls, leading to 28% revenue CAGR over FY09-12 and 22% YoY growth in 1HFY13. We expect the robust growth trend to continue on the back of (a) strong outlook in CFLs and luminaires (20-22% industry growth), and (b) recent diversification into home electrical appliances. We model 23% revenue CAGR over FY Nonetheless, the segment EBIDT margin will remain under pressure ( % over FY13-15 v/s 10%+ pre-fy11) owing to higher cost of raw materials such as copper, zinc and aluminum, increasing fuel prices, and higher marketing expenses. Electrical goods division to post 22% revenue CAGR amidst near-term margin pressure 106

107 Orient Paper Industries Potential cost saving triggers are expected to lower EBITDA loss here on Paper business unlikely to break even in near future OPI s paper division has an installed capacity of 186ktpa (tissue paper: 25ktpa; writing paper: the balance 161ktpa), with two paper manufacturing plants at Amlai in Madhya Pradesh and Brajrajnagar in Orissa. While operations at the Brajrajnagar plant (capacity: 76ktpa) have been suspended since 1999, the Amlai plant (capacity: 110ktpa) is running. OPI sells paper under the brands, Orient and Peacock. Despite steady sales growth (15-20% over FY11-12), we expect OPI s paper business to continue witnessing losses in the near term owing to (1) declining realizations, and (2) escalation in prices of pulp and coal. However, its recently added (a) 250m gallon water reservoir (to address water shortage problem can sustain till 50 days), and (b) 55MW CPP at Amlai (to address power requirements of the paper business) are likely to resolve some operational bottlenecks. The resultant cost savings (INR300m-350m at stabilization) would help reduce EBITDA loss. The said plant will also be left with ~15MW of surplus power for expansion or monetization. Paper segment to post steady revenue growth but unlikely to break even in near future Demerger to aid value unlocking OPI s Board has approved the proposal to demerge the cement business into Orient Cement. The shareholders will get one new equity share of Orient Cement for each share held in OPI. The demerger process is currently at an advanced stage; final approval from Orissa High Court is expected in 2-3 months. Demerger and subsequent listing of Orient Cement will create a focused cement play. We expect this to aid meaningful value unlocking, improve capital efficiency and lead to re-rating. Shareholding before and after impending demerger Source: Company 107

108 Orient Paper Industries With dilution of energy cost advantage, EBITDA/ ton to decline 30% to INR759 in FY13, before posting a 15% CAGR over FY13-15 Strength of Financials: Expect 51% EBITDA CAGR Dilution of cost leadership to impact cement profitability over FY13-15 Though OPI s cement realizations have been lower than regional peers, its cost leadership enabled it to enjoy superior profitability. However, given the subdued price growth due to unfavorable market-mix and dilution of its energy cost advantage, we expect OPI s EBITDA/ton to decline 30% to INR759 in FY13, before posting a 15% CAGR over FY This would imply deterioration in EBITDA margin of the cement business from 30% in FY12 to ~23.5% over FY Strong realizations and operating efficiencies had helped OPI to maintain superior profitability Expect 51% EBITDA CAGR amidst margin expansion in non-cement businesses Though cost structure in the cement business is likely to deteriorate over FY12-15, cost saving measures in non-cement businesses (CPP, water reservoir, etc) would render resilience. We estimate OPI s overall revenue/ebitda to witness 20%/51% CAGR over FY EBITDA margin would expand 5.1pp over FY13-15, after declining 6.6pp over FY PAT is likely to register 45% CAGR over FY13-15 despite higher depreciation and interest. Expect revenue CAGR of 18.6% over FY12-15 Expect EBITDA margin expansion post FY13 108

