Star Ferro & Cement Ltd.

Transcription

1 February 24, 216 Star Ferro & Cement Ltd. Cement Star of North East CMP INR 15 Target INR 151 Initiating Coverage BUY Ke y S ha re Da ta Face Value (INR) 1. Equity Capital (INR Mn) Market Cap (INR Mn) 23, Week High/Low (INR) 189/96 6 months Avg. Daily Volume (BSE) 16,254 BSE Code NSE Code Bloomberg Code SFCL SFCL IN Shareholding Pattern (as on 31st Dec 215) Others, 33.45% Institution.12% Source: Company Ke y Fina nc ia ls (INR Million) Promoter, 66.43% Pa rtic ula rs FY14 FY15 FY16E FY17E Net Sales 11, , , ,369.8 Growth (%) 77.9% 21.9% 17.6% 21.1% EBITDA 2, ,35.7 4, ,152.8 PAT ,6.6 1,63.7 Growth (%) % % 2.6% 62.% EPS (INR) BVPS (INR) Ke y Fina nc ia ls Ra tios Pa rtic ula rs FY 14 FY15 FY 16 E FY 17 E P/E (x) P/BVPS (x) Mcap/Sales (x) EV/EBITDA (x) ROCE (%) 4.4% 9.6% 1.2% 13.1% ROE (%).5% 7.% 8.4% 12.6% EBITDA Mar (%) 21.7% 3.4% 24.6% 25.3% PAT Mar (%).5% 5.8% 6.% 8.% Debt - Equity (x) Yr price performance SFCL vis-à-vis BSE Mid Cap 19% 14% 9% 4% -1% 12-Feb 12-Mar 12-Apr 12-May 12-Jun SFCL 12-Jul 12-Aug 12-Sep BSE Mid Cap Analysts: Nikhil Saboo Tel No: ; Mobile: nikhil.saboo@skpmoneywise.com Anik Das Tel No: ; Mobile: anik.das@skpmoneywise.com 12-Oct 12-Nov 12-Dec 12-Jan 12-Feb Company Background Star Ferro & Cement Ltd (SFCL), promoted by first generation entrepreneurs Mr. Sajjan Bhajanka and Mr. Sanjay Agarwal is the largest cement player in the North East Region (NER) with 23% market share selling under Star Cement brand. It has fully integrated cement plants with an installed cement capacity of 3.7 MTPA (own capacity 2.9 MTPA & leased capacity.84 MTPA); 2.6 MTPA of clinker capacity, 51 MW of power plant located in Meghalaya and Assam and adding 1. MTPA grinding unit in West Bengal. Investment Rationale Leadership in NER with strong brand pull, robust distribution network and close proximity to raw materials SFCL has emerged as NER s largest cement manufacturer with ~23% market share, having its own captive limestone mines (reserves of ~3 million tonnes), captive power plant (51 MW) and close availability of coal resulting in operational efficiencies and low logistic costs. Regional players enjoy strong entry barriers on account of political instability, geographical complexity and regulatory hurdles making it a supply deficit market with no additions to the existing capacities is in the pipeline. SFCL has invested heavily in dealer s network expansion and currently has presence in 11 states with a network of 2,3+ dealers and 8,7+ retailers. It distributes directly via dealers (77% sales contributed by trade segment), which has resulted in strong brand equity, deeper penetration, greater reach and higher market share. About 3-4% of revenue is spent on advertising. En-route to eastern market- Positive step for future growth NER contributes ~7% of SFCL cement output whereas eastern region market accounts for the rest ~3%. SFCL is leveraging its strong brand and distribution network to penetrate into markets of West Bengal, Bihar & Jharkhand which has a total cement market of about 53 MTPA (volumes from the eastern market have grown from 3% of the total volumes in FY13 to ~3% in FY15). Over the next two years, we expect a sharp uptick in volumes from eastern market backed by capacity addition of 1 MTPA grinding unit at Siliguri and aggressive advertisement. SFCL would get a freight subsidy of ~9% by expanding towards the Eastern Region, as opposed to ~5% freight subsidy within NER under NEIPP 27. Margins to scale up with better operating efficiencies & capacity utilization EBITDA margins have improved significantly from ~17.9% in FY13 to ~23.3% in 9MFY16 on account of better operating efficiencies, higher capacity utilization, fiscal incentives (Rs 6-65/tonne) and uninterrupted supply of raw materials enabling, SFCL to enjoy higher EBIDTA/tonne of Rs 1,8+ (higher by Rs 4-5/bag compared to other regional players) which is ~2x-3x the industry average. SFCL is set to increase its cement capacity utilization to ~74% by FY17E from ~65.4% in FY15, on its effective capacity of ~4.7 MTPA. SFCL is likely to maintain its margin supremacy over its peers, backed by improvement in cement realizations, moderation in operating cost & fiscal incentives benefit, and we expect SFCL's EBITDA margins to improve to ~25.3% by FY17E. Valuation With government s thrust on infrastructure development, leadership in NER with entry barriers, strong brand pull and pricing power coupled with robust distribution network, retail-centric business model, raw material security, enroute to eastern market, fiscal incentives benefit and enhancing return ratios, augurs well for SFCL. We have valued the stock on the basis of EV/EBIDTA of 6.5x of FY17E EBIDTA method of relative valuation. In view of the sharp correction in the share price to Rs 15 now, after a stupendous rally to a life time high of Rs 185 recently, we recommend a BUY on the stock with a target price of Rs 151/- (44% upside) in 15 months. SKP Securities Ltd Page 1 of 22

