India Cements Rating: Target price:

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1 : price: EPS: Another weak quarter; Maintain SELL ICEM reported weak 2QFY14 results, with a revenue de-growth of 3.3% y-o-y and EBITDA de-growth of 37.8% y-o-y. Volumes de-grew by 3% y-o-y to 4mt. Realisations de-grew 5.5% y-o-y and 1.7% q-o-q to Rs. 4,116/t on weak pricing scenario in its key markets. Total costs/t grew 3% y-o-y to Rs. 3,708/t. EBITDA/t came in at 8/t v/s. Rs.768/t in 2QFY13. The company reported a loss of Rs. 225mn vs. PAT of Rs. 491mn in 2QFY13. Key takeaways from the result and our interaction with the management: Volumes & realisations: 2QFY14 volumes de-grew by 3% y-o-y to 4mt. Overall 1HFY14 volume growth is ~4% y- o-y. We maintain our volume growth of 5% for FY14E, implying 2HFY14 volume growth of ~6%. Volume mix is Tamil Nadu 36%, Kerala 14%, Karnataka & AP 26%, Maharashtra 17%, East 7%. Overall 1HFY14 realisations are down 6% y-o-y. We estimate FY14 realisations to de-grow 1% y-o-y, implying 2HFY14 realisation to grow 7.5% from 1HFY14 levels or Rs. 300/t, which we believe factors in the price hikes in its key markets since mid Sep-13. Costs inflation on freight and other expenses: Total costs/t in 2QFY14 grew by 3% y-o-y. This was led by higher freight costs, up 10% y-o-y and other expenses, up 14% y-o-y. Higher other expenses was due to repairs and maintenance and inflation in packaging costs. Power & fuel costs/t was down 4% y-o-y on higher usage of petcoke and drop in imported coal costs. Phase I (25MW) CPP at AP which was commissioned during July-13 witnessed teething problems during the quarter. The plant will be re-comissioned in Dec-13 along with Phase II (25MW). IPL business: ICEM s IPL revenues and EBITDA during the quarter was Rs. 569mn and Rs. 184mn respectively Capex plans: ICEM incurred a total capex of Rs.1bn in 1HFY14. It plans to incur ~Rs. 2.5bn over the next 18 months. Debt levels: Gross debt at ~Rs. 3bn increased by Rs. 2.2bn from Mar-13 due to higher receivable days and increase in short term loans & advances (increased by 1.6bn from Mar-13 levels to Rs. 6.6bn). We cut our FY14E EBITDA estimate by 9% due to weak realisations in 2QFY14. However, we retain our FY15E EBITDA estimates due to pick up in cement prices in its key markets. Despite this the stock is trading at 5.5x FY15E EBITDA. In the last five years average one year forward EV/EBITDA is 5.5x. The stock has traded below 5.5x for more than 60% of the trading days. Hence at, risk reward is unfavorable and maintain our SELL rating with a target price of /share based on 5.5x FY15E EBITDA for cement business (Rs. 29/share), Rs. 1/share for Trinetra Cement and Rs. 10/share for its IPL franchise. We remain skeptical on ICEM s balance sheet quality given mis-allocation of capital and higher loans & advances to related parties and subsidiaries. Financial summary Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) EV/EBITDA (x) EV/t (Rs.mn) FY13 45,970 8,233 1, ,027 FY14E 47,477 6, ,115 FY15E 52,029 8,011 1, ,093 Date v 7, 2013 Market Data SENSEX Nifty 6187 Bloomberg Shares o/s Market Cap ICEM IN 307mn Rs. 15.9bn 52-wk High-Low m Avg. Daily Vol Index member 2QFY14 result update Rs. 150mn BSE100 Latest shareholding (%) Promoters 28.2 Institutions 48.4 Public 23.4 Stock performance (%) 1m 3m 12m ICEM Sensex Vijayaraghavan Swaminathan raghavan@sparkcapital.in Girish Choudhary girish@sparkcapital.in Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset 1