109 Orient Paper Industries High cost structure to impact capital efficiency moderately PAT to post 45% CAGR over FY13-15 Leverage to increase on the back of ongoing expansion OPI has already acquired land for its planned 3mtpa greenfield cement capacity (clinker capacity of 2mtpa) at Gulburga, Karnataka. The project requires ~INR16b of capex and is likely to be completed by early-fy15. OPI expects to receive MoEF approval soon, post which it will start ordering plant and machinery, and start construction work, which should take 2.5 years thereon. The capex would be funded by mix of debt and internal accruals, which is expected to augment net debt to INR14.8b by FY15 as against INR3.8b in FY12. Despite steady uptick in OCF, FCF negative on the back of ~INR16b capex over FY13-15 Net debt to witness sharp upswing owing to negative FCF Healthy dividend payout (%) 109

110 Orient Paper Industries Valuation & View Trading at discount, despite superior profitability Impending demerger and subsequent listing of the cement business is a key nearterm value unlocking trigger. We expect the de-merged cement business to witness re-rating owing to its superior cost efficiency and greater efficiency in capital allocation. OPI trades at 6.2x FY15 PE and 5.7x FY15E EBITDA. This implies an EV of USD43/ton (v/s USD64/ton for our Mid Cap Cement Universe and USD111/ton for our Full Cement Universe) and 3.6x FY15E EBITDA (v/s 3.9x FY15E EBITDA for our Mid Cap Cement Universe and 5.9x FY15E EBITDA for our Full Cement Universe) for the cement business. Implied valuation of pure cement at discount despite operational efficiencies FY13E FY14E FY15E Market Cap (INR m) 16,259 16,259 16,259 Net Debt (NR m) 4,043 1,467 14,939 EV 20,302 17,725 31,198 EV of other businesses 6,030 9,861 12,280 Implied EV of Cement business 14,272 7,864 18,917 Implied EV/Ton Implied EV/EBITDA Our target price implies 45% upside Our SOTP valuation stands at INR115/share: (1) cement (5x FY15E EBITDA), (2) electrical goods (6x FY15E EBITDA), and (3) paper (1x FY15E Sales). We initiate coverage with a Buy rating; our target price implies 50% upside. Orient Papers: SOTP valuation Parameter Multiple FY13E FY14E FY15E Cement EV/EBITDA 5 15,931 20,959 26,033 Paper EV/Sales 1 3,785 4,352 5,114 Electrical EV/EBITDA 6 2,245 5,509 7,166 Total EV 21,961 30,820 38,313 Less: Net Debt 3,953 1,376 14,849 Equity Value 18,008 29,443 23,465 Fair Value (INR/Share) Upside (%) CEMENT Implied TP

111 Orient Paper Industries Financials and Valuation Income Statement (INR Million) Y/E March E 2014E 2015E Net Sales 16,198 19,279 24,334 28,080 33,586 40,330 Change (%) Total Expenditure 13,124 16,617 20,639 25,667 29,433 34,816 % of Sales EBITDA 3,074 2,662 3,695 2,413 4,153 5,514 Margin (%) Depreciation ,131 1,653 EBIT 2,523 1,848 2,811 1,449 3,022 3,861 Int. and Finance Charges ,042 Other Income - Rec PBT bef. EO Exp. 2,341 2,095 3,183 1,805 3,201 3,816 PBT after EO Exp. 2,341 2,095 3,183 1,805 3,201 3,816 Current Tax ,145 Deferred Tax Tax Rate (%) Reported PAT 1,593 1,431 2,123 1,238 2,177 2,595 PAT Adj for EO items 1,593 1,431 2,123 1,238 2,177 2,595 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 2014E 2015E Equity Share Capital Total Reserves 7,564 8,823 10,981 11,743 13,324 15,259 Net Worth 7,767 9,026 11,186 11,948 13,529 15,464 Deferred Liabilities 1,313 1,354 1,462 1,488 1,552 1,628 Total Loans 5,162 4,891 5,096 6,446 10,446 16,646 Capital Employed 14,243 15,271 17,744 19,882 25,527 33,738 Gross Block 16,365 17,919 19,126 22,060 22,560 39,810 Less: Accum. Deprn. 5,206 5,964 6,806 7,771 8,902 10,554 Net Fixed Assets 11,159 11,956 12,319 14,290 13,659 29,256 Capital WIP ,735 1,500 8, Total Investments Curr. Assets, Loans&Adv. 4,987 6,418 7,308 7,666 8,578 9,568 Inventory 1,503 1,642 1,964 2,156 2,579 3,097 Account Receivables 1,844 2,397 3,470 3,851 4,145 4,646 Cash and Bank Balance Loans and Advances 1,173 1,790 1,359 1,540 1,658 1,659 Curr. Liability & Prov. 3,153 4,076 4,558 4,515 5,651 6,777 Account Payables 2,346 3,393 3,930 4,082 4,882 5,863 Provisions Net Current Assets 1,834 2,342 2,750 3,151 2,928 2,792 Appl. of Funds 14,243 15,271 17,744 19,882 25,527 33,738 E: MOSL Estimates; * Adjusted for treasury stocks 111

