CMP* (Rs) 1,424 Upside/ (Downside) (%) 19 Bloomberg Ticker Market Cap. (Rs bn) 268 Free Float (%) 46 Shares O/S (mn) 188

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1 Company Update February 28, 2018 IN Market Cap. (Rs bn) 268 Free Float (%) 46 Shares O/S (mn) 188 In a Sweet Spot Despite Challenges is expected to witness a decent recovery in its operational performance in the backdrop of recent realisation recovery in its key markets and likely spill-over impact of reduction in fuel prices from ongoing quarter. We note that, after inducting new CEO in Feb 17, has marked a tremendous improvement in its operational efficiencies. Resultantly, its operating cost/tonne has declined by ~Rs129/tonne to Rs4,120 in last two years despite sharp upsurge in fuel prices during the period. We recent interacted with the to understand the current status of business and way forward. Below are the key takeaways:- New Capacity to Come on Stream in 2021: s capacity expansion (3mnT clinker and 5.9mnT cement) with an aggregate capex of Rs30bn funding through internal accrual commence ground breaking work in the current year. All these units (barring 2.2mnT SGU in Uttar Pradesh, as land is yet to be finalised) will be commissioned towards the mid Notably, all units in UP and Jharkhand enjoys fiscal incentives, as per states policy of the respective state governments. Incentive Declines to ~Rs1.3bn in CY18: As enjoys sales tax benefits up to on investment in 2 of its plants i.e. Chanda and Sindri SGU, its incentive value has declined to Rs1.3bn in CY18 from Rs1.5bn incy17 mainly due to implementation of GST. Hereon, expects quarterly run-rate of fiscal incentive in the range of Rs mn, which can improve further in two circumstances: (a) Significant growth in Maharashtra volume; and (b) commissioning of new planned capacities in Uttar Pradesh and Jharkhand. It has already exhausted up to Rs8bn and Rs5bn sales tax fiscal incentives for Chanda and Sindri SGU, respectively till date. Expects Volume Growth in Tandem with Industry Growth: While expects its volume to improve in tandem with the industry s growth, we believe clinker constraints can impact its volume growth in the medium-term, as clinker capacity is already being utilised at >90% level. We note that average cement to clinker ratio of has been in the range of x during Hence, potentially can sell up to 31.5mnT cement in case the product-mix does not change significantly. We expect s sales volume to clock 5% CAGR over CY18-CY20E. Recent Price Hike & Cost Reduction to Result in Strong Recovery in Unitary EBITDA: expects the spill-over favourable impact of reduction in fuel prices and recent up-tick in realisation should result in incremental EBITDA/tonne by ~Rs /tonne in the subsequent quarters. Further, rationalisation of manpower may also result in saving to the tune of Rs30-40/ tonne. However, landed cost of slag is still prevailing higher at Rs1800/tonne due to logistics bottlenecks and supply crunch. We expect EBITDA/tonne at Rs664 and Rs726 in CY19E and CY20E, respectively as against Rs565 in CY18. Outlook & Valuation We continue to maintain our positive view on owing to its deep penetration in the rural markets (~80% trade segment volume) and consistent focus on premium products. Looking ahead, we expect its operating performance to improve led by recent up-tick in realisation in select markets. As the current valuations at 11.2x and 9.8x EBITDA of CY19E and CY20E appear to be attractive, we maintain our recommendation on the stock with an unrevised Target Price of Rs1,700 (12x CY20 EBITDA). Share price (%) 1 mth 3 mth 12 mth Absolute performance 3.3 (1.7) (13.0) Relative to Nifty 2.6 (3.1) (14.1) Shareholding Pattern (%) Sept'18 Dec'18 Promoter Public Year Stock Price Performance Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Note: * CMP as on February 27, 2019 Key Financials (Rs mn) CY17 CY18E CY19E CY20E Sales 129, , , ,346 EBITDA 15,555 17,236 21,443 24,397 APAT 9,155 10,222 12,559 14,569 EPS (Rs) DPS (Rs) P/E (x) P/B (x) EV/EBITDA (x) RoE (%) Div. Yield (%) Source: Company, RSec Research Research Analyst: Binod Modi Contact: binod.modi@relianceada.com 1

2 IN Healthy Traction in RMC Business: Double-digit growth in RMC volume is underpinned by strong infrastructure development activities across the country. It expects RMC volume should continue to grow in double-digit with ~10% of operating margin. In addition to this, it has recently forayed into adhesive business with products called Leakblock- Waterproofing Technology. The Company procures it from the third party and uses own branding. This business contributes very negligible revenue of ~Rs20mn/annum as on date with higher margin. Trade, Fuel and Freight Mix: Trade accounts for 80% of total sales. Petcoke, Coal and AFR account for 65%, 30% and 5%, respectively. Road and rail mix comes at 60:40. Risks to the View ff Government s failure to revive infrastructure projects. ff Significant surge in operating cost and dip in realizations. 2