2 Industry Snapshot Indian Cement Sector (North Eastern & Eastern Market) India is the second largest cement manufacturer in the world with a cumulative installed capacity of nearly ~366 MTPA. Country s cement consumption from current ~263 MTPA is expected to grow at a CAGR of ~7.4% over FY14-17E vs a ~5.5% CAGR witnessed in FY11-14 backed by expected pick-up in the demand of housing and infrastructure segments, which accounts for ~6% and ~2% of total cement consumption. Per capita consumption of cement in India stands at ~21 kg vis-à-vis global average of ~365 kg, indicating a good potential for secular growth over medium to long term. The cement sector is all set to enter a cyclical upturn backed by (1) imminent project led demand recovery (2) subsiding of cost pressures and (3) improved demand-supply dynamics would further accelerate the sector's cyclical recovery. Presently, North East & Eastern market accounts for ~13% of installed capacity of cement in India i.e. ~48 MTPA. Regional per capita cement consumption is lowest in the country, highlighting good potential for growth coupled with pricing premium of over ~5 kg bag in the Region and renewed focus of GoI to kick start infrastructure projects in North East, augurs well for SFCL. Exhibit: Per capita cement consumption region-wise / state-wise States Bihar Jharkhand Orissa West Bengal Chhattisgarh NER Pan India Expected Consumption In FY16 (MTPA) Source: SKP Research; NER - North Eastern Region North East Region: % of total cement consumption 4% 2% 4% 6% 3% Per capita cement consumption (in kg) % Size and Growth Trends: In the last 5 years cement capacity in the North East Region (NER) has nearly doubled and is currently estimated at ~11 MTPA and cement consumption is expected to grow at a CAGR of ~1% over next five years vs. 7% CAGR witnessed in last 5 years. Pick-up in demand and better utilization is on account of GoI s thrust on infrastructure development, no major additional capacities in the pipeline (consolidation on cards as small players expected to be edged out eventually) and sustained reduction of cement arrivals from mainland players, gives additional advantage to existing players. Exhibit: North East Region - (Total Capacity and Demand) 15 77% 83% 75% 1 67% 63% 68% 11 6% FY11 FY12 FY13 FY14 FY15 FY16E FY17E NER Cement Capacity (MTPA) NER Cement Demand (MTPA) Capacity Utilisation (%) Source: Com pany, SKP Research 1% 5% % SKP Securities Ltd Page 2 of 22

3 Major Players and Market Share: Currently, in NER, there are only three major cement manufacturers: SFCL, Dalmia Bharat & Meghalaya cement. SFCL has been one of the earliest players with ~.4 MTPA capacity in Meghalaya. Over the years, it has increased its capacity manifold to ~2.9 MTPA in cement and 2.6 MTPA in clinker. Dalmia Bharat acquired Calcom and Adhunik cement and expanded Calcom s clinker capacity to become regional players with ~18% market share. Meghalaya cement is the third largest cement producer in NER with ~15% market share. Exhibit: Major Players - Installed Capacity Player Capacity (MMT) *CPP Brand Name Dalmia Bharat (Only NER Capacity) MW Dalmia Cement Star Cement MW Star Cement Meghalaya Cement MW Topcem Others Amrit,Max Cement Total Capacity - North East MW - Exhibit: Market Share - North Eastern Market Imports from Bangladesh, 9% Supplies from West Bengal, 1% Star Cement, 23% Others, 25% Dalmia Bharat, 18% Meghalaya Cement, 15% Source: Com pany, SKP Research; *CPP - Captive pow er plant NER - High entry barrier & supply deficit region: In FY15, cement demand in the NER was at ~6.6 MTPA and top 3 producers accounted for ~55-6% of total demand with capacity utilization levels at ~6%. Notwithstanding the region s superior limestone reserves coupled with coal availability, only few mainland cement companies have been able to set up local manufacturing units due to tangible entry barriers such as political instability, tough terrain and difficulty in land acquisition and mining approvals. Thus NER remains a supply deficit market due to lower regional capacity addition and gap is filled by imports from Bangladesh and supply from West Bengal. Going forward, we believe the supply from Bangladesh and West Bengal would reduce (import of cement from other states declined from 3% in FY12 to 1% in FY15) as players like SFCL and Dalmia Bharat ramp up their production. Opportunities & Demand Drivers GoI s thrust on infrastructure development in NER: Despite NER being extremely rich in terms of natural resources, rail & road connectivity has been one of the concerns for the government which has remained far behind as compared to other regions of India, leaving a significant socio-economic development gap with rest of India on parameters like per capita GDP and electricity consumption. To fill the gap, GoI has launched various infrastructure development projects in NER. SKP Securities Ltd Page 3 of 22