112 Orient Paper Industries Financials and Valuation Ratios Y/E March E 2014E 2015E Basic (INR) * Consol EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (USD) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Creditor (Days) Working Capital Turnover (Days) Leverage Ratio (x) Debt/Equity * Adjusted for treasury stocks Cash Flow Statement (INR Million) Y/E March E 2014E 2015E Oper. Profit/(Loss) before Tax 2,523 1,848 2,811 1,449 3,022 3,861 Interest/Dividends Recd Depreciation ,131 1,653 Direct Taxes Paid ,142 (Inc)/Dec in WC CF from Operations 2,533 2,550 3,058 1,813 4,348 5,475 CF from Operating incl EO 2,533 2,550 3,058 1,813 4,348 5,475 (inc)/dec in FA -1,845-1,316-2,710-2,700-7,000-10,000 (Pur)/Sale of Investments CF from investments -2,224-1,508-2,921-2,700-7,000-10,000 Issue of Shares (Inc)/Dec in Debt ,350 4,000 6,200 Interest Paid ,050 Dividend Paid CF from Fin. Activity ,729 4,495 Inc/Dec of Cash Add: Beginning Balance Closing Balance

113 Initiating Coverage Sector: Cement BSE SENSEX S&P CNX 19,987 6,057 5-S framework 5-S score, Rank 54 9 Valuation score, Rank 53 8 Target price & upside Base case INR57 18% Blue Sky INR % Stock Info Bloomberg Valuation summary (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj EPS (INR) EPS Gr. (%) , BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) NA Valuations Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) PRSC IN Equity Shares (m) Week Range (INR) 60/39 1,6,12 Rel. Perf. (%) -12/-22/-3 M.Cap. (INR b) / (USD b) 24/0.4 P/E (x) P/BV (x) EV/EBITDA (x) EV/Ton (USD) Prism Cement CMP: INR49 TP: INR57 Neutral Volume and profitability recovery, as operations normalize Capital allocation to non-cement businesses key risk; initiate with Neutral Prism Cement (PRSC) is likely to post strong volume CAGR of 12% over FY13-15 v/s 9.5% for our Cement Universe, driven by replacement of damaged kiln by FY13 end. Cement profitability has declined sharply over FY11-12, but we expect cost saving triggers to kick in from late-fy14 and drive up profitability. We expect PRSC to post 18% revenue CAGR and 59% EBITDA CAGR over FY13-15, implying margin expansion of ~5.1pp from FY13. Our SOTP-based target price of INR57 implies very little upside. Moreover, its diversified business carries the risk of inefficient allocation of capital. Neutral. Resolution of silo breakdown to drive 12% volume CAGR While PRSC has posted strong volume CAGR of 34% over FY10-12, led by brownfield capacity addition in unit II of its Satna plant, we believe the major volume thrust is already behind. There was a blip in its cement production in 1QFY13, as the blending silo in clinker unit II was damaged. Going forward, volume growth hinges on the replacement of the silo which is expected to be resolved by 4QFY13. We have modeled volume growth of 12% CAGR over FY13-15 for PRSC v/s 9.5% for our Cement Universe due to lack of visibility on further capacity expansion till FY15. Cost saving triggers to kick in from FY14, drive profitability PRSC's cement profitability has declined sharply over FY11-12 on account of (a) subdued realization growth, (b) higher variable cost due to silo