Cement: excess supply to touch 100mn MT in FY15E

Cement Excess supply to touch 100mn MT in Mangesh Bhadang + 91 22 4088 0381 Tushar Manudhane + 91 22 4088 0392 September 27, 2013 September Friday, September 27, 2013 27, 2013 Cement: excess supply to touch 100mn MT in 1

Excess supply to touch 100mn MT in - iew: lower demand growth will ensure delays in recovery of cement cycle Cement industry in India is witnessing the longest streak of excess capacity addition starting from FY08 up to during which approximately 240mn MT of capacity is getting commissioned. In the last decade cement industry in India has put up capacity which is 1.5x its installed base in FY03. As a result, excess capacity in the country is likely to cross 100mn MT in which will put pressure on prices and margins. Unlike previous cycles, excess capacity has not resulted in a sharp decline in profitability probably because of better balance sheets and production discipline till now. However, we believe that persistent excess supply will create pricing pressures thereby weakening the margins. We remain UNDERWEIGHT on the sector with Ambuja Cements (ACEM IN) as our top SELL and GRASIM as our top BUY idea. Unabated growth in supply will depress margins for cement sector: We expect 65mn MT of capacity addition during FY14-16E which we believe will take excess capacity in the system to 100mn MT by and is expected to exert pressure on prices and margins. We expect no improvement in profitability for the cement sector as the excess capacity buildup will take 3-4 years to average out during which prices will remain volatile and discipline will be under pressure. Recent price hikes are not a precursor to better pricing power: While we do admit that pricing has improved in various micro markets, we believe that volatility in prices has also increased which has resulted in lower margins. The recent rise in cement prices can not be considered as pricing power as its done merely to pass on the increased costs whereas return ratios have declined. Given the current replacement cost of cement plant, we expect that cement companies will have to report EBITDA / MT in excess of Rs1850 to deliver ROCE in excess of 12%. Leverage which plays a key role in containing excess supply build up is still low at 0.9x as on : Leverage plays a key role in cement cycles by containing supply and thereby resulting in better prices and profitability. However, despite addition of massive capacity, balance sheet of cement companies have remained strong with aggregate debt:equity ratio of 0.9x. Key reason for the same is the entry of new players, better cash earnings from existing plants and spate of brown-field expansions. We believe that better balance sheets will continue the gush of cement capacities beyond resulting in a delayed recovery cycle. South and East region to be worst affected by excess supply: Based on our analysis, we believe that south and East are the two regions which will be affected the most on account of excess supply and lower demand, Pricing will remain volatile across all regions as supply starts finding new markets in different regions as either local demand dries up or prices in other markets are attractive. Valuations still in contrast with fundamentals: Given the macro conditions, seasonally weak construction activities and political logjam we believe that demand growth is expected to remain muted which will limit the pricing growth thereby impacting margins in a rising cost scenario. We reiterate our UNDERWEIGHT rating on the sector as we believe that earnings will remain under pressure until visible improvement in demand growth. Grasim (GRASIM IN) is our top BUY whereas Ambuja Cements (ACEM IN) is our top SELL idea. 2

Table of content Excess supply to touch 100mn MT in : excess supply will ensure delays in recovery of cement cycle 4 Utilization will remain benign at 73% even in : demand growth key to improved utilization 5 Supply has increased exponentially in the past decade: industry has added 1.5x its FY03 capacity in the last decade 6 Where is the pricing power?: growth in realization has offset the rising costs but margins still lower 7 Balance sheet of cement sector still strong: better balance sheets will ensure the gush of capacities in future 8 Margins still have room to correct: persistent supply pressures will put margins under stress 9 ROCE is a function of utilization rates: return ratios to remain subdued on lower utilization levels 10 Demand growth expected to pickup in line with GDP: demand will not be higher as GDP growth is expected to be moderate 11 Pricing has to go up substantially to improve return ratios: new capacities will make single digit ROCE despite EBITDA/MT of Rs1,500 12 Impact of Land acquisition act to be negligible in medium term: LARR will impact capacities coming up post FY17 14 India cement demand-supply model: demand to bottom in as capacity crosses 400mn MTPA in 15 Regional demand supply dynamics: South and East victims of aggressive capacity creation 16 FY14 earnings likely to see further downside: weak demand will limit pricing uptick to offset rising costs 21 Valuations still in contrast with fundamentals: awaiting demand growth to resume to turn positive on the sector again 22 Absolute and relative stock performance 23 Valuation summary 24 3