4 Exhibit: Central government s infrastructure development thrust in north eastern region Sector Roads Govt Initiative Special Accelerated Road Development for North East (SARDP-NE) and National Highway Development Programmes (NHDP) in NER for 1,141 kms, will result in over ~18-22 MT of cement demand in NER region over next few years. Furthermore, Minister of Road Transport and Highways of India will spend additional Rs15 bn on road projects in North East. Budgeted expenditure (Rs bn) 335 Airports Five airports sanctioned and eight more are in pipelines. Rs 5 bn investment is expected in next ~1 years. 5 Railways ~2 ongoing new line (Rs 33 bn for ~1,157 kms of rail network), gauge conversion (Rs 99 bn ~1,439kms of rail network) & double line (Rs21 Bn 1,4kms) projects in NER. 45 Largest Hydro power potential in India is in NER with ~98% still untapped, ~63, MW of Hydro Power Hydro Power capacity identified; ~14, MW already allotted to Pvt. Every ~1, MW of hydro power has the potential to generate cement demand of ~1 1.2 MT. Hence this itself - will mean incremental cement demand of ~7 75 MT in the longer term. Multitude of tax incentives for cement producers in the NER: To boost investments in NER region, the government had introduced fiscal incentives under the North East Industrial policy (NEIP) in 1997 for 1 years. In 27, Sikkim was also included under the new policy North East Industrial and Investment Promotion Policy (NEIIPP) to attract industrial investments in the region. Key benefits under NEIIPP 27 are as follows: All new and existing units that go in for substantial expansion, unless otherwise specified, and which commence commercial production within the 1 years from the date of notification of NEIIPP, 27 eligible for incentives for ten years from the date of commencement of commercial production. Incentives to all industrial units, new as well as existing units on their substantial expansion, located anywhere in NER. Consequently, the distinction between thrust and non-thrust industries made in NEIP,1997 discontinued from April1, 27. 1% Excise Duty exemption on finished products made in the NER continued, as was available under NEIP, Capital Investment Subsidy enhanced from 15% of investment in plant and machinery to 3% and the limit for automatic approval of subsidy at this rate at Rs.1.5 crores per unit, as against Rs.3 lakhs available under NEIP,1997. Interest Subsidy 3% on working capital loan under NEIIPP, 27 as was available under NEIP, Source: DIPP SKP Securities Ltd Page 4 of 22

5 Eastern Region: Size and Growth Trends: Total capacity of eastern market in FY15 was estimated at ~53 MTPA, with a capacity utilization of 77%. The region is expected to post a CAGR of ~12% over next ~2-3 years backed by capacity addition from the exiting players and significantly higher infrastructure spending especially in West Bengal where assembly elections are due. Further, the eastern region continues to be underpenetrated coupled with regional contribution of 15% to the total housing shortage in urban India, thereby implying potential for strong cement demand. Exhibit: Eastern Market- (Total Capacity, Production & Capacity Utlilisation) FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Total Capacity (MTPA) Total Production (MTPA) Capacity Utilisation (%) Major Players and Market Share: Currently in the Eastern region s top six cement manufacturers enjoys a market share of ~67% and top cement group (Lafarge Holcim) enjoy a market share of ~38%. Recently, Heidelberg Cement has announced the acquisition of Italcementi at a global level, which may result in consolidation of the group in India. Exhibit: Market Share & Installed Capacity - Eastern Market Market Share (%) - Eastern India Capacity- Eastern Market (MTPA) Others, 33% Lafarge, 15% Dalmia Bharat, 13% Shree Cement, 2. ACC, 6.2 Birla Corp, 7.5 UltraTech, 11.4 Lafarge, 5.2 ACC, 11% Ambuja, 12% Ambuja, 4.9 Dalmia Bharat, 8.8 Source: SKP Research SKP Securities Ltd Page 5 of 22

6 Capacity addition in the East: Cement players are planning to add ~22 MMT of capacity over the next 3 years, despite that utilization levels are likely to remain healthy. Shree Cement and JK Lakshmi, the new entrants over last six months in the region, are operating at utilisation levels of around 45-5%, planning to add 5.2 MMT & 2.7 MMT capacities respectively while Emami Cement, another new entrant is expected to commission its plant by next year. There has been increased supply from Ultratech and Star Cement in the market and Shree and JK Lakshmi Cement have been ramping up their market share with aggressive pricing. In H1FY16, prices in the region have moderated by INR5-2/bag. Exhibit:Capacity addition in Eastern region (In MTPA) & Utilisation rate - (%) Capacity addition in Eastern region (In MTPA) Ultratech- 3.2 Shree Shree-Bihar Star Cement 1 2 JK Lakshmi- 1 JK Lakshmi- Emami Dalmia- 1.5 Ambuja -.8 ACC FY18E FY17E FY16E Opportunities & Demand Drivers: Utilisation Rate (%) North Central East West South FY13 FY14 FY15 FY16E FY17E There is an uptick in government-related infrastructure spending in Odisha and Bihar and a significant pick-up in the private sector capex after a long halt. Over the next 2-3 years, government-led Housing for All projects coupled with upcoming state election in West Bengal will spur cement demand. Key opportunities in the eastern market are as follows. States West Bengal Expected Demand 15 MMT Opportunities States per capita cement consumption stands at 148kg Vs all India average of 27kg, huge potential for growth. Post monsoon, demand is expected to pick-up as government will increase its focus on from rural and urban housing, owing to huge under-investment in the past. Bihar 12 MMT Post elections, Bihar could see heightened activities in roads & highways construction sector. The Central government had already announced schemes worth US$16bn and special package of US$19bn for the state. Odisha 1 MMT The state has received higher budgetary allocation for Irrigation and Rural development and the state government is focused on low-cost housing under Housing for All scheme. SKP Securities Ltd Page 6 of 22