damage, (c) sustained cost pressure, and (d) lower capacity utilization. However, we model healthy recovery, with ~55% CAGR in EBITDA/ton over FY13-15 to INR853, led by multiple cost saving triggers such as (1) replacement of the blending silo by the end of FY13, (2) commencement of captive coal mine (annual savings of ~INR1b; not factored in our estimates), and (3) encouraging uptick in realizations on the back of favorable market mix. We expect most of the cost saving triggers to kick in from FY14. Expect steady operations in RMC; TBK margins to improve PRSC is India's third-largest RMC player and we expect it to continue growing steadily (at 15-20%) in this segment, with stable margins. In the TBK business, we expect margin expansion, led by greater focus on value-added products and cost savings driven by to switch towards low cost fuel mix. Its 4.8mtpa greenfield expansion plan in Andhra Pradesh is still under initial evaluation and is unlikely to commence before FY16. PRSC has generated free cash flow of INR1.1b in FY12 (v/s negative INR2.2b in FY11) on the back of steady uptick in operating cash flow and moderating capex. We expect the trend to continue, going forward, leading to decline in net debt to ~INR12b (net debt-equity of 0.8x) by FY

114 Prism Cement Initiating coverage with Neutral rating We expect PRSC to post 18% revenue CAGR and 59% EBITDA CAGR over FY13-15, implying margin expansion of ~5.1pp from FY13. Our SOTP valuation is INR57/share, which implies an EV of USD80/ton. We initiate coverage with a Neutral rating. Moreover, its diversified business carries the risk of inefficient allocation of capital. About Prism Cement Prism Cement (PRSC), a Rajan Raheja group entity, is an integrated building material company with presence in cement, ready-mix-concrete (RMC), and tiles and bathroom & kitchen products (TBK). It merged its RMC and TBK businesses with its cement business in April Its cement business has a capacity of 5.6mtpa, with dispatch mix skewed towards central India. PRSC also has 74% stake in Raheja QBE General Insurance Company, a JV with QBE Group of Australia. Blue Sky Scenario Prism Cement Prism Cement has the potential to deliver ~86% returns over the next two years, driven by: Savings of INR1b from captive coal block, expected from 2HFY14, which is not factored in our base assumptions. Coal gasification at Andhra Pradesh plant and availability of LNG at Karnataka (in 6-9 month) driving cost savings, which are yet to be factored in. PRSC: Blue Sky Scenario (FY15) (INR m) Remarks Cement EV/EBITDA 5x To be driven by savings of INR1b from captive coal block, which is not factored in our base assumptions RMC EV/EBITDA 6x 4,232 TBK EV/EBITDA 6.5x Factoring in for EBITDA margin improvement to 15% driven by change in fuel mix Raheja QBE At BV 1,224 Norcros At BV 1,064 Total EV 61,463 Less: Net debt 10,386 Equity Value 51,076 Value/share (INR) 101 Upside (%) 109 Implied Cement EV/Ton (USD) 101 PRSC: 5-S Analysis 5-S Score Rank Average 1. Size & scalability [30] Sales Mix [20] Supply chain efficiencies [20] Strategic & Other issues [10] Strength of financials [20] S Score Valuation Score