FY07 FY08 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Excess supply to touch 100mn MT in - iew: excess supply will ensure delay in recovery of cement cycle Longest period of excessive capacity at play 110 90 Excess supply (mn MTPA) Excess supply as % of existing capacity 85 93 100 104 30% 25% 70 67 72 20% 15% 50 30 10 10 10 12 15 18 23 15 20 25 25 25 24 12 6 (0) 17 32 5% 0% -10-5% Source: Company data, quant Global Research estimates After FY07 demand to be higher than supply in FY16, a gap of 9 years 50 45 40 35 30 25 20 15 10 5 0 8.8 26.3 28.2 45.7 24.5 Source: Company data, quant Global Research estimates 28.5 22.0 Incremental demand (mn MT) Incremental supply (mn MT) 23.2 26.4 15.0 Unabated growth in supply will continue to depress margins for cement sector: We expect 65mn MT of capacity addition during FY14-16E which we believe will take excess capacity in the system to 100mn MT by and is expected to exert pressure on prices and margins. We expect no improvement in profitability for the cement sector as the excess capacity buildup will take 3-4 years to average out during which prices will remain volatile and discipline will be under pressure. Incremental demand to be higher than supply only in : Cement sector is likely to witness the longest duration of capacity creation starting from FY08 till. During all these years, incremental supply was higher than incremental demand which led to subdued utilization levels. will be the first year after FY07 to report higher demand than supply. 4

FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Utilization will remain benign at 73% even in - iew: demand growth key to improved utilization Longest streak of addition of excess supply from FY08 to to keep utilizations lower 30 Excess supply addition over demand (mn MT) 25 27.2 20 15 11.5 Earlier cement bull run of FY08-09 was fuelled by 5 years of excess demand over supply 13.5 14.7 14.8 14.2 13.0 10 5 0 0.0 1.5 3.9 1.8 5.5 3.1 7.2 2.7 8.7 8.7-5 -10-15 (13.3) (6.2) (2.2) (8.8) (4.5) Extraordinarily high capacity addition in following years has created a massive imbalance which will need 2-3 years to correct (6.2) -20 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% 85% 85% 84% 82% 81% 78% 87% 82% 81% 82% 83% 85% 91% 96% 101% 92% 87% 76% 76% 74% 73% 72% 73% Source: Company data, quant Global Research estimates 5

FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Supply has increased exponentially in the past decade - iew: industry has added 1.5x its FY03 capacity in the last decade All India installed cement capacity at year-end to cross 400mn MTPA in FY16 500 450 400 350 300 250 All india year end installed capacity (mn MTPA) India added 106 mn MT capacity from FY93 to FY07 at a CAGR of 7.4% Capacity addition in FY07 to is 175 mn MT at 12.6% CAGR. demand growth during the period was lower at 7.3% CAGR While capex will slow down in next three years, the addition of 65mn MT capacity is still higher than incremental demand 223 269 293 322 344 367 393 408 200 150 100 62 66 71 81 89 101 109 108 119 135 138 146 152 160 169 195 50 0 Exponential increase in capacity from FY07-13 leading to supply excesses: Cement industry in India added 175mn MT from FY07-13 at CAGR of 12.6% which has resulted in massive capacity build up. This has coincided with extremely low demand in last 2 years which has further aggravated the problems of cement industry. Based on announced capex, the industry is likely to add 65mn MT capacity which is likely to delay the up-cycle for cement sector. The cumulative capacity addition in the last decade is 1.5x its existing capacity in FY03. Source: Company data, quant Global Research estimates 6

FY1993 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 CY2005 CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 Where is the pricing power? - iew: growth in realization has offset the rising costs but margins still lower Cost inflation has led to pricing growth 30 Growth in realization (y-y, %) 25 Growth in operating costs (y-y, %) 20 15 Rise in realizations since 2010 does not signal return of pricing power as costs have risen at much faster pace 10 5 0-5 -10-15 Pricing power still a function of utilization and not production discipline: Earlier, cement up cycles were a function of lower utilization levels and higher demand which lead to better prices as well as profitability. However, the last few years have been an exception as despite lower utilization levels, prices have remained sturdy. While we do admit that pricing discipline has prevailed in various micro markets for a prolonged period, we believe that volatility in prices has also increased which has resulted in negative earnings surprise. The recent rise in cement prices can not be considered as pricing power as margins during the period did not improve nor did return ratios. The pricing increase has offset the rising operating costs for the sector. Given the current replacement cost of cement plant, we expect that profitability has to improve substantially to deliver ROCE in excess of 15%. Note: data pertains to ACC and Ambuja on cumulative basis; Source: Company data, quant Global Research 7

FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Balance sheet of cement sector still strong - iew: better balance sheets will ensure the gush of capacities in future Aggregate debt:equity of 1.0x is still lower than historical average suggesting room for further capacity addition 50 Capacity addition in a year (mn MT) Cement industry aggregate debt:equity ratio (RHS) 45 1.8 1.7 1.6 1.7 40 1.6 46 1.9 1.7 35 1.5 1.5 1.5 1.4 1.5 30 25 20 15 10 5 2 4 1.1 6 0.9 10 1.3 7 12 8 11 16 3 9 1.2 6 0.9 8 9 0.7 26 0.6 28 29 24 0.6 0.6 0.6 0.6 22 0.9 1.3 1.1 0.9 0.7 0 0.5 Leverage which plays a key role in containing excess supply build up is still absent: We believe leverage plays a key role in cement cycles by containing supply and thereby resulting in better prices and profitability. However, despite addition of massive capacity, balance sheet of cement companies have remained strong. Key reason for the same is the entry of new players, better cash earnings from existing plants and spate of brown-field expansions. We believe that better balance sheets will continue the gush of cement capacities beyond resulting in a prolonged recovery cycle. Source: Capitaline, Company data, quant Global Research 8

FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Margins still have room to correct - iew: persistent supply pressures will put margins under stress Despite lower utilizations, margins have not reached previous cycle lows; however, persistent supply pressure will hit margins in future 20% Aggregate NPM (%) -5% 15% Excess supply as % of existing capacity (RHS, inverse scale) 0% 5% 5% 15% 20% 0% 25% -5% 30% Despite large excess capacity NPM has not tested earlier lows: While NPM of cement sector is currently at a 8 year low, it is still far from the lows of earlier cycles, despite historically low utilization. This can be attributed in part to better production discipline, lower interest costs (as leverage is not high) and high cash earnings from existing plants. We believe that maintaining NPM at higher levels will be difficult for a prolonged period unless demand growth improves. Source: Capitaline, Company data, quant Global Research estimates 9

FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 ROCE is a function of utilization rates - iew: return ratios to remain subdued on lower utilization levels Sector ROCE has declined in line with the utilization rates 105% All India utilization rates Aggregate ROCE (%) 30.0% 100% 24.7% 25.0% 95% 90% 85% 13.6% Despite rise in utilization rates, ROCE didnt improve during this period as pricing was lower for two consecutive years 17.1% 20.4% 16.2% 14.3% We expect sector ROCE's to remain in 9-12% range for FY14-16E 20.0% 15.0% 80% 75% 10.3% 11.0% 11.4% 8.2% 5.9% 6.7% 6.9% 7.4% 7.4% 5.8% 6.7% 9.1% 8.8% 10.4% 9.6% 10.0% 70% 5.0% 65% 82% 85% 85% 84% 82% 81% 78% 87% 82% 81% 82% 83% 85% 91% 96% 101% 92% 87% 76% 76% 74% 73% 72% 73% 0.0% ROCE not expected to improve on lower industry utilization rates: Aggregate ROCE for the sector has seen a gradual decline from the peak of FY07. this perfectly coincides with the peak utilization rates seen in that year. We expect utilization rate to remain subdued for a longer period which coupled with higher capex costs will lead to deterioration in ROCE for the sector. Return ratios and valuation multiples are currently contradicting each other for certain stocks which we believe will correct through persistent lower utilization rates.. Source: Capitaline, Company data, quant Global Research estimates 10

FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Demand growth expected to pickup in line with GDP - iew: demand will not be higher as GDP growth is expected to be moderate Demand to bottom out in FY14, but recovery is expected to be gradual 16% Cement demand growth India GDP growth (%, constant prices) Cement demand growth to GDP growth multiple (X, RHS) 2.5 14% 12% 8% 6% 4% 5.7% 6.4% 7.3% 8.0% 4.3% 6.7% 8.0% 4.1% 5.4% 3.9% 8.0% 7.1% 9.5% 9.6% 9.3% 6.7% 8.6% 9.3% 6.2% We have assumed Cement demand to GDP growth multiple of 1.2x in 5.0% 4.9% 6.0% 2.0 1.5 1.0 0.5 2% 0% 7.0% 7.5% 10.6% 8.4% 9.6% 6.8% 14.7% -0.5% 9.7% 8.5% 5.6% 6.8% 13.1% 9.4% 8.3% 8.1% 10.2% 4.8% 6.8% 5.9% 4.3% 7.1% 8.0% - -2% (0.5) Source: RBI, Company data, quant Global Research estimates 11

Pricing has to go up substantially to improve return ratios - iew: new capacities will make single digit ROCE despite EBITDA/MT of Rs1,500 Scenario analysis on impact of EBITDA per tonne on return ratios (Rs mn) Assuming Rs700 EBITDA per tonne Assuming Rs1000 EBITDA per tonne Assuming Rs1500 EBITDA per tonne Current scenario 3 years back Current scenario 3 years back Current scenario 3 years back Replacement Cost (US$) 150 100 150 100 150 100 Total cost 9,300 4,800 9,300 4,800 9,300 4,800 Debt 5,580 2,880 5,580 2,880 5,580 2,880 Equity 3,720 1,920 3,720 1,920 3,720 1,920 EBITDA per tonne (Rs) 700 700 1,000 1,000 1,500 1,500 Depreciation cost 372 192 372 192 372 192 EBIT 328 508 628 808 1,128 1,308 Interest cost 670 259 670 259 670 259 PBT (342) 249 (42) 549 458 1,049 tax 62 (10) 137 115 262 PAT (342) 187 (31) 412 344 787 ROCE (%) 2.6 7.9 5.1 12.6 9.1 20.4 ROE (%) (9.2) 9.7 (0.8) 21.4 9.2 41.0 ASSUMPTIONS Exchange rate (Rs/$) 62 48 62 48 62 48 Depreciation rate 4% 4% 4% 4% 4% 4% Interest rate 12% 9% 12% 9% 12% 9% Tax rate 25% 25% 25% 25% 25% 25% New capacities will take much longer to generate better returns: We have done a scenarios analysis to understand how much the profitability has to improve to generate decent ROCE for a new cement plant. Based on our analysis, we find that a new capacity will generate single digit ROCE despite making Rs1500 EBITDA / MT. To make 12% ROCE, the plant has to generate EBITDA / MT of Rs1,855 which is far from reality in the current scenario. Even to make EBITDA / MT of Rs1,500, the cement prices have to reach Rs330/ 50 Kg bag on an all India average basis from current Rs280 (assuming constant costs). Source: quant Global Research estimates 12