7 Company Profile Star Ferro & Cement Company (SFCL) was incorporated as a separate company in 211 and is the de-merged entity of Century Plywood, with demerger coming in effect from 1st April 212. SFCL is promoted by first generation entrepreneurs Mr. Sajjan Bhajanka (Chairman & MD), Mr. Sanjay Agarwal (Managing Director), Mr. Rajendra Chamaria (VC & MD) and ably supported by Mr. Sanjay Kumar Gupta (CEO) and Mr. Dilip Kumar Agarwal (CFO). Exhibit: Key Milestones The demerged entity had two major business verticals a) Cement and b) Ferro Alloys, contributing 88% and 12%, respectively to revenues in FY14. The Ferro Alloy vertical was demerged into Shyam Century Ferrous Ltd at a demerger ratio of 1:1 w.e.f SFCL has ~3.3 MTPA cement capacity in Meghalaya, Assam and West Bengal under its ~7.48% owned subsidiary Cement Manufacturing Company Ltd (CMCL). CMCL has a clinker capacity of.8 MTPA at Lumshnong (Meghalaya) with grinding capacity of ~3.3 MTPA (~.6 MTPA at Lumshnong, ~1.6 MTPA at Guwahati, Assam and leased capacity of ~.84 MTPA in West Bengal) and is adding ~1. MTPA of grinding unit in West Bengal. CMCL through its 1% subsidiary Megha Technical & Engineers Pvt. Ltd (MTEPL), has ~.67 MTPA grinding capacity at Lumshnong (Meghalaya) and power generation capacity of 9 MW (DG Set). CMCL holds ~87.5% in Star Cement Meghalaya Ltd (SCML), which has ~1.75 MTPA clinker capacity at Lumshnong (Meghalaya) and rest ~12.5% stake in SCML is held by MTEPL. CMCL also holds 51% stake in Meghalaya Power Limited (MPL) which operates 51 MW power plant. 21 Cement Manufacturing Company Ltd (CMCL) was incorporated in The plant commenced operations in 25 with capacity of.4 MTPA 28 Cement and clinker capacity increased to 1.6 MTPA and.6 MTPA respectively 21 Commenced 8 MW of power capacity 211 Star Ferro & Cement Company (SFCL) was incorporated as a separate company Cement capacity increased to 1.27 MTPA, and clinker capacity increased to.8 MTPA 213 Cement capacity increased to 2.9 MTPA and clinker capacity to 2.6 MTPA 214 SFCL entered into on-lease agreement with local cement grinding units in Siliguri and Durgapur (Total.84 MTPA capacity) Cement capacity increased to 3.7 MTPA 215 Power generation capacity increased to 51 MW The ferro alloy division has been demerged into Shyam Century Ferrous Ltd Source: Com pany, SKP Research SKP Securities Ltd Page 7 of 22

8 Exhibit: Company Structure (Key Subsidiaries/Associates) Star Ferro and Cement Ltd. Promoters 28.5 % 7.48 % 1 % Megha Technical & Engineers Pvt. Ltd. ('MTEPL') Cement Manuf acturing Comapny Ltd. ('CMCL') % *Grinding unit with capacity of.67 MTPA at Lumshnong * Power generation capacity of 9MW (DG Set) *Clinker manufacturing capacity of.8 MTPA at Lumshnong 51% Meghalaya Power Ltd. ('MPL) *Grinding Unit with capacity of.59 MTPA at Lumshnong *Grinding unit with capacity of 1.6 MTPA at Sonapur, Guwahati, Assam *Hired.7 mn ton grinding units in WB % Star Cement Meghalaya Ltd. ('SCML') *Clinker manufacturing capacity of 1.75 MTPA at Lumshnong *51 MW power plan *Rest of 49% Shareholding with Shyam Century Ferrous Ltd Business Segment and Revenue Mix: SFCL has three business segments viz. cement, clinker and others. Cement vertical contributes ~9%+ of total sales and ~88% of total EBIT whereas clinker and others vertical contributes ~8-1% of total sales. Exhibit: Revenue Mix (%) 1% % 95% 1% 12% 8% 9% % 85% 8% 9% 4% 83% 92% 75% FY13 FY14 FY15 Cement Clinker Others SKP Securities Ltd Page 8 of 22

9 Cement - Installed Capacity & Capacity Utilisation: SFCL, is the largest cement player in NER, with ~23% market share and a cumulative cement manufacturing capacity of ~3.7 MTPA. It has three manufacturing units in Meghalaya and one unit in Assam along with two hired units in West Bengal and sells cement under the brand name Star Cement. NER remains the supply deficit market due to lower regional capacity addition, political instability, regulatory hurdles and geographical complexity. To grasp the demand opportunity and lessen the region s dependence on import from other states, SFCL has increased its total cement capacity (Assam & Meghalaya) from ~1.27 MTPA in FY12 to ~2.9 MTPA in FY15, through setting up ~1.6 MTPA grinding unit in Assam and adding ~.6 MTPA at Meghalaya. Both these units were commissioned in Q4FY13, post which cement capacity in Meghalaya now stands at 1.26 MTPA. SFCL entered into on-lease agreement with local cement grinding units in Siliguri and Durgapur (total.84 MTPA), further increasing total capacity to ~3.7 MTPA. SFCL is also planning to add 1 MTPA grinding unit in West Bengal, which is expected to be operational by October 216. SFCL currently manufactures high grade ordinary portland cement (OPC), pozzolana portland cement (PPC) and other specialty grades required in infrastructure projects using state-of-the-art dry process rotary kiln technology. Exhibit: Cement - (Installed Capacity & Capacity Utilisation) % % % % % %* 74%* % 8% 6% 4% 2% FY11 FY12 FY13 FY14 FY15 FY16E FY17E -6 Cement Installed Capacity (TPA) Production (TPA) Capacity Utilisation (%) Source: Com pany, SKP Research, *Effective capacity utilization % Clinker- Installed Capacity & Capacity Utilisation: SFCL has increased its clinker capacity to 2.6 MTPA (~1.7 MTPA commissioned in Q4FY13) from.8 mt in FY12. The recent lease arrangement for grinding clinker in West Bengal will further increase CMCL s market expansion. Clinker s production grew at a CAGR of ~6% during FY13-15 and we expect this segment to maintain a share of ~7-1% in total sales over the next two years, on back of higher capacity utilization (current capacity utilization 61%). Currently, Bangladesh imports 1-15 MT of clinker annually as the country does not have its own supply of limestone. SFCL is exploring opportunities to export clinker from its north east plants. SKP Securities Ltd Page 9 of 22