115 Prism Cement 5-S Analysis [Score 54 / 100] & [Rank 9] Size & Scalability [12 / 30] Has 5.6mtpa of cement capacity in Madhya Pradesh and is one of the largest holders of limestone reserves in the state. Posted strong volume CAGR of 34% over FY10-12, led by recent brownfield addition. Production witnessed temporary blip in 1QFY13 due to damage of blending silo. Going forward, volume growth hinges on the replacement of the silo and subsequent uptick in utilization from the current 72%. Expect volume growth of 12% CAGR over FY13-15, driven by replacement of damaged blending silo by FY13 end. Sales Mix [17 / 20] Sales mix concentrated in Central and East India, with Uttar Pradesh (45%), Madhya Pradesh (32%), Bihar (16%), and Chhattisgarh (3%) being the key contributors. Over FY11-12, realizations have been muted due to (1) higher clinker sales, (2) new market entry, and (3) relatively weaker price growth in Central India. In 1HFY13, pricing outlook was encouraging (INR33/ bag increase over FY12 average), led by stronger demand-supply dynamics in Central India. We model INR37/15/12 per bag increase in PRSC's realizations in FY13/14/15. Strategic & Other Issues [3 / 10] Non-cement segments (RMC, TBK) accounted for 60%/57% of revenue/ebitda in FY12. While non-cement businesses have posted superior RoCE than cement in FY12, we expect steady recovery in cement to reverse the equation, going ahead. We expect the RMC business to continue growing steadily (at 15-20%), with stable margins. In the TBK business, we expect margin expansion, led by greater focus on value-added products and cost savings driven by to switch towards low cost fuel mix. Strength of Financials [12 / 20] PRSC's cement profitability has declined sharply over FY1-12. However, we expect healthy recovery, with ~55% CAGR in EBITDA/ton over FY13-15 to INR853, led by multiple cost saving triggers. Expect 18%/59% CAGR in revenue/ebitda over FY Greenfield expansion of 4.8mtpa in Andhra Pradesh is still under initial evaluation and is unlikely to commence before FY16. Moderate capex and FCF generation to reduce net debt to ~INR12b (net debt-equity of 0.8x) by FY15. Supply Chain Efficiencies [10 / 20] Costly fuel mix (70% open market purchase) and inefficient fuel and electricity usage a drag on energy cost. Increase in lead distance to 425km, with new market entry, has increased freight cost. Multiple cost saving triggers: (1) replacement of the blending silo by the end of FY13, (2) commencement of captive coal mine (annual savings of ~INR1b, not factored in our estimates), and (3) encouraging uptick in realizations on the back of favorable market mix. Expect most of the triggers to kick in from FY14. We model in 2% CAGR in cement cost over FY13-15, driven by normalization of production and operating leverage. Valuation & View [53 / 100] Our SOTP valuation is INR57/share. We value cement business at 4x FY15E EBITDA, TBK business at 6.5x FY15E EBITDA (at 25% premium to Kajaria Ceramics) and the RMC business at 5x FY15E EBITDA. The implied valuation of the cement business is an EV of USD64/ton (v/s USD64/ton for our Mid Cap Cement Universe and USD111/ton for our Full Cement Universe) and 3.2x FY15E EBITDA (v/s 3.9x FY15E EBITDA for our Mid Cap Cement Universe and 5.9x FY14E EBITDA for our Full Cement Universe). We initiate coverage with a Neutral rating. Moreover, its diversified business carries the risk of inefficient allocation of capital. 115