Bull, bear and base case demand assumptions - iew: bull case utilization in at 76.8% not significant Scenario analysis on impact of EBITDA per tonne on return ratios Bear case Capacity 293.3 321.8 343.7 366.9 393.3 408.3 Production 210.7 223.7 236.8 247.0 260.3 277.7 Consumption 209.3 223.6 236.8 247.1 260.6 278.1 Demand growth 6.8% 5.9% 4.3% 5.5% 6.7% Utilization (%) 76.1 75.7 73.6 72.7 71.3 71.1 Pricing growth 0% 14% 8% 6% 6% 6% Cost growth 11% 12% 8% 5% 7% 7% Base case Capacity 293.3 321.8 343.7 366.9 393.3 408.3 Production 210.7 223.7 236.8 247.0 264.4 285.5 Consumption 209.3 223.6 236.8 247.1 264.7 285.9 Demand growth 6.8% 5.9% 4.3% 7.1% 8.0% Utilization (%) 76.1 75.7 73.6 72.7 72.5 73.1 Pricing growth 0% 14% 8% 6% 8% 8% Cost growth 11% 12% 8% 5% 7% 7% Bull case Capacity 293.3 321.8 343.7 366.9 388.3 400.3 Production 210.7 223.7 236.8 247.0 268.5 291.9 Consumption 209.3 223.6 236.8 247.1 268.7 292.3 Demand growth 6.8% 5.9% 4.3% 8.8% 8.8% Utilization (%) 76.1 75.7 73.6 72.7 74.6 76.8 Pricing growth 0% 14% 8% 6% 9% Cost growth 11% 12% 8% 5% 7% 7% Even after assuming higher demand growth and lower supply in FY16, utilization will still remain lower at 76.8% which will limit pricing growth in our view. Source: quant Global Research estimates 13

Impact of Land acquisition act to be negligible in medium term - iew: LARR will impact capacities coming up post FY17 Key highlights of Land acquisition bill related to land purchase for a cement plant: Both LA and R&R Provisions will apply when Government acquires land for immediate and declared use by private companies for public purpose Only R&R provisions will apply when Private companies buy land for a project, more than 100 acres in rural areas, or more than 50 acres in urban areas. Minimum R&R entitlements include: an additional subsistence allowance of Rs.36,000 for the first year, an additional entitlement of a job to the family member, or a payment of Rs.5,00,000 up front, or a monthly annuity totaling Rs.24,000 per year for 20 years with adjustment for inflation the option from these three choices shall be the legal right of the affected land owner family, not the land acquirer an additional upfront compensation of Rs.50,000 for transportation an additional upfront resettlement allowance of Rs.50,000 if the land owner loses a home in a rural area, then an additional entitlement of a house with no less than 50 square meters in plinth area Why LARR Act will not affect cement company s capex plans in medium term? A greenfield cement plant can take anywhere between 4-6 years from conceptualization to commissioning which means that the capacities coming up over the next three years have already acquired the land for the project. The companies with brownfield capex potential have already acquired the land required for mining in the adjoining area to the existing mine which limits the requirement of additional land purchases. Over a longer term (capacities coming up post FY17), we expect LARR to be a serious impediment for companies with greenfield capex plans as cement plants generally require large tracts of land. 14