10 Exhibit: Clinker - (Installed Capacity & Capacity Utilisation) 5 75% 68% 42 61% 54% % FY13 FY14 FY15 FY16E FY17E % 7% 6% 5% 4% 3% 2% 1% % Cement Installed Capacity (TPA) Production (TPA) Capacity Utilisation (%) Market Mix North Eastern Region Vs Eastern Market: Exhibit: Market Mix (%) Currently, NER contributes ~7% of its cement output whereas eastern region accounts for the rest ~3%. Within NER, Assam is the major market where it dispatches ~35%-4% of its cement volumes followed by Arunachal Pradesh, Meghalaya, Manipur, Mizoram, Tripura, Sikkim etc. In East region, West Bengal is the major market (accounts for ~24% of the volumes and 4% market share) followed by Jharkhand and Bihar. SFCL has started expanding its presence in eastern market (total market of ~53 MTPA) and over the next two years we expect a sharp uptick in volumes backed by capacity addition of 1 mn MT grinding unit at Siliguri (volumes from the eastern market have grown from 3% of the total volumes in FY13 to ~3% in FY15). Market mix (FY13) Market mix (FY14) Market Mix (FY15) East,3% East,21% East,3% North-East,97% North-East,79% North-East,7% SKP Securities Ltd Page 1 of 22

11 Fiscal Incentives leads to higher profitability: SFCL enjoys various fiscal benefits under NE industrial policy (NEIIPP 27) which includes 1% excise exemption, 1% income tax exemption, interest subsidy at 3% of working capital loan, transport subsidy, capital investment subsidy up to 3% of investment in plant & machinery. As a result, SFCL generates robust EBITDA/tonne which is almost ~2.x of pan-india level cement players. Exhibit: Fiscal Incentives leads to higher profitability Exemption Balance Exemption period** SCML CMCL-GGU CMCL-LMS MTEPL Income Tax 1% under Section 8 8 years 8 years - 2 years IE, subject to MAT Excise Duty on Clinker 75% 8 years - 2 years - Cement 75%/36%^ - ^8 years 2 years ^2 years Central Sales Tax 99% 5 years VAT 99%^^ 5 years Rs 275 Crs / 5 years - - Freight Subsidy Inward Within NER* 9% Outside NER 9% Freight Subsidy Outward 3 years 3 years Within NER* 5% Outside NER 9% Capital Investment Subsidy 3% of Investment in Plant & Machinery One time One time - - ^^At GGU unit, VAT exemption is 99% upto 2% of FCI ^ 75% for integrated units and 36% for standalone grinding units. *Freight subsidies are not available for intra-state movements; ** As on SKP Securities Ltd Page 11 of 22

12 Investment Rationale Leadership in North East region with strong brand pull, close proximity to raw materials and robust distribution network Leadership in North East region with pricing power Over the years, SFCL has emerged as the largest cement manufacturer in NER with ~23% market share and a total NER installed capacity of 2.9 mn MT (one integrated cement plant, one clinkerisation unit and two split grinding unit). The regional players enjoy strong entry barriers on account of political instability, geographical complexity and regulatory hurdles making it a supply deficit market with no new capacities in the pipeline. Presently, mainland companies bring cement in NER which results in high logistic cost coupled with demand supply mismatch which creates a high price-end market (cement arrivals in NER from mainland players has come down to 1% from 3%), allowing SFCL to enjoy its leadership position with better pricing power. Exhibit: Higher realisations Vs Peers backed by leadership position in NER Growing Market Share In NER (%) FY13 FY14 FY15 FY16E FY17E Sales Realization (Rs/Tonne) Source: Com pany, SKP Research Closer proximity to raw materials Cement is a localised industry due to low value and bulky end product. Proximity to source of raw material is imperative to keep the cost of cement at bay. SFCL enjoys the advantage of having its own captive limestone mines in Meghalaya (mines are located within 2-3 kms of the clinker units, providing uninterrupted supply of raw material) having reserves of 3 million tonnes, which is enough to meet all its raw material requirements (based on expanded capacity) for the next 7-8 years. Also, coal is readily available in close proximity (Assam and Meghalaya have large coal deposits), ensuring cost and operational efficiencies which provides strong back-up for Company s 51 MW power plants. Captive power ensures non-dependency on grid power and fly ash generated from power plant is used in cement plants at almost nil cost. Proximity to rich limestone source, availability of quality fuel at the doorstep and a presence in the market place has resulted in an edge in logistic costs. SKP Securities Ltd Page 12 of 22

13 Exhibit: SFCL locational advantage Source: Com pany, SKP Research Strong brand pull led by aggressive advertising campaigns The Company s greatest asset is the recall value of its brands among customers. This is largely driven by its aggressive but strategic brand spends over the last 3-4 years with consistent focus on quality. Currently, advertisement expense accounts for ~3-4% of total revenues. As a result, over the years SFCL has positioned Star Cement as a Tier 1 brand in NER. Star Cement followed by Dalmia Cements, commands premium pricing. Second grade cement brands sells at Rs 5-7 per bag discount, and C grade brands sell at Rs 2-3 per bag discount to Star Cement. Exhibit: Advertisement Expense (Rs Million) Advertisement Expense - As a (%) of Sales 4.% 3.7% 3.2% 3.3% % 3.% 2.4% % 1.% 161.% FY213 FY214 FY215 FY216E FY217E A&P Expense (Rs Millions) As a (%) of Net Sales Source: Com pany, SKP Research SKP Securities Ltd Page 13 of 22