116 Prism Cement Size & Scalability: Recovery in utilization to drive dispatches hereon Volume growth hinges on stabilization of recent expansion PRSC has 5.6mtpa of cement capacity at Satna in Madhya Pradesh and is one of the largest holders of limestone reserves in the state. It has posted strong volume CAGR of 34% over FY10-12, led by brownfield capacity addition in unit II of its Satna plant (3.6mtpa in December 2010). There was a blip in its cement production in 1QFY13, as the blending silo in clinker unit II was damaged. While the issue has been fixed with an intermittent facility, the management has indicated that full resolution would happen by the end of FY13, increasing utilization to 90% (v/s 85% in FY12 and 72% in 1HFY13). Despite immediate constraints, recovery in utilization would be the key volume growth driver hereon. Volume thrust from expansion already behind To post sub-par dispatch growth over FY12-15 though lack of further expansion would limit growth potential We have modeled volume growth of 12% CAGR over FY13-15 for PRSC v/s 9.5% for our Cement Universe, driven by replacement of damaged blending silo by FY13 end. The growth would be on the back of steady uptick in utilization to >100% by FY The lack of visibility on further capacity expansion till FY15 would limit growth potential. Sales Mix: Expect favorable market to drive 6.6% CAGR in realization Favorable market mix PRSC's sales mix is concentrated in Central and East India, with Uttar Pradesh (45%), Madhya Pradesh (32%), Bihar (16%), and Chhattisgarh (3%) being the key contributors. With no capacity expansion planned till FY15, we expect near-term market mix to remain unaltered. Almost 90% of its cement production is skewed towards superior quality PPC. 116

117 Prism Cement Market mix: High contribution from Uttar Pradesh /Madhya Pradesh (%) Expect 12% CAGR in realization over FY12-15 to drive healthy realization growth after underperformance in FY11-12 Over FY11-12, PRSC's realizations have been 5-15% lower than our Cement Universe, largely on account of (1) higher clinker sales, (2) entry into new markets (Bihar), with expanded capacity, and (3) relatively weak price growth in Central India. However, pricing outlook has been encouraging over 1HFY13 (INR33/bag increase over FY12 average), led by stronger demand-supply dynamics in Central India. We model INR37/ 15/12 per bag increase in PRSC's realizations in FY13/14/15. We expect outperformance in realizations to place PRSC largely at par with our Cement Universe by FY Supply Chain Efficiencies: Cost saving triggers kick in from FY14 Costly fuel mix, suboptimal efficiency a drag on energy cost PRSC procures ~30% of its coal requirement (~1mtpa) through linkage coal and the balance through open market purchases. The higher proportion of open market coal (@INR6,200/ton) and escalation in linkage coal prices (landed cost for PRSC at INR5,500/ ton) by Coal India had a severe negative impact on its energy cost. Its average coal procurement cost has grown 68% over FY10-12 to INR5,400/ton v/s INR4,900/ton for our Cement Universe. Moreover, sub-optimal fuel efficiency (partly due to lower utilization) remains a major overhang on energy cost: (a) PRSC's average coal usage (as % of clinker) is 17-18% v/s 14% for our Cement Universe, (b) electricity/ton of cement has also grown by 17% over FY10-12, and (c) electricity cost stood at INR5-6/ unit (no captive power plant) v/s INR4-4.5/unit for our Cement Universe. Coal usage/ton of clinker inferior to industry average (%) Trend in coal usage per ton of clinker (%) 117

118 Prism Cement Rising trend in power usage (KWH/ton of cement) Electricity cost (INR/unit) above industry average Freight mix skewed towards railways PRSC's freight mix is skewed towards railways (60% contribution). Its overall freight cost was up significantly (~32% on per ton of cement dispatch) over FY10-12, largely on account of (a) increase in rail freight, and (b) increase in lead distance from 340km to 425km, with entry into new markets post commencement of new capacity. While we have assumed healthy uptick in PRSC's realizations over FY13-15, a part of the increase will be offset by higher lead distance. This, along with increase in diesel price, would keep fright cost high. Benefits of cost savings to accrue from FY14 PRSC has three major cost saving triggers: 1. Replacement of blending silo by the end of FY13 would have a positive bearing on utilization and raw material cost (estimate savings of INR /ton), as it would reduce clinker purchase. 2. PRSC's captive coal mine (15mtpa reserve at Chhindwara, Madhya Pradesh) is likely to start operations by 3QFY14 and would fulfill 30%+ of its coal requirement at an estimated landed cost of INR2,700/ton, leading to annual savings of ~INR1b (not factored in our estimates). The mining contract for the same has already been outsourced to Apex Encon. 3. Seven upcoming power plants, with cumulative capacity of 17,000MW, are set to start operations in Central India over the next couple of years, which should reduce PRSC's power and fly ash cost. We model 2% CAGR in cement cost over FY13-15, driven by cost saving triggers. However, any delay in replacement of blending silo could have a negative bearing on utilization and raw material cost, as it would necessitate higher clinker purchases. 118

