CMP: INR110 TP: INR130(+17%) Buy Cement division set for a better 2HFY18

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1 BSE SENSEX S&P CNX 32,870 10,128 4 December 2017 Update Sector: Cement Prism Cement CMP: INR110 TP: INR130(+17%) Buy Cement division set for a better 2HFY18 TBK segment to see profitability improvement led by better product mix Stock Info Bloomberg PRSC IN Equity Shares (m) Wk Range INR 130 / 72 1, 6, 12 Rel. Per % -6/-10/-1 M.Cap. (INR b) 57.1 M.Cap. (USD b) 0.9 Avg Val, INRm 39.0 Free float (%) 25.1 Financials Snapshot (INR b) Y/E Mar 2018E 2019E 2020E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh. INR RoE (%) RoCE (%) P/E (x) P/BV (x) Shareholding pattern (%) As On Sep-17 Jun-17 Sep-16 Promoter DII FII Others FII Includes depository receipts Stock Performance (1-year) Prism Cement Sensex - Rebased Dec-16 Mar-17 Jun-17 Aug-17 Nov-17 We recently hosted Prism Cement (PRSC) at our Midcap Conference. Cement demand for the company is likely to grow 5% YoY in 2HFY18, led by resolution of the sand mining issue in UP, a favorable base of 2HFY18 (was impacted by demonetization) and strong growth from the underlying markets of UP/MP. Improved pricing in the central market driven by higher consolidation, limited supply addition and strong demand will result in a margins improvement for the cement division in 2HFY18/FY19. TBK segment should see a margins improvement in 2HFY18/FY19, led by its higher utilization, product mix improvement and new product launches. Led by a favorable base and a positive business outlook in both cement and TBK, we expect EBITDA CAGR of 29% over FY Cement demand to inch up in 2HFY18/FY19 PRSC s volumes fell ~3% YoY in 1HFY18 due to the ramp-up of JPA s assets and demand destruction in the underlying markets due to the sand mining ban in UP/Bihar (together constitute ~72% of its overall volumes). Our channel checks suggest that the sand mining ban issue in UP has been resolved, which bodes well for demand in the central market. Additionally, strong demand from the central region, led by the affordable housing program in MP and the infrastructure projects in UP, should result in significant increase in off take. Hence, we expect cement demand for PRSC to grow ~5% YoY in 2HFY18 v/s a decline of 3% YoY in 1HFY18. Margin improvement led by improved pricing We expect the cement segment s profitability to improve in 2HFY18/FY19 (v/s 1HFY18), led by improved pricing on the back of consolidation, limited supply addition and improved utilization in the central region. However, we expect some of these benefits to be negatively impacted by cost push in form of higher power & fuel cost (due to an increase in petcoke prices and coal prices). Better focus and product mix to drive profits for TBK TBK segment (standalone) has seen a sharp reduction in EBIT losses in 2QFY18 (from INR230m to INR50m), led by volume growth (v/s volume decline in previous quarters), a better product mix, and new product launches. We expect losses in TBK (standalone) to reduce further in 2HFY18 on improved volume growth and positive operating leverage. Abhishek Ghosh Research analyst (Abhishek.Ghosh@MotilalOswal.com); Pradnya Ganar Research analyst (Pradnya.Ganar@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Strong earnings CAGR over FY17-20E PRSC is likely to generate strong earnings CAGR over FY17-20, led by i) an improvement in cement profitability on the back of pricing improvement and positive operating leverage, and ii) a turnaround of TBK (standalone) due to positive operating leverage, a better product mix and an improved sales focus. Hence, we expect margin improvement of 5.6pp over FY17-20, which should drive EBITDA CAGR of 29%. Valuation view Our SOTP value for PRSC is INR130/share (EV of USD110/ton, 5x FY20E RMC EBITDA and 10x FY20E TBK EBITDA). PRSC is a pure play on a recovery in central India, which is likely to see strong improvement in profitability, driven by higher consolidation in the region over the last months. Additionally, the region is likely to see no meaningful capacity addition over the next months. However, there could be some pricing volatility over the next 2-3 quarters due to the ramp-up of JPA s assets. However, the key monitorable would be a turnaround in TBK profitability, which has also seen a marked improvement in 2QFY18. Maintain Buy. 4 December

