Madras Cements Ltd 9 th October, 2012 BUY

Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Madras Cements Ltd 9 th October, 2012 BUY CMP Target Price Rs.186.35 Rs.240.00 Madras Cements Ltd is the flagship company of the Ramco Group, a well-known business group of South India. It is headquartered at Chennai. The main product of the company is Portland cement. The company is the fifth largest cement producer in the country. BSE Code 500260 NSE Code MADRASCEM Market Cap (Rs Cr.) 4434.56 52 Week High/Low 197.60/96.05 Industry Cement Face Value Rs.1.00 Shares O/S 237969380 EPS 16.19 Book Value 86.15 P/E 11.51 P/B 2.16 Shareholding Pattern The company has registered decent numbers for the quarter ending March 2012. The company has reported a rise of 25.14% in its net profit at Rs 123.01 crore for the quarter, as compared to Rs 98.30 crore for the same quarter in the previous year. Total income from operations of the company has increased by 29.56% to Rs 995.27 crore for Q1FY13 compared to Rs.768.21 crore for the quarter ended June 30, 2011. The company posted a sharp growth of 21% in volumes depicting increased cement demand in its key markets i.e. Tamil Nadu, Karnataka and Kerala. Operating profit zoomed about 26% at Rs.312.70 crore as compared to Rs.248.38 crore clocked in the like quarter last year. Realizations too has improved about 7% in the quarter. EPS stood higher at Rs.5.17 as against Rs.4.13 in Q1FY12. The company has commissioned its 2 mtpa cement grinding capacity at Ariyalur which lead to 21.78% and 14% (y-o-y) rise in depreciation and power & fuel cost respectively. The revenue of the cement division stood at Rs.948.33 crore; up by 29.54% on a y-o-y basis. The revenue from its power(windmills) division rose by 27.65% at Rs.40.95 crore as compared to Rs.32.08 crore in year ago quarter. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With strong presence in South India, growing volumes and reducing costs and higher realizations; MCL growth prospects looks attractive. We believe Madras Cement Ltd. is trading at an attractive valuation at 10.62x and 9.37x of FY13EPS of Rs.17.55 and FY14EPS of Rs.19.89. We initiate a BUY on the stock with a target price of Rs.240 (appreciation of about 29%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

Business Details Madras Cements (MCL) was established in 1957, is part of Ramco Group, a well known business group of South India. It is based at Chennai. The company is the fifth largest cement producer in the country. Ramco Supergrade is the most popular cement brand in South India. Business area of the company: The main product of the company is Portland Cement manufactured through the five advanced production facilities spread over South India. The cement capacity is 10.49 million tons per annum. The company also produces Ready Mix Concrete and Dry Mortar products. In addition, the company also operates one of the largest wind farms in the country. Integrated Cement Plants Ramasamy Raja Nagar, Virudhunagar, Tamil Nadu Alathiyur, Ariyalur District, Tamil Nadu Ariyalur, Govindapuram, Ariyalur District, Tamil Nadu Jayanthipuram, Andhra Pradesh Mathodu, Chitradurga District, Karnataka Grinding Units Uthiramerur, Kanchipuram District, Tamil Nadu Valapady, Salem District, Tamil Nadu Kolaghat, Purba Medinipur District, West Bengal Packing Terminals Nagercoil Packing Unit, Kumarapuram, Aralvaimozhi, Kanyakumari District, Tamil Nadu Hyderabad Packing Plant, Pochampally Road, Malkapur, Nalgonda District, Andhra Pradesh Today Madras Cements Ltd is not only one of the most respected cement companies in the country but also leads in giving the best return for the investors. With a cement capacity of 10.49 millions tons per annum, the company is the fifth largest producer of cement in India. It is also one of the largest wind energy producer in the country with a capacity of 185.59 MW. For Private Circulation Only 2 Hem Research