119 Prism Cement We model moderation in cost FY14 onward (INR/ton) Strategic & Other Issues: High non-cement contribution High non-cement contribution and capital allocation PRSC has merged its ready mix concrete (RMC) and tiles and bathroom & kitchen products (TBK) businesses with the cement business in FY10, which resulted in the emergence of an integrated building materials company. Its non-cement businesses accounted for 60%/57%/42% of FY12 revenue/ebitda/capital Employed. Almost 10% of PRSC's capital allocation is towards RMC, which earns RoCE of 14-16%. TBK accounts for ~32% of capital allocation and earned RoCE of 6% in FY12 (18%/12% in FY10/11) due to intense competition from the unorganized sector and sharp increase in input and energy costs. PRSC's cement business has posted inferior capital efficiency over FY11-12 due to recent capex, cost escalation and operational bottlenecks (damage of blending silo). We believe that the cement business is at the cusp of recovery and renders strong visibility of profitability improvement over FY Going forward, the possibility of continued capital allocation towards non-cement businesses would be a key concern. Segmental revenue mix (%) Capital allocation mix (%) RoCE trend (%) 119

120 Prism Cement RMC business to enjoy stable margin and high asset turn PRSC is India's third-largest RMC player after UltraTech and Lafarge. It has 85 existing plants, with a total capacity of 6m cubic meters, along with backward integration in aggregates (9 aggregate plants, manufactured sand, etc; also supplying to third parties). The backward integration enables PRSC's RMC business to earn relatively stable/high margins as compared to peers (ACC makes EBITDA loss). PRSC's RMC business enjoys 5-6% EBITDA margin along with high asset turn of 4-5x, translating into RoCE of 14%. We expect improvement in utilization (backed by low penetration of RMC in India; the management expects ~20% volume growth in the near term) to boost asset turn and capital efficiency. GST implementation would be favorable for the organized sector, as it would eliminate the tax advantage enjoyed by the unorganized sector. We model 12% volume and 18% revenue CAGR over FY13-15, amidst stable EBITDA margin of 5%. Strong brands in TBK; switch to low cost fuel to aid cost savings PRSC is India's leading tiles manufacturer, with strong brand equity and one of the largest distribution networks. It has brands such as (1) Johnson (floor tiles and bathroom & kitchen products), (2) Marbonite (vitrified tiles), (3) Endura (industrial tiles), etc. Due to high competition from unorganized players, PRSC follows a JV/outsourcing model to (a) gain cost advantage in low-end products, and (b) focus on high-end vitrified/industrial tiles and bathroom & kitchen accessories. South India (especially Andhra Pradesh) is PRSC's core market due to proximity to plants, while the JV model offers geographical diversification. We assume 15% volume CAGR over FY13-15 in TBK business, with no major change in existing revenue mix between own manufacturing (35%), JV (45%) and outsourcing (20%). PRSC has converted its fuel source to RNLG from high cost propane gas or LPG in its three plants (including Pen and Kunigal), covering 40% of capacity. The company is likely to derive cost benefits, with other plants also set to move towards natural gas-based fuel over the next few years. RMC: Expect steady growth amidst stable margins TBK: Profitability to improve due to changing fuel mix 120