3 Cement demand to look up in 2HFY18/FY19 PRSC serves the markets of UP, MP and Bihar. Demand in these markets had been subdued over the last six months due to the sand mining ban. As a result, PRSC has seen volumes decline by ~3% YoY in 1HFY18 due to the ramp-up of JPA s assets and demand destruction in the underlying markets due to the sand mining ban in UP/Bihar (which constitute ~72% of its overall volumes). Our channel checks suggest that the issue pertaining to the sand mining ban in state of UP has been resolved, which should bode well for demand in the central market. Infrastructure projects in UP should drive demand in the region. The government s Pradhan Mantri Awaas Yojana (Gramin) (PMAY (G)) program focuses on building 10m houses in the rural areas. States of Bihar, Uttar Pradesh and Madhya Pradesh contribute ~40% of the rural target of 10m houses. Exhibit 1: Bihar, Uttar Pradesh and Madhya Pradesh contribute ~40% of rural target Others, 24% Bihar, 17% Chhattisgarh, 6% Rajasthan, 7% Odisha, 11% West Bengal, 12% Uttar Pradesh, 12% Madhya Pradesh, 12% Source: Ministry of Rural Development Strong demand led by the affordable housing program in MP and the infrastructure projects in UP should result in sustainably strong demand from the region. Hence, we expect cement demand for PRSC to grow at ~5% YoY in 2HFY18, as against a decline of 3% YoY in 1HFY18. Exhibit 2: Cement demand for PRSC for 2HFY18 appears favorable Volumes (mt) YoY Growth(%) QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18E 4QFY18E Exhibit 3: Cement demand to grow at 5% for next 2-3 years for the company FY12-9% FY13 Volumes (mt) 7% FY14 11% FY15-6% FY16-2% FY17 YoY Growth(%) 5% 5% 5% FY18E FY19E FY20E 4 December

4 Exhibit 4: Utilization levels to improve for cement division Capacity (mt) Dispatch (mt) Utilization (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Source: Company, MOSL Margin improvement led by improved pricing We are fairly positive on the long-term prospects of the central market, given utilization improvement due to limited capacity addition. While JPA ramp-up by Ultratech might put some volume pressure in the short term, it should bode well for the players in the region over the medium-tolonger run, as JPA s premium pricing will result in an improved pricing environment. We expect profitability of the cement segment to improve in 2HFY18/FY19 v/s 1HFY18, led by improved pricing on the back of consolidation, limited supply addition and improved utilization. However, we expect some of the benefits of higher pricing to be negatively impacted by cost push in the form of higher power & fuel cost (due to an increase in petcoke and coal prices). Exhibit 5: EBITDA/t was impacted in 2QFY18 due to poor pricing EBITDA/ton (INR/t) Exhibit 6: Expect EBITDA/t to reach INR 964 by FY20 (INR/t) EBITDA/ton QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Better focus and product mix to drive profits for TBK segment TBK segment had witnessed a market share loss in FY17, which resulted in a sharp decline in its EBITDA. However, we expect a recovery in the market share and an improvement in margins, going forward, for the following reasons: Increase in capacity utilization, especially in owned manufacturing plants, should lead to improved operating leverage. 4 December

5 Prism Cement is focusing on expanding its product range and launching new products. It has started display centers in Guwahati, Kolkata and Chennai. The company is also revamping its sales team to generate demand through strong influencer connect. Various cost-management programs and initiatives have also been undertaken. TBK segment (standalone) has seen a sharp reduction in EBIT losses in 2QFY18 (from INR230m to INR50m), led by volume growth (v/s volume losses in previous quarters), a better product mix, and new product launches. We expect losses in TBK (standalone) to reduce further in 2HFY18 on improved volume growth and positive operating leverage. Exhibit 7: Display center in Chennai Exhibit 8: Display center in Chennai Strong earnings CAGR over FY17-FY20 PRSC is likely to generate strong earnings CAGR, led by: improvement in cement profitability on the back of pricing improvement and positive operating leverage Turnaround of TBK (standalone) due to positive operating leverage, better product mix and improved sales focus. Hence, we expect margin improvement of 5.6pp over FY17-20, which is likely to drive EBITDA CAGR of 29%. 4 December

6 Exhibit 9: Margins to improve by 5.6pp over FY17-20 EBITDA (INR mn) EBITDA margins(%) ,388 2,342 1,199 2,621 2,862 3,049 3,717 5,401 6,504 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Valuation view Our SOTP value for PRSC is INR130/share (EV of USD110/ton, 5x FY20E RMC EBITDA and 10x FY20E TBK EBITDA). PRSC is a pure play on a recovery in central India, which is likely to see strong improvement in profitability, driven by higher consolidation in the region over the last months. Additionally, the region is likely to see no meaningful capacity addition over the next months. However, there could be some pricing volatility over the next 2-3 quarters due to the ramp-up of JPA s assets. However, the key monitorable would be a turnaround in TBK profitability, which has also seen a marked improvement in 2QFY18. Maintain Buy. 4 December