Robust Industry outlook Cement is one of the core industries which plays a vital role in the growth and expansion of a nation. The industry occupies an important place in the Indian economy because of its strong linkages to other sectors such as construction, transportation, coal and power. India is the second largest producer of quality cement in the world. The cement industry in India comprises 139 large cement plants and over 365 mini cement plants. Currently, there are 40 players in the industry across the country. The demand for cement, being a derived one, depends mainly on the industrial activities, real estate business, construction activities and investment in the infrastructure sector. The industry is involved in production of several types of cement such as Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement, etc. They are produced strictly as per the Bureau of Indian Standards (BIS) specifications and their quality is comparable with the best in the world. After a strong growth in the first three months of the year 2012-13, the cement production grew by a slower five per cent in July 2012. Production stood at 190.5 million tonnes, 2.1 per cent lower than that in June 2012. In August 2012, the demand for cement is likely to have remained subdued due to monsoons. However, as the monsoons ends, the construction activity is likely to pick up. This is expected to push up demand for the commodity in the second half of the year. Cement production and despatches are likely to grow at similar pace of 7.5 per cent during the year. After remaining stable during July-August 2012, cement prices weakened in September 2012. Slow down in construction activity due to rains led to the fall in prices. The prices in most of the cities have fallen month-on-month with an exception of Chennai and Kolkata market where prices remained stable. CMIE expects prices to increase post monsoons as construction activity is likely to pick up. The cement industry has been on an expansion drive since the last two-three years. During the September 2012 quarter, four projects worth more than Rs.1,400 got commissioned adding a production capacity of around 4.3 million tonnes per annum (mtpa). Projects worth around Rs.8,700 crore are scheduled to be commissioned in the remaining part of the year 2012-13. Capacity addition is expected to accelerate in 2013-14. After discounting, it is believed that atleast a capacity of 31 mtpa will come in during the year. This will be at an investment of more than Rs.11 thousand crore. For Private Circulation Only 3 Hem Research

Cement demand started showing improvement in the second half of 2011-12 after showing modest growth in the first half of the year. CMIE expects demand to pick up in the second half of the year as construction activity is likely to gain pace post rains. Production is expected to grow by seven per cent during the October 2012-March 2013 period. Demand from individual and affordable housing segment will primarily boost cement demand as residential housing accounts for a huge 55-60 per cent of total demand for cement. Around 20-25 per cent of demand comes from the infrastructure segment. The government plans to speed up execution of infrastructure projects will augur well for the cement production. Thus, for the year 2012-13, cement production is expected to rise by 7.5 per cent to 240.8 million tonnes. Despatches are likely to rise at a similar pace as production. By March 2013, the industry s sales volumes are expected to cross 240 million tonnes. Cement realisations are also expected to improve during the year 2012-13 after recovering in the previous year. Realisations are expected to average 6.8 per cent per cent higher as cement makers are likely to pass on the rising input costs and higher manufacturing expenses to consumers. Cement is considered the most preferred building material and is used worldwide for all construction works such as housing and industrial construction, as well as for creation of infrastructures like ports, roads, power plants, etc. Aggregate sales of cement companies are estimated to have grown by 12.4 per cent in the September 2012 quarter. The growth is expected to be realisation driven as cement volumes are likely to have remain subdued due to monsoons. Thus, the second half of the year is likely to witness a volume growth of around seven per cent. Realisations are also likely to improve and aid the overall growth in sales. Thus, sales are expected to grow by 13-14 per cent during the December 2012 and March 2013 quarters. For the year 2012-13 as a whole, the industry is likely to post a sales growth of 14.9 per cent, backed by higher volumes and improved realisations. The industry is expected to show a marginal improvement in profitability in 2012-13. The initiatives provided by the Government of India to various infrastructure projects, road network and housing activities will provide required stimulus for the growth of cement industry in India. For Private Circulation Only 4 Hem Research

Power plant will reduce cost Madras Cements has lined up investments to the tune of Rs 300 crore for the FY13, of which Rs 225 crore will be utilised for setting up a thermal power project. In Ariyalur, the company had commissioned 20 MW thermal power plant in the first quarter of 2012-13. Another 25-MW power plant was also commissioned at Ramasamy Raja Nagar in Q1FY13; adding total 45MW. Increased in these power plants would help the company to lower its power and fuel cost effectively. It will further reduce the dependence of the company on grid. This would aid in cost reduction measure taken by the company and thus improving profitability. Capacity addition During Q1FY13, the company has commissioned 2 mtpa cement grinding capacity at Ariyalur taking its current capacity to 12.5 mtpa from 10.5 mtpa. This capacity addition would help the company in meeting increased demand of cement and support the volume growth and increased production. The Company expects to sustain and improve the output levels of all the units during FY13. The Company continues its endeavour for the sale of Blended Cement. At Salem Grinding Unit, the Company is in the process of installing a Roll Press for increasing the cement grinding capacity from the present level of 90 TPH to 230 TPH at a cost of Rs.60 crores. The project is expected to be commissioned in the year 2012-13. For Private Circulation Only 5 Hem Research