121 Prism Cement Related / unrelated investments PRSC primarily has two investments: % stake in Norcros for INR1.33b: Norcros is a leading supplier of ceramic tiles, showers and adhesive products operating in UK, South Africa, Middle East and Australia. Currently, PRSC is drawing healthy dividend (GBP650k in FY12) from this investment and expects to enjoy export synergies on the back of Norcros' distribution network % stake in Raheja QBE General Insurance (JV with QBE Australia) for INR1.53b: The company focuses on niche segments (liability insurance, marine liability, trade credit), with a profit sensitive approach. It does not have any plans to scale up in the near future. Strength of Financials: Cement business to see revival in profitability Cement profitability to improve with potential cost savings Sustained input cost pressure (particularly coal and power) and lower capacity utilization led to a sharp decline in cement profitability over FY EBITDA/ton declined from INR1,218 (margin 35%) in FY10 to INR251 (margin 8%) in FY12. This has resulted in much lower profitability for PRSC than peers. We expect the gap to reduce on account of higher realization uptick and cost saving catalysts in FY14. We model ~55% CAGR in EBITDA/ton over FY13-15 (on a low base) to INR853. On the back of steady revival in the cement segment, coupled with cost saving triggers in TBK, we expect PRSC to post 15% revenue CAGR and 60% EBITDA CAGR over FY13-15, implying margin expansion of ~2.3pp. The company expects reversion to sustainable RoCE of 18-20% in the medium tserm. Cement profitability to improve from FY14 EBITDA to post 49% CAGR over FY12-15 Cement capex plan tentative; non-cement business to witness steady capex PRSC plans to set up a greenfield capacity of 4.8mtpa in Kurnool, Andhra Pradesh, where it has already acquired land (~3,000 acres) and obtained all requisite approvals including mining lease, environment clearance, etc. However, given unfavorable demand-supply dynamics in Andhra Pradesh and greater focus on stabilizing the recently commissioned brownfield capacity at Satna, further clarity on the greenfield expansion is likely by FY14, followed by 30 months of execution time. The 121

122 Prism Cement management has guided capex of USD90/ton without power plant, though it has not yet invited letters of intent (LoI). Additionally, PRSC is likely to spend ~INR300m of maintenance capex per annum. Coal mine to start production by 2HFY14: PRSC's captive coal block in Madhya Pradesh is set to commence operations by 2HFY14. The total cost of project execution would be INR400m, ~75% of which has already been incurred. RMC - to add 7-8 plants per annum: PRSC has rapidly expanded its RMC plants over the last four years - from 49 plants in FY08 to 85 plants in FY12. Growth outlook for the RMC segment remains robust (20% CAGR) due to low penetration in India (10% of total cement usage v/s 50-70% in developed countries). PRSC plans to set up 7-8 plants (average cost of INR30m-40m per plant) per annum. TBK - to witness geographic expansion: PRSC is enhancing its capacity of vitrified/ glazed ceramic tiles at Dewas, Madhya Pradesh by 2m square meters per annum to 54m square meters per annum. The project will get commissioned by FY13 (capex of INR400m). It also plans to set up its own tile manufacturing unit in East India. It will continue to follow an asset light model, with production mix remaining stable at current levels. FCF generation to moderate leverage till FY15, if cement capex does not commence PRSC's leverage grew sharply from net cash in FY09 to INR12.1b in FY12 (1.1x) on the back of (1) strong cement capex over FY10-11, and (2) merger of TBK and RMC businesses in FY10. Of the INR12.7b gross debt, ~INR7.5b is in cement, INR1.3b in RMC and the balance in TBK. PRSC generated free cash flow of INR1.1b in FY12 (v/s negative INR2.2b in FY11) on the back of steady uptick in operating cash flow and moderating capex. We expect FCF generation of INR7.6b over FY13-15, leading to a decline in net debt to ~INR12b by FY15 (net debt-equity of 0.8x). Leverage increased on the back of capex (INR m) FY12 FCF turned positive with moderating capex 122