India cement demand-supply model - iew: demand to bottom in as capacity crosses 400mn MTPA in India regional demand supply model (mn MT) FY07 FY08 Capacity North 41.5 52.7 59.2 76.4 84.2 87.5 94.5 98.6 106.5 112.2 East 25.0 28.7 29.9 37.2 37.9 43.1 47.4 55.2 60.2 65.2 South 54.6 61.9 80.4 99.2 101.6 116.1 120.9 125.3 131.8 134.5 West 47.5 51.6 53.6 55.9 69.6 75.0 81.0 87.8 94.8 96.3 All India (year end) 168.6 194.9 223.1 268.8 293.3 321.8 343.7 366.9 393.3 408.3 Capacity not in production 4.4 4.4 5.8 3.8 2.3 2.3 5.3 5.3 5.3 5.3 All India wt avg capacity 161.1 167.3 198.0 231.2 276.8 295.4 321.9 339.8 365.0 390.3 Capacity growth (%) 5.2 3.9 18.4 16.8 19.7 6.7 9.0 5.6 7.4 7.0 Production North 37.2 41.8 47.2 55.3 61.4 66.7 71.2 73.5 78.3 84.5 East 12.6 23.8 26.0 29.4 31.6 32.8 34.4 36.2 39.0 42.1 South 49.8 54.2 59.9 65.2 66.1 67.2 69.9 73.4 78.2 84.4 West 55.6 48.5 48.5 51.3 51.5 56.9 61.3 63.9 69.0 74.5 All India 155.3 168.3 181.6 201.1 210.7 223.7 236.8 247.0 264.4 285.5 Production growth (%) 9.5 8.4 7.9 10.8 4.7 6.2 5.9 4.3 7.1 8.0 Utilization North 93.7 88.6 84.4 81.6 76.5 77.7 78.2 76.2 76.3 77.3 East 91.5 111.2 88.8 87.5 84.1 81.0 76.1 70.5 67.6 67.1 South 94.5 93.1 84.2 72.6 65.8 61.7 59.0 59.6 60.8 63.4 West 96.2 88.3 92.2 93.6 82.1 78.7 78.6 75.7 75.6 78.0 All India 96.4 100.6 91.7 87.0 76.1 75.7 73.6 72.7 72.5 73.1 Domestic Consumption North 45.8 49.8 53.0 59.9 62.7 68.8 73.4 75.8 80.7 87.2 East 20.5 25.3 28.2 33.1 36.5 37.8 39.7 41.7 44.9 48.5 South 44.0 48.7 53.9 56.7 55.1 55.2 57.4 60.3 64.2 69.3 West 38.7 40.2 42.9 48.0 52.8 59.1 63.7 66.3 71.6 77.4 All India 149.0 164.0 178.0 197.7 207.0 221.0 234.2 244.1 261.5 282.4 Exports 5.9 3.6 3.2 2.0 2.3 2.7 2.7 2.9 3.2 3.5 Total demand 154.9 167.7 181.2 199.7 209.3 223.6 236.8 247.1 264.7 285.9 Demand growth (y-y%) 9.4 8.3 8.1 10.2 4.8 6.8 5.9 4.3 7.1 8.0 Source: Company data, quant Global Research estimates We have changed our domestic demand growth estimate for FY14 from 7% to 4.3%. As a result our utilization rate assumptions for FY15 has gone down to 72.1% from 74.8% earlier. 15

Regional demand supply dynamics - iew: South and East victims of aggressive capacity creation Regional demand supply scenario North Capacity 84.2 87.5 94.5 98.6 106.5 112.2 Production 61.4 66.7 71.2 73.5 78.3 84.5 Consumption 62.7 68.8 73.4 75.8 80.7 87.2 Utilization 77% 78% 78% 76% 76% 77% NORTH: Despite better utilization rates in the region, prices have remained volatile in the past few quarters. Demand in the region has been weak recently, however, we expect revival in both demand and prices from FY15. East Capacity 37.9 43.1 47.4 55.2 60.2 65.2 Production 31.6 32.8 34.4 36.2 39.0 42.1 Consumption 36.5 37.8 39.7 41.7 44.9 48.5 Utilization 84% 81% 76% 71% 68% 67% WEST: West remains a favorite market with prices expected to remain stable as demand and supply drivers are in favour of the region. Excess supply in south will deter substantial growth in prices. EAST: Capacity addition in Chhattisgarh and excess supply in Andhra will lead to increased supply in the region. Cement prices were higher in the past but we expect some volatility in future. West Capacity 69.6 75.0 81.0 87.8 94.8 96.3 Production 51.5 56.9 61.3 63.9 69.0 74.5 Consumption 52.8 59.1 63.7 66.3 71.6 77.4 Utilization 82% 79% 79% 76% 76% 78% Source: Company data, quant Global Research SOUTH: Pain in south expected to remain with extremely low utilizations. However, we expect capacity additions to slow down which will lead to higher utilizations compared to levels South Capacity 101.6 116.1 120.9 125.3 131.8 134.5 Production 66.1 67.2 69.9 73.4 78.2 84.4 Consumption 55.1 55.2 57.4 60.3 64.2 69.3 Utilization 66% 62% 59% 60% 61% 63% 16