Standalone Profit & Loss Account Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Net sales 2804.89 2616.22 3256.74 3745.25 4344.49 Growth ----- -6.73% 24.48% 15.00% 16.00% Expenditure 1947.97 1987.45 2317.91 2700.33 3180.17 EBITDA 856.92 628.77 938.83 1044.93 1164.32 Growth ------ -26.62% 49.31% 11.30% 11.43% EBITDA margin 30.55% 24.03% 28.83% 27.90% 26.80% Other income 20.37 28.47 31.04 29.96 28.24 Depreciation & Amortisation 196.09 220.77 253.90 285.65 310.32 EBIT 681.20 436.47 715.97 789.23 882.24 EBIT margin 24.29% 16.68% 21.98% 21.07% 20.31% Interest 150.88 139.28 158.45 165.86 175.85 PBT 530.32 297.19 557.52 623.37 706.39 Tax 176.76 86.28 172.31 205.71 233.11 Adjusted PAT 353.56 210.91 385.21 417.66 473.28 Growth ------ (40.35) 82.64 8.42 13.32 Net Profit margins 12.61 8.06 11.83 11.15 10.89 Extraordinary item 0.11 0.07 (0.10) 0.00 0.00 Reported PAT 353.67 210.98 385.11 417.66 473.28 Equity Capital 23.80 23.80 23.80 23.80 23.80 Res. & Surplus 1534.36 1710.71 2026.58 2,372.84 2,762.82 Equity Shares 23.80 23.80 23.80 23.80 23.80 EPS 14.86 8.86 16.19 17.55 19.89 Ratios Particulars FY10 FY11 FY12 FY13E FY14E Return on Equity 22.69 12.16 18.79 17.43 16.98 Return on Capital employed 16.52 9.64 15.04 15.56 16.42 Debt/Equity 1.65 1.61 1.32 1.12 0.93 Asset turnover 0.53 0.46 0.54 0.58 0.64 Current Ratio 2.08 1.86 1.77 1.78 1.81 Book value per share 65.48 72.88 86.15 100.70 117.08 For Private Circulation Only 6 Hem Research

Balance Sheet Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Share Capital 23.80 23.80 23.80 23.80 23.80 Reserves & Surplus 1534.36 1710.71 2026.58 2,372.84 2,762.82 Shareholders funds 1558.15 1734.51 2050.38 2396.64 2786.62 Borrowings 2566.51 2791.17 2710.41 2675.18 2586.01 Minority Interest 0.00 0.00 0.00 0.00 0.00 Deferred tax Liability 585.10 589.00 649.18 649.18 649.18 Sources of funds 4709.76 5114.68 5409.97 5721.00 6021.81 Gross block 4,811.14 5,291.23 5,866.61 6347.88 6896.02 Accumulated Depreciation 1,118.62 1,319.83 1,573.73 1,859.38 2,169.70 Net block 3692.52 3971.40 4292.88 4488.50 4726.32 Capital work in progress 317.70 545.65 527.55 568.25 593.28 Investments 88.74 88.82 88.74 107.91 115.85 Projects in progress 0.00 0.00 0.00 0.00 0.00 Inventories 412.54 392.28 491.09 545.92 556.85 Sundry debtors 155.51 182.67 211.10 234.87 248.95 Cash and bank balance 35.60 40.01 47.49 57.13 62.89 Other current assets 0.00 0.00 0.00 0.00 0.00 Loans and advances 532.01 483.80 399.39 431.66 441.55 Total current assets 1,135.65 1,098.76 1,149.07 1,269.58 1,310.24 Deferred tax asset 0.00 0.00 0.00 0.00 0.00 Current liabilities and provisions 546.24 589.95 648.27 713.25 723.89 Net current assets 589.41 508.81 500.80 556.33 586.35 Misc exp 21.39 0.00 0.00 0.00 0.00 Uses of funds 4,709.76 5,114.68 5,409.97 5,721.00 6,021.80 For Private Circulation Only 7 Hem Research

Quarterly Financial Highlights Rs. Crore Particulars Q1FY13 Q1FY12 Q4FY12 YoY% QoQ% Revenues 995.27 768.21 940.23 29.56 5.85 Expenditures 682.57 519.83 712.32 31.31 (4.18) Operating Profit 312.70 248.38 227.91 25.90 37.20 Adjusted Net Profit 123.01 98.30 99.19 25.14 24.01 OPM% 31.42 32.33 24.24 (91bps) 718bps NPM % 12.36 12.80 10.55 (44bps) 181bps EPS 5.17 4.13 4.17 25.18 23.98 Past Price movement of the stock For Private Circulation Only 8 Hem Research

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