7 Financials and Valuations Income Statement (Consolidated) (INR Million) Y/E March E 2019E 2020E Net Sales 47,427 49,443 55,718 51,684 49,607 51,984 54,953 55,506 Change (%) Total Expenditure 45,085 48,244 53,098 48,822 46,558 48,267 49,552 49,002 % of Sales EBITDA 2,342 1,199 2,621 2,862 3,049 3,717 5,401 6,504 Margin (%) Depreciation 1,598 1,766 1,368 1,841 1,918 1,479 1,642 1,712 EBIT ,252 1,021 1,131 2,238 3,759 4,792 Int. and Finance Charges 1,903 2,415 2,536 2,814 2,166 1,761 1,720 1,660 Other Income - Rec ,070 1,437 1,250 1,300 1,300 PBT bef. EO Exp , ,726 3,339 4,432 EO Expense/(Income) -16-1, PBT after EO Exp , ,726 3,339 4,432 Current Tax ,108 Deferred Tax Tax Rate (%) Reported PAT ,381 2,504 3,324 PAT Adj for EO items , ,381 2,504 3,324 Change (%) L/P Margin (%) Balance Sheet (INR Million) Y/E March E 2019E 2020E Equity Share Capital 5,034 5,034 5,034 5,034 5,034 5,034 5,034 5,034 Total Reserves 5,864 5,047 4,658 4,371 4,523 5,610 7,819 10,848 Net Worth 10,897 10,081 9,691 9,405 9,557 10,643 12,853 15,882 Deferred Liabilities Total Loans 16,084 18,333 18,828 18,524 16,308 16,308 14,308 9,308 Capital Employed 27,900 28,866 28,655 27,929 25,864 26,951 27,161 25,190 Gross Block 31,984 34,553 35,418 22,526 23,585 25,731 27,231 29,231 Less: Accum. Deprn. 11,890 13,607 14,935 2,092 3,693 5,173 6,815 8,527 Net Fixed Assets 20,094 20,946 20,483 20,433 19,892 20,558 20,416 20,704 Capital WIP Total Investments 3,782 3,473 3,378 3,296 3,819 3,819 3,819 3,819 Curr. Assets, Loans&Adv. 14,983 14,083 15,744 15,752 12,698 11,435 11,498 8,576 Inventory 4,674 4,622 5,500 4,717 3,997 4,747 4,919 4,637 Account Receivables 4,779 5,258 5,574 6,087 6,055 5,063 4,919 4,803 Cash and Bank Balance , ,540-1,454-3,844 Loans and Advances 5,155 3,679 3,873 3,797 1,979 3,165 3,115 2,981 Curr. Liability & Prov. 12,599 12,535 14,113 15,000 15,039 12,710 12,422 11,759 Account Payables 12,164 12,130 13,648 14,285 14,518 12,659 12,297 11,592 Provisions Net Current Assets 2,384 1,548 1, ,342-1, ,183 Appl. of Funds 27,900 28,866 28,655 27,929 25,864 26,951 27,161 25,190 E: MOSL Estimates 4 December

8 Financials and Valuations Ratios Y/E March E 2019E 2020E 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 (%) RoIC RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity Cash Flow Statement (INR Million) Y/E March E 2019E 2020E Oper. P/L before Tax ,252 1,021 1,131 2,238 3,759 4,792 Interest/Dividends Recd ,070 1,437 1,250 1,300 1,300 Depreciation 1,598 1,766 1,368 1,841 1,918 1,479 1,642 1,712 Direct Taxes Paid ,108 (Inc)/Dec in WC -2, ,233 2,609-3, CF from Operations 377 2,543 3,304 5,682 6,544 1,349 5,600 6,564 EO expense CF from Operating incl EO 353 2,410 3,620 5,448 6,185 1,349 5,600 6,564 (inc)/dec in FA -2,697-2, ,898-1,322-1,500-1,500-2,000 Free Cash Flow -2, ,693 18,345 4, ,100 4,564 (Pur)/Sale of Investments CF from investments -2,579-2, ,980-1,846-1,500-1,500-2,000 Issue of Shares (Inc)/Dec in Debt 3,401 2, , ,000-5,000 Interest Paid -1,903-2,415-2,536-2,814-2,166-1,761-1,720-1,660 Dividend Paid CF from Fin. Activity 1, ,578-3,657-4,373-2,056-4,014-6,954 Inc/Dec of Cash , , ,390 Add: Beginning Balance , ,540-1,454 Closing Balance ,568 1,119-1,540-1,454-3,844 E: MOSL Estimates 4 December

9 N O T E S 4 December

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