2 Quarterly Financial Results Standalone financial results Rs. mn \ Period 30-Sep Sep-12 yoy Growth 30-Jun-13 qoq growth FY13 FY14E yoy growth Revenues 10,859 11, % 12, % 45,970 47, % Material cost 1,391 1, % 1, % 5,459 6, % Employee cost % % 3,339 3, % Freight costs 2,394 2, % 2, % 8,819 9,910 1% Power & Fuel costs 3,051 3, % 3, % 12,551 12, % Other expenditure 1,955 1, % 2, % 7,568 8, % EBITDA 1,276 2, % 1, % 8,233 6, % Margins 11.7% 18.3% 15.4% 17.9% 14.4% Other income % % % Interest % % 3,077 3, % Depreciation % % 2,818 2, % PBT (314) % % 2, % Tax (89) % % % Effective tax rate 28.3% 31.5% 34.6% 35.2% 34.0% Reported PAT (225) % % 1, % Margins -2.1% 4.4% 1.4% 3.6% 0.8% Extra-ordinary items Adjusted PAT (225) % % 1, % EPS (Rs.) % % % 2

3 Business Overview Key estimate revision Volume de-growth of 3% y-o-y FY14E FY15E Old New Change Old New Change Revenue 48,072 47, % 51,997 52, % EBITDA 7,500 6, % 8,030 8, % Margin (%) 15.6% 14.4% 15.4% 15.4% PAT % 1,372 1, % PAT Margin 1.9% 0.8% 2.6% 2.5% EPS % % Volumes (mt) % 2.5 3% 4% 11% 2.8 7% % 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Volumes (mt) % Y-o-Y growth 12% 10% 8% 6% 4% 2% 0% -2% -3% -4% All figures in Rs. mn, except EPS, which is in Rs. Realisations down on a y-o-y and q-o-q basis Cement EBITDA/t adjusted for IPL, Windmill and Shipping biz., Realisations (Rs./t) 5,000 4,500 4,000 3,500 3,000 2,500 20% 12% 10% 7% 3% 4,252 4,462 4,355 4,373 3% 4,188 4,186 4,116-1% -6% -5% -10% 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 0% 1,250 1, , QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Realisations (Rs./t) % Y-o-Y growth EBITDA/t 3

4 Business Overview (Contd.) Cost trends Higher freight and other expenses Annual volume trends Breakdown of cost/t 2Q FY14 1Q FY14 4Q FY13 3Q FY13 2Q FY13 1Q FY13 4Q FY12 3Q FY12 Raw material % % 20% Employee Freight * 981 1, Power & fuel 1,250 1,246 1,229 1,232 1,308 1, Other costs % 5% 5% 5% -1% -5% -5% FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E 10% 0% -10% Total costs 3,708 3,614 3,651 3,581 3,587 3,431 3,430 3,382 **both inward and outward One year fwd. EV/EBITDA trend Key assumptions Volumes (mt) % growth 10.0 FY12 FY13 FY14E FY15E Volumes (mt) Realisations (Rs/t) Raw material (Rs/t) Power cost (Rs/t) v-08 Feb-09 May-09 Aug-09 v-09 Feb-10 May-10 Aug-10 v-10 Feb-11 May-11 Aug-11 v-11 Feb-12 May-12 Aug-12 v-12 Feb-13 May-13 Aug-13 Fuel cost (Rs/t) Freight outward (Rs/t) yr fwd EV/EBITDA Average EBITDA (Rs/t)