14 Robust distribution network and retail-centric business model SFCL has heavily invested in dealer s network expansion to retain its premium position in NER and currently has its presence in 11 states with 2,3+ strong dealers and 8,7+ strong retail network. It distributes directly via dealers rather than through C&F agents which has resulted in deeper penetration, greater reach and higher market share. SFCL would achieve a freight subsidy of ~9% by expanding towards the Eastern Region, as opposed to ~5% freight subsidy within NER under NEIPP 27. Therefore, SFCL has steadily increased its sales presence outside NER (West Bengal, Bihar, and Jharkhand) to capitalize the freight subsidy. SFCL's business model is primarily retail driven, nearly 77% of its total product marketed to retail customers while only 23% is marketed through the discount-driven institutional network. Exhibit: Robust Dealer network growth & Sales Mix (%) 25 2 SFCL- A retail focus brand with 77% sales in the trade segment Non Trade, 23% FY12 FY13 FY14 FY15 FY16 NE WB, BH & JHK (Oct) Source: Com pany, SKP Research Trade, 77% En-route to eastern market - Positive step for future growth NER contributes ~7% of SFCL cement output whereas eastern region market accounts for the rest ~3%. SFCL is leveraging its strong brand and distribution network to penetrate into markets of West Bengal, Bihar & Jharkhand which has a total cement market of about 53 MTPA (volumes from the eastern market have grown from 3% of the total volumes in FY13 to ~3% in FY15). Over the next two years, we expect a sharp uptick in volumes from eastern market backed by capacity addition of 1 MTPA grinding unit at Siliguri and aggressive advertisement. Exhibit: Capacity addition details Capacity (MTPA) Subsidiaries Location Remarks Grinding Clinker CMCL Meghalaya - Lumshnong 59 8 MTEPL Meghalaya - Lumshnong 67 - Q4FY13 SCMIL Meghalaya - Lumshnong Q4FY13 CMCL Guwhati (Assam) 16 - Q4FY13 CMCL West Bengal 46 - On lease from Q3FY14-15 CMCL West Bengal - Durgapur 38 - On lease from Q3FY16 CMCL West Bengal 1 - Expected by October 216 Source: Com pany, SKP Research SKP Securities Ltd Page 14 of 22

15 Strong Financial performance: Cement volumes expected to grow at ~17.1% CAGR over FY15-17E Key drivers for revenue growth for SFCL going forward will be (1) GoI s thrust on infrastructure development in NER (2) en-route to eastern market with robust distribution network and retail-centric business model (3) superior brand mix and innovative marketing strategies and (4) strong entry barriers for new player in NER with no new capacities in pipeline. To grasp the demand opportunity and lessen the region s dependence on import from other states, SFCL has increased its total cement capacity from ~1.27 MTPA in FY12 to ~3.7 MTPA currently and is also planning to add 1 MTPA grinding unit in West Bengal, which is expected to be operational by October 216. Going forward, on the back of above demand drivers, we expect SFCL sales to grow at a CAGR of 19.3% during FY15-17E resulting into better capacity utilization and higher sales volume. Capacity utilization is expected to improve from 65% in FY15 to effective sub ~74% by FY17E and cement volumes to grow at ~17.1% CAGR over FY15-17E. Exhibit: Expect revenue CAGR of 19.3% during FY15-17E led by pick-up in sales volume ( T o n n e s P e r A n n u m) Capacity ramp-up drive sales volume CAGR of ~17.1% during FY15-17E FY13 FY14 FY15 FY16E FY17E Expect revenue CAGR of 19.3% during FY15-17E FY13 FY14 FY15 FY16E FY17E Cement Sales Volume Clinker Sales Volume Revenue (Rs Mn) Growth (%) Pricing premium, regional advantage and fiscal incentives drive EBITDA/Tonne of Rs 19+, 2x of industry s average Cement prices in the NER are among the highest in the country. Strong realisations led by tier 1 brand positioning and focus towards trade sales, tax benefits (excise duty & VAT benefits amounting to Rs 25-35/tonne), freight subsidy (subsidy of Rs 25-3/tonne) and proximity to raw materials (uninterrupted supply of limestone, coal & power) have helped SFCL to enjoy higher EBIDTA/tonne of Rs 1,8+ (higher by Rs 4-5/bag compared to other regional players) which is ~2x-3x the industry average. These benefits will continue for the next 3-8 years. During FY15, SFCL reported cement realizations of Rs 6,213/tonne and EBITDA/tonne of Rs 1,847/tonne. Going forward, on back of above factors we expect SFCL cement realisation to improve moderately by ~3% y-o-y during FY15-17E led by gradual improvement in utilisation rates SKP Securities Ltd Page 15 of 22