3 IN Profit & Loss Y/E Dec (Rs mn) CY17 CY18 CY19E CY20E Net Sales 129, , , ,346 % yoy growth Total Cost 113, , , ,950 EBITDA 15,555 17,236 21,443 24,397 EBIDTA Margin (%) Depreciation and Amortisation 6,401 5,996 6,181 6,217 Interest 1, ,057 1,123 Other Income 4,853 4,758 4,824 5,017 PBT 12,984 15,105 19,029 22,074 Tax 3,829 (123) 6,470 7,505 % Tax 29.5 (0.8) Net Profit 9,155 15,228 12,559 14,569 YoY Growth (%) (17.5) 16.0 Net Profit Margin (%) Adjusted Profit 9,155 10,222 12,559 14,569 Balance Sheet Y/E Dec (Rs mn) CY17 CY18E CY19E CY20E Share Capital 1,880 1,880 1,880 1,880 Reserves & Surplus 91, , , ,622 Total Shareholder's funds 93, , , ,502 Unsecured Loans Total Debt Deferred Tax Liability 5,414 6,631 6,631 6,631 TOTAL LIABILITIES 99, , , ,132 Gross Block 84,799 88,899 92,899 98,399 Less: Accumulated Depreciation 12,389 18,386 24,567 30,784 Net Block 72,410 70,514 68,333 67,615 CWIP 2,617 3,922 13,922 23,922 Investments 2,302 2,302 6,302 6,802 Other Non Current Assets 13,354 14,951 16,343 17,591 Inventories 14,040 16,786 16,476 17,735 Sundry Debtors 6,682 8,683 9,491 10,216 Cash & Bank 26,954 30,154 27,634 27,982 Other Current Assets 7,874 11,899 13,008 14,001 Loans & Advances 2,657 2,857 3,357 3,857 Total Current Assets 58,206 70,378 69,966 73,791 Current Liablities 47,296 47,555 50,808 54,109 Provisions 1,932 2,166 2,324 2,479 Net Current Assets 8,978 20,657 16,835 17,203 Total Assets 99, , , ,132 3

4 IN Cash Flow Statement Y/E Dec (Rs mn) CY17 CY18E CY19E CY20E PBT 12,984 15,105 19,029 22,074 Depreciation 6,401 5,996 6,181 6,217 Interest Paid 1, ,057 1,123 Others (1,794) Operating Cash flow before WC changes 18,614 21,993 26,267 29,414 Change in Working Capital (890) (8,480) 1,303 (20) Cash Generated from Operation 17,724 13,514 27,570 29,393 Direct Tax (net) (2,177) 1,341 (6,470) (7,505) Net Cash from Operating Activities 15,548 14,855 21,100 21,888 Purchase / Sale of Fixed Assets (net) (5,194) (5,404) (14,000) (15,500) Purchase of Investment (22) - (4,000) (500) Others 983 (1,597) (1,392) (1,248) Net Cash in Investment activities (4,233) (7,001) (19,392) (17,248) Proceeds/ Repayment of LT Borrowings (net) - (592) - - Interest Paid (420) (892) (1,057) (1,123) Others (3,792) (3,170) (3,170) (3,170) Net cash in Financing activities (4,212) (4,653) (4,227) (4,292) Net inc. / (dec.) in cash & cash equivalents 7,103 3,200 (2,519) 348 Key Ratio Y/E Dec CY17 CY18E CY19E CY20E Valuation Ratio (x) P/E P/CEPS P/BV EV/EBITDA EV/Sales EV/tonne (USD) Dividend Payout (%) Dividend Yield (%) OCF Yield (%) Per Share Data (Rs) EPS (Basic) EPS (Diluted) CEPS DPS Book Value EBITDA/tonne Returns (%) RoCE RoE Turnover ratios (x) Asset Turnover (Gross block) Inventory (days) Receivables (days) Payables (days) WCC (days) (30.0) (17.8) (22.1) (22.1) 4

5 IN Rating History Date Reco CMP TP 06-Feb Oct Jul Apr Feb Oct Jul-17 HOLD Apr-17 HOLD PLEASE CLICK HERE FOR PREVIOUS REPORTS Rating Guides Rating Expected absolute returns (%) over 12 months >10% HOLD -5% to 10% REDUCE >-5% Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. 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