5 Financial Summary Abridged Financial Statements Key metrics Rs. mn FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E Profit & Loss Operational metrics Revenues 42,034 45,970 47,477 52,029 Sales volumes (mt) EBITDA 9,034 8,233 6,839 8,011 Blended realisations/t 4,217 4,354 4,311 4,505 Other Income EBITDA/t Depreciation 2,513 2,818 2,775 2,969 Grow th ratios EBIT 6,714 5,600 4,332 5,391 Revenues 20.0% 9.4% 3.3% 9.6% Interest 2,904 3,077 3,760 3,417 EBITDA 106.9% -8.9% -16.9% 17.1% PBT 3,810 2, ,974 PBT 334.7% -33.8% -77.3% 245.3% Exceptionals loss/(income) PAT 329.6% -44.2% -76.9% 245.3% Tax Margins Ratios PAT after exceptionals 2,930 1, ,303 EBITDA 21.5% 17.9% 14.4% 15.4% Balance Sheet PBT 9.1% 5.5% 1.2% 3.8% Netw orth 40,676 40,896 40,172 40,373 PAT 7.0% 3.6% 0.8% 2.5% Total Debt 27,010 30,229 32,740 32,740 Performance Ratios Deferred Tax 3,245 3,297 3,297 3,297 Net Debt to Equity (x) Total Netw orth & Liabilities 70,931 74,422 76,209 76,410 RoE (%) 7.2% 4.0% 0.9% 3.2% Gross Block 65,019 68,420 69,920 72,920 RoIC (%) 9.1% 5.8% 4.4% 5.5% Net Block + CWIP 45,938 47,684 45,846 45,314 Gross Asset Turnover (x) Investments 8,520 9,578 9,578 9,578 Valuation metrics Net w orking capital (ex cash) 16,445 17,113 19,478 19,895 Shares Outstanding (mn) 307 Cash ,307 1,622 Market Cap (Rs. mn) 15,977 15,977 15,977 15,977 Net w orking capital 16,474 17,160 20,785 21,517 Core Enterprise Value (Rs. mn) 39,783 42,984 44,236 43,921 Total Assets 70,931 74,422 76,209 76,410 EV/EBITDA (x) Cash Flows EV/t of capacity (Rs/t) 2,802 3,027 3,115 3,093 Cash flow s from operating 8,259 6,665 4,280 6,923 P/EPS(x) Cash flow s from investing (5,459) (5,716) (1,232) (2,651) Book value/share Cash flow s from financing (3,102) (930) (1,789) (3,956) FCF/EV % -4.0% -4.1% -2.2% 1.2% Free cash flow s after interest (1,608) (1,771) (980) 505 Dividend yield (%) 2.9% 2.9% 2.9% 2.9% 5

6 Financial Summary Trinetra Cements 61.2% subsidiary TRINETRA CEMENT - India Cement's holdng is at ~ 61% Rs. mn FY12 FY13 FY14E FY15E Profit & Loss Revenues 3,523 4,432 4,805 5,567 EBITDA EBIT (14) Interest PBT (418) (57) (195) (67) PAT (418) (57) (195) (67) Balance Sheet Netw orth 7,133 6,527 6,332 6,264 Total Debt 3,170 3,298 3,398 3,398 Total Netw orth & Liabilities 10,303 9,824 9,729 9,662 Gross Block 6,760 6,760 6,760 6,760 Net Block + CWIP 6,597 6,344 5,978 5,612 Pre-Operative Expenses Net w orking capital (ex cash) 3,703 3,477 3,739 3,616 Cash Net w orking capital 3,705 3,480 3,751 4,050 Total Assets 10,303 9,824 9,729 9,662 Cash Flows Cash flow s from operating 589 1, Cash flow s from investing (1,094) (113) - - Cash flow s from financing 451 (955) (369) (476) Free Cash Flow s after interest (505) 422 (90) 422 Operational metrics Sales volumes (mt) Realisations/t 3,492 3,925 4,004 4,124 EBITDA/t EBITDA margin 7% 19% 11% 13% Trend in realisation and volumes Volumes (lmt) 4,400 4,200 4,000 3,800 3,600 3,400 3,200 3,000 3, ,708 Trend in EBITDA/t 1, , ,186 3, , Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep Realisation (Rs./t) ,524 Volumes (lkst) , Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 EBITDA/t

7 Absolute Interpretation Buy Add Reduce Stock expected to provide positive returns of >15% over a 1-year horizon Stock expected to provide positive returns of >5% <15% over a 1-year horizon Stock expected to provide returns of <5% -10% over a 1-year horizon Stock expected to fall >10% over a 1-year horizon Recommendation History Date price 23-Aug Aug Buy 05-Jun Buy 21-May Add 28-Feb Add Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through the independent analysis of Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss or revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of interest statement Analyst ownership of the stock Group/directors ownership of the stock Broking relationship with the company covered Investment banking relationship with the company covered Yes/ 7

8 Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst s personal views about any and all of the subject securities or issuers; and no part of the research analyst s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Decker & Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker & Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker & Co. All responsibility for the distribution of this report by Decker & Co, LLC in the US shall be borne by Decker & Co, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Decker & Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker & Co, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations; Disclosure of interest statement Analyst ownership of the stock Group/directors ownership of the stock Broking relationship with the company covered Investment banking relationship with the company covered Yes/ 8