FY08 FY08 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 North - relatively well placed but demand concerns remain 18mn MT of capacity addition in North Prices have seen steady fall in the last 12 months Company Location State Timeline Capacity 350 Jaipur Delhi Chandigarh Managalam Cement Morak RAJ 3QFY14 1.3 330 Ambuja Cements Ltd Pali RAJ 3QFY14 0.3 Lafarge NA RAJ 4QFY14 2.6 JK Cement* Jhajjhar HY 1QFY15 1.5 JK Cement Mangrol RAJ 2QFY15 1.5 Shree Cement Beawar RAJ 2QFY15 2.0 310 290 270 250 Ultratech Cement Shambhupura RAJ 4QFY15 2.9 230 JK Lakshmi Cement Udaipur RAJ 1QFY16 1.2 210 Ambuja Cements Ltd Marwar Mundwa RAJ 4QFY16 1.5 190 Ambuja Cements Ltd* Dadri-2 UP 4QFY16 1.5 170 ACC Ltd* Tikaria UP 4QFY16 1.5 Total 17.8 Note - *= grinding capacity; Source: Company data, quant Global Research estimates Source: CMA, quant Global Research Pace of capacity addition has slowed 35% North capacity addition as % of total Demand growth of just 3% expected in 14% 13% Cement consumption growth (y-y) 30% 27% 29% 12% 25% 20% 8% 9% 6% 6.7% 6% 8% 15% 12% 8% 8% 6% 4% 5% 3% 5% 4% 4% 5% 2% 0% 0% Source: Company data, quant Global Research estimates Source: Company data, quant Global Research estimates 17

FY08 FY08 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 East capacity additions to play spoilsport 18mn MT of capacity addition in East Company Location State Timeline Capacity Century Cements* Sagardighi WB 2QFY14 0.8 Ultratech Cement Raipur CH 4QFY14 4.8 Shree Cement* NA BH 4QFY14 1.5 Ambuja Cements Ltd Bhatapara CH 4QFY14 0.8 OCL india Ltd* Medinipur WB 2QFY15 1.4 Dalmia Cement* Lanka ASSAM 4QFY15 0.9 JK Lakshmi Cement* NA OR 4QFY15 0.9 JK Lakshmi Cement Durg CH 4QFY15 1.8 ACC Ltd Jamul CH 3QFY16 5.0 Total 17.9 Cement prices off highs and expected to correct further 410 Bhubaneswar Kolkata Lucknow 360 310 260 210 160 Note - *= grinding capacity; Source: Company data, quant Global Research estimates No letup in capacity creation in East 30% East capacity addition as % of total Source: CMA, quant Global Research After showing promise, demand growth fizzled out 30% Cement consumption growth (y-y) 25% 25% 25% 24% 20% 17% 20% 17% 15% 15% 14% 15% 9% 8% 11% 8% 8% 5% 4% 5% 4% 5% 5% 2% 0% 0% Source: Company data, quant Global Research Source: Company data, quant Global Research 18

FY08 FY08 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 South prolonged weakness to keep prices volatile 13.7mn MT of capacity addition in south Company Location State Timeline Capacity Madras Cement* Vizag AP 4QFY14 1.0 Ultratech Cement Malkhed KN 3QFY15 4.4 Dalmia Cement Belgaum KN 4QFY15 2.5 Jaiprakash Shahabad KN 4QFY15 3.0 Sagar Cement Chincholi KN 4QFY16 2.8 Total 13.7 Prices expected to remain volatile 380 Hyderabad Bangalore Chennai 330 280 230 180 130 Note - *= grinding capacity; Source: Company data, quant Global Research estimates Source: CMA, quant Global Research Still paying for earlier excesses Demand expected to recover from historic lows 35% South capacity addition as % of total 12% 11% 11% 30% 30% 25% 23% 8% 6% 5% 20% 4% 15% 13% 14% 2% 0% 0% 5% 5% 4% 4% 2% 2% -2% Cement consumption growth (y-y) 6% 5% 4% 8% 0% -4% -3% Source: Company data, quant Global Research Source: Company data, quant Global Research 19

FY08 FY08 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 West relatively well placed compared to other regions 15.3mn MT capacity addition with entry of new players Company Location State Timeline Capacity Century Cements Manikgarh MH 4QFY14 2.8 ABG Cement Kutch GUJ 4QFY14 4.0 Binani Cement Junagad GUJ 4QFY15 2.5 Reliance Cement Satna MP 4QFY15 4.5 Ambuja Cements Ltd* Osara MP 4QFY16 1.5 Total 15.3 Prices fall from highs, Mumbai prices stable 350 Ahmedabad Mumbai Pune 330 310 290 270 250 230 210 190 170 Note - *= grinding capacity; Source: Company data, quant Global Research estimates Capacity addition relatively slower than other regions 30% West capacity addition as % of total 24% 25% 20% 15% Source: CMA, quant Global Research Demand blip in, else demand drivers firmly in place 14% Cement consumption growth (y-y) 12% 12% 12% 8% 8% 8% 8% 7% 6% 9% 8% 8% 8% 8% 4% 4% 4% 5% 4% 4% 2% 2% 0% 0% Source: Company data, quant Global Research Source: Company data, quant Global Research 20

1Q 1Q 1Q 1Q 1Q 1QFY14 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1QFY14 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1QFY14 FY14 earnings likely to see further downside - iew: weak demand will limit pricing uptick to offset rising costs Both macro and seasonal factors have lead to weak demand.... 12 11.1 10.9 Volume growth (y-y, %) 10 8 7.4 6.3 6.7 6 5.3 4.4 4 3.3 2.5 2 1.3 1.8 0.7..... which has resulted in lower realizations 25.0 Realization growth (y-y, %) 20.0 18.3 19.1 15.0 12.0 9.4 9.4 10.0 5.0 - Operating cost growth (y-y,%) 16.6 9.4 8.3 4.9 2.5 (3.7) 0-2 (0.3) (1.6) (5.0) (10.0) (9.9) (8.1) -4 (15.0) Note: data pertains to aggregate of 17 listed cement companies; Source: Company data, quant Global Research Cement companies reported worst 1Q EBITDA/MT in last six years 1,600 Operating profit (Rs/MT) Average 1,400 1,346 1,200 1,148 1,059 1,055 1,000 919 1,060 831 800 600 400 200 - Note: data pertains to aggregate of 9 listed cement companies; Source: Company data, quant Global Research Note: data pertains to aggregate of 17 listed cement companies; Source: Company data, quant Global Research Weak demand will ensure that prices don t catch up with rising costs: for the past two years, demand growth has been lackluster which has resulted in lower realizations and lower margins. Given the macro conditions, seasonally weak period and political logjam we believe that demand growth is expected to remain muted which will limit the pricing growth hereby impacting margins in a rising cost scenario. 1Q results an indication of things to come: During 1Q FY14 results, cement companies reported their worst EBITDA / MT as realization growth was lower than costs. We expect the street to downgrade consensus estimates for cement companies as we believe that 2Q will be equally worst if not more as realizations have dropped further. 21

May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Valuations still in contrast with fundamentals - iew: awaiting demand growth to resume to turn positive on the sector again ACC valuations way below long term average 14 ACC Fwd EV/EBIDTA (x) Avg. EV/EBITDA (x) +1 std. dev -1 std. dev 12 ACEM substantial downside still left 15 ACEM Fwd EV/EBIDTA (x) Avg. EV/EBITDA (x) +1 std. dev -1 std. dev 13 10 11 8 6 4 2 9 7 5 3 Source: quant Global Research UTCEM valuations below long term average; awaiting corporate action in the stock 12 10 8 6 4 2 UTCEM Fwd EV/EBIDTA (x) Avg. EV/EBITDA (x) +1 std. dev -1 std. dev Source: quant Global Research ICEM valuations factoring in management discount 17 ICEM Fwd EV/EBIDTA (x) 8 Yr Average EV/ EBIDTA (x) +1 Std dev -1 Std dev 15 13 11 9 7 5-3 Source: quant Global Research Source: quant Global Research 22

Absolute and relative stock performance Company CMP (Rs) Market cap (US$ mn) Daily Avg Trd Val 3M (US$ mn) Absolute performance (%) Relative performance (%) 1M 3M 1YR YTD 1M 3M 1YR YTD ACC 1,095 3,333 7.0 12.3 (4.5) (19.5) (22.4) 4.5 (9.9) (24.1) (24.3) Ambuja Cements 185 4,692 9.5 19.1 2.0 (2.5) (5.4) 10.9 (3.8) (8.1) (7.6) Grasim Industries 2,674 4,055 3.4 20.3 (0.6) (14.5) (12.8) 12.0 (6.3) (19.5) (14.8) Ultratech Cement 1,809 7,844 6.8 13.3 (1.2) (2.6) (9.9) 5.4 (6.8) (8.2) (12.0) India Cements 50 248 1.1 2.4 (16.8) (41.3) (44.4) (4.7) (21.5) (44.7) (45.7) Shree Cement 4,149 2,309 1.2 14.3 (10.6) 14.2 (10.7) 6.4 (15.7) 7.6 (12.8) Madras Cements 183 695 0.6 26.2 (14.8) 0.2 (25.6) 17.5 (19.6) (5.6) (27.4) Century Textiles 241 358 3.6 9.9 (11.9) (30.2) (41.9) 2.3 (16.9) (34.2) (43.3) Birla Corp 207 255 0.1 (1.9) (10.2) (1.4) (31.0) (8.7) (15.3) (7.0) (32.7) Prism Cement 29 232 0.1 19.8 (14.0) (48.4) (42.3) 11.4 (18.9) (51.4) (43.7) Kesoram Industries 58 102 0.1 6.0 (10.7) (44.8) (50.0) (1.4) (15.7) (48.0) (51.2) Dalmia Bharat 123 159 0.0 15.2 (2.8) (12.3) (31.6) 7.2 (8.3) (17.4) (33.2) Orient Paper & Industries 7 24 0.0 16.8 - (89.7) (90.9) 8.7 (5.7) (90.3) (91.1) Heidelbergcement India 35 128 0.1 17.9 (21.7) (25.0) (37.4) 9.7 (26.1) (29.3) (38.9) JK Cement 196 219 0.1 8.8 (17.9) (12.4) (45.7) 1.3 (22.5) (17.5) (47.0) JK Lakshmi Cement 70 131 0.2 16.6 (37.2) (30.1) (56.9) 8.5 (40.8) (34.1) (58.0) OCLIndia 134 122 0.1 2.4 (7.0) 1.5 (11.1) (4.7) (12.3) (4.3) (13.2) Andhra Cement 5 22 0.0 (0.8) (20.0) (43.0) (47.1) (7.7) (24.5) (46.3) (48.4) Mangalam Cement 100 43 0.0 1.7 (15.4) (28.6) (45.1) (5.3) (20.2) (32.7) (46.4) Sagar Cements 168 49 0.0 (22.6) (16.0) (16.0) (42.1) (28.0) (20.7) (20.8) (43.5) Note: pricing as on 26 September 2013; Source: Bloomberg estimates for NOT RATED stocks; quant Global Research estimates 23