16 Exhibit: Cement EBITDA/tonne comparison EBITDA - 2x of industry s average x x 2.5x EBITDA/tonne to improve to Rs 192/t by FY17E % 25.3% FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 Cement Realisation (Rs/Tonne) EBITDA/Tonne (Rs) Star Ferro & Cement All India average EBITDA Margin (%) Consolidated EBITDA/PAT to grow at a CAGR of 8.8%/39.8% during FY15-17E We expect SFCL to post an EBITDA growth at ~8.8% CAGR over FY15-FY17E, backed by improvement in cement realizations, moderation in operating cost and fiscal incentives benefit. Net profit during the same period is expected to improve by ~1.95x on account of higher utilization rates amid stable capital charges and decline in interest cost. PAT growth will also be supported by increase in cash flow generation which will yield a higher treasury income over FY16-17E. Exhibit: EBITDA And PAT EBITDA And EBITDA Margin (%) PAT and PAT Margin (%) % 35% 3% 24.6% 25.3% 22% 25% 18% 2% FY13 FY14 FY15 FY16E FY17E 15% 1% 5% % % 61 1% 834 6% 6% FY13 FY14 FY15 FY16E FY17E 8% 9% 8% 7% 6% 5% 4% 3% 2% 1% % EBITDA (Rs Mn) EBITDA Margin (%) PAT (Rs Mn) PAT Margin (%) De-leveraging balance sheet with low capex commitment: Over the last few years, SFCL has reduced its net debt from Rs 829 crores in FY13 to Rs 672 crores in FY15, bringing down D/E ratio significantly to ~.7x in FY15 from ~.9x in FY14 on account of better operational performance and working capital management. SKP Securities Ltd Page 16 of 22

17 On account of better capacity utilization over the next two years, it is estimated to generate an operating cash flow of Rs 25 crore, which would be used to fund its major capex programme. Currently, SFCL is adding ~1 MTPA of grinding unit in West Bengal at a capex of Rs 19 crore and has leased ~.84 MTPA grinding unit in Siliguri and Durgapur. Furthermore, SFCL is also expected to receive Rs. 6 crore of subsidies over next two years. Thus, on back of limited capex commitment, we expect D/E ratio to come down to~.4x in FY17E. Exhibit: Debt/Equity And Interest Coverage Ratio 7.x 6.x 5.x 4.x 3.x 2.x 1.x.x Debt/Equity And Interest Coverage Ratio (x) 4.3x 2.7x 2.4x 2.4x 1.1x.9x.9x.7x.5x.4x FY13 FY14 FY15 FY16E FY17E Debt/ Equity (x) Interest Coverage Ratio (x). Peer Comparison: Exhibit: Peer Valuation Company Capacity* Mcap (Rs Mn) Revenue Revenue (Rs Mn) EBITDA Margin (%) PAT (Rs Mn) CAGR (%) FY13- FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 15 Dalmia Bharat Ltd % 2.% 13.6% 15.% % JK Lakshmi Cement Ltd % 18.6% 13% 13.7% % Ramco Cement Ltd % 22.9% 13.3% 17.1% % Birla Corp % 13.1% 7.4% 8.1% % Mangalam Cem % 15.9% 6.9% 8.6% % Sanghi Industries % 17.2% 17.2% 15.2% % Star Ferro Cement Ltd % 17.9% 21.7% 3.4% %,*Capacity in MTPA, Mcap as on Feb 24, 216 PAT CAGR (%) FY13-15 SKP Securities Ltd Page 17 of 22

18 Valuations Exhibit: Valuation Charts With government s infrastructure development thrust & strong entry barriers in NER, coupled with leadership in NER with strong brand pull and pricing power, robust distribution network, retail-centric business model, raw material security, en-route to eastern market, fiscal incentives benefit and enhancing return ratios, augurs well for SFCL. We have valued the stock on the basis of EV/EBIDTA of 6.5x of FY17E EBIDTA method of relative valuation. In view of the sharp correction in the share price to Rs 15 now, after a stupendous rally to a life time high of Rs 185 recently, we recommend a BUY on the stock with a target price of Rs 151/- (44% upside) in 15 month Rolling forward EV/EBITDA (x) chart 25 2 Rolling forward EV/MT ($) chart Dec-13 Feb-14 Ap r-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Ap r-15 Jun-15 Aug-15 Oct-15 Dec-15 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Daily EV/EBITDA Mean+1sd Mean EV/EBITDA Mean-1sd Daily EV/MT($) Mean+1sd Mean EV/MT($) Mean-1sd Risks & Concerns Sharp recovery in diesel prices can inflate cost pressures- Currently road freight accounts for ~8% of total freight cost, any sharp recovery in diesel prices could inflate costs pressures may hurt margins. Delay in project execution may lead to lower capacity utilizations- Any material delay in infrastructure project execution will lead to lower utilization of its existing capacity resulting to lower sales volumes and pricing power. Rollback of subsidy benefits under NEIIPP 27 - Currently, the company enjoys various fiscal benefits under NE industrial policy (NEIIPP 27). This includes 1% excise exemption, 1% income tax exemption, interest subsidy at 3% of working capital loan, transport subsidy, capital investment subsidy up to 3% of the investment in plant & machinery. Rollback of any such benefits could lead to a negative impact on margins. SKP Securities Ltd Page 18 of 22