Valuation summary Bloomberg Market cap CMP* Px target Upside/ EPS (Rs) P/E (x) P/B (x) EV/EBITDA (x) ROE (%) Rating Code (Rsbn) (Rs) (Rs) downside (%) ACC ACC IN SELL 206 1,095 955 (12.8) 68.2 67.2 75.8 16.1 16.3 14.5 2.8 2.7 2.5 9.0 8.1 7.0 17.4 16.3 17.4 Ambuja Cements ACEM IN SELL 285 185 112 (39.4) 9.8 9.2 11.8 18.9 20.1 15.7 3.2 3.0 2.7 10.3 11.0 8.9 16.9 14.7 17.1 Grasim GRASIM IN BUY 245 2,674 3,978 48.8 294.7 310.6 369.0 9.1 8.6 7.2 1.2 1.1 1.0 5.6 4.0 3.4 13.8 12.8 13.3 India Cements ICEM IN BUY 15 50 61 21.0 6.1 5.6 6.1 8.3 9.1 8.2 0.4 0.4 0.4 4.4 4.2 3.9 4.6 4.1 4.5 Ultratech Cement UTCEM IN ACCUMULATE 496 1,809 1,823 0.8 97.7 113.7 131.7 18.5 15.9 13.7 3.3 2.9 2.6 11.2 9.6 8.4 17.6 18.3 18.9 Note: pricing as on 26 September 2013; Source: Company data, quant Global Research estimates 24

Disclosure Rating history ACC LTP (Rs) Buy Accumulate Reduce Sell PT (Rs) 1471 1371 1271 1171 1071 971 871 771 671 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: quant Global Research estimates Rating history Ambuja Cements 226 LTP (Rs) Buy Accumulate Reduce Sell PT (Rs) 206 186 166 146 126 106 86 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: quant Global Research estimates 25

Disclosure Rating history Grasim LTP (Rs) Buy Accumulate Reduce Sell PT (Rs) 3957 3457 2957 2457 1957 1457 Sep-09 Nov-09 Dec-09 Feb-10 Mar-10 May-10 Jun-10 Aug-10 Sep-10 Nov-10 Dec-10 Feb-11 Mar-11 May-11 Jun-11 Aug-11 Sep-11 Nov-11 Dec-11 Feb-12 Mar-12 May-12 Jun-12 Jul-12 Sep-12 Oct-12 Dec-12 Jan-13 Mar-13 Apr-13 Jun-13 Jul-13 Sep-13 Source: quant Global Research estimates Rating history India Cements 200 LTP (Rs) Buy Accumulate Reduce Sell PT (Rs) 180 160 140 120 100 80 60 40 Apr-10 May-10 Jul-10 Aug-10 Sep-10 Nov-10 Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jul-11 Aug-11 Sep-11 Nov-11 Dec-11 Jan-12 Feb-12 Apr-12 May-12 Jun-12 Aug-12 Sep-12 Oct-12 Dec-12 Jan-13 Feb-13 Apr-13 May-13 Jun-13 Aug-13 Sep-13 Source: quant Global Research estimates 26

Disclosure Rating history Ultratech Cement LTP (Rs) Buy Accumulate Reduce Sell PT (Rs) 2074 1874 1674 1474 1274 1074 874 674 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Source: quant Global Research estimates Ratings and other definitions Stock rating system BUY. We expect the stock to deliver >15% absolute returns. ACCUMULATE. We expect the stock to deliver 6-15% absolute returns. REDUCE. We expect the stock to deliver +5% to -5% absolute returns. SELL. We expect the stock to deliver negative absolute returns of >5%. Not Rated (NR). We have no investment opinion on the stock. Sector rating system OVERWEIGHT. We expect the sector to relatively outperform the Sensex. UNDERWEIGHT. We expect the sector to relatively underperform the Sensex. NEUTRAL. We expect the sector to relatively perform in line with the Sensex. Institutional Equities Research coverage universe distribution of ratings 60% 50% 40% 30% 20% 0% 51% 23% Buy Accumulate