19 Q2 FY16 Result Update Exhibit: Q3FY16 Result Review Figs. in INR M illion Particulars Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%) FY16-9M FY15-9M YoY (%) Net Sales 4, , % 3, % 11, , % Other Operating Income % Total Income 4, , % 3, % 11, , % Expenditure 3,37.3 2, % 2, % 8,86.6 6, % Material Consumed % % 1, , % (as a % of Total Income) 1.9% 14.1% 11.6% 11.3% 14.1% Purchase of Traded goods % % 1, % (as a % of Total Income) 9.6% 2.3% 8.6% 8.8% 1.2% Changes in Inventories & WIP 8. (325.4) % (163.9) % (332.3) (19.7) 74.3% (as a % of Total Income) 1.9% -9.6% -5.3% -2.9% -2.1% Employees Cost % % % (as a % of Total Income) 6.5% 7.3% 9.8% 7.1% 7.4% Other Expenses 2, , % 1, % 6,23. 4, % (as a % of Total Income) 49.8% 51.1% 57.6% 52.4% 49.% EBITDA , % % 2, , % EBITDA M argin (%) 21.4% 34.9% (1,35)Bps 17.7% 367 Bps 23.3% 3.4% (71)Bps Depreciation % % 1, , % EBIT % % 1,47.1 1, % Other Income % % % Interest Expense % % % Income from Forw ard Contracts Exceptional Items, net (4.8) (3.1) (2.5) Profit Before Tax % (79.1) % % Income Tax % % % Effective Tax Rate (%) 2.8% 7.1% % - 3.5% 13.2% - Profit After Tax (PAT) % (94.8) -43.6% % Minority interests (16.2) Profit After Tax (PAT) % (78.6) -336.% PAT M argins (%) 6.7% 7.5% (75)Bps -3.4% 976 Bps 6.95% 4.76% 218 Bps Diluted EPS % (.4) -336.% % Source: Company Data, SKP Research SKP Securities Ltd Page 19 of 22

20 Exhibit: Income Statement Figures in INR Million Exhibit: Balance Sheet Figures in INR Million Particulars FY14 FY15 FY16E FY17E Particulars FY14 FY15 FY16E FY17E Total Income 11, , , ,369.8 Share Capital Growth (%) 77.9% 21.9% 17.6% 21.1% Reserve & Surplus 6, ,578. 7, ,695.1 Expenditure 9, , , ,217. Shareholders Funds 6, ,8.2 7, ,917.2 Material Cost 2,95.7 1, , ,874. Total Debt 8,443. 6, ,15.6 5,145.6 Traded Goods , ,629.6 Minority Interest 2, ,23.9 3, ,81.4 Employee Cost , ,425.9 Liabilities & Provisions 4, , , ,315.5 Admin & Other Exp. 6,38.4 6, , ,286.7 Deferred Tax Liabilities EBITDA 2, ,35.7 4, ,152.8 Total Liabilities 22,72. 21, , ,546.3 Depreciation 1, , , ,116.7 Net Block inc. Capital WIP 12, , , ,682.2 EBIT , ,26. 3,36.1 Deferred Tax (Net) Other Income Non-Current Assets Interest Expense Inventories 1, ,91.4 1, ,679.2 Profit Before Tax (PBT) 76. 1, , ,384.1 Sundry Debtors 1, ,98. 3,26.2 4,441.2 Income Tax Cash & Bank Balance Profit After Tax (PAT) , , ,145.7 Other Current Assets - - Minority Interest Loans and Advances 6,37.4 6,82.3 7, ,149.9 Adj PAT (Post Minority) ,6.6 1,63.7 Non Current Investment Growth (%) -75.3% % 2.6% 62.% Other Non Current Assets Diluted EPS Total Assets 22,72. 21, , ,546.3 Exhibit: Cash Flow Statement Figures in INR Million Exhibit: Ratio Analysis Particulars FY14 FY15 FY16E FY17E Particulars FY14 FY15 FY16E FY17E Profit Before Tax (PBT) 76. 1, , ,384.1 Earning Ratios (%) Depreciation 1, , , ,116.7 EBITDA Margin (%) 21.7% 3.4% 24.6% 25.3% Finance Costs PAT Margins (%).5% 5.8% 6.% 8.% Chg. in Working Capital 1, ,89.2 2,16.7 2,26.5 ROCE (%) 4.4% 9.6% 1.2% 13.1% Direct Taxes Paid - (27.5) (149.1) (238.4) ROE (%).5% 7.% 8.4% 12.6% Other Charges - - Per Share Data (INR) Operating Cash Flows 1, ,61.7 1, ,257. Diluted EPS Capital Expenditure (1,173.2) (433.6) (874.8) (916.7) Cash EPS (CEPS) Investments BVPS Others - - 3,. 3,. Valuation Ratios (x) Investing Cash Flows (1,174.7) (42.3) 2,84.9 1,993.3 P/E Changes in Equity - - Price/BVPS Inc / (Dec) in Debt 49.1 (1,231.1) (2,2.) (2,9.) EV/Sales Dividend Paid (inc tax) (122.1) - (184.2) (184.2) EV/EBITDA Financing Cash Flows (585.2) (2,13.1) (3,84.2) (3,61.2) Dividend Yield (%).4% 1.% 1.% 1.% Chg. in Cash & Cash Eqv (16.4) Balance Sheet Ratios Opening Cash Balance Debt - Equity Balances with Banks - - Current Ratio Closing Cash Balance Fixed Asset Turn. Ratios SKP Securities Ltd Page 2 of 22

21 Notes: The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities. DISCLAIMER: This document has been prepared by SKP Securities Ltd, hereinafter referred to as SKP to provide information about the company(ies)/sector(s), if any, covered in the report and may be distributed by it and/or its affiliates. SKP Securities Ltd., offers broking and depository participant services and is regulated by Securities and Exchange Board of India (SEBI). It also distributes investment products/services like mutual funds, alternative investment funds, bonds, IPOs, etc., renders corporate advisory services and invests its own funds in securities and investment products. We declare that no material disciplinary action has been taken against SKP by any regulatory authority impacting Equity Research Analysis. 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The following Disclosure of Interest Statement, clarifies it further: SKP or its Research Analyst(s) engaged in preparation of this Report or his/her relative (i) do not have any financial interests in the subject company mentioned in this report (ii) one of the whole-time Director of the company owns less than 1% equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report (iii) do not have any other material conflict of interest at the time of publication of the research report. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. SKP Securities Ltd Page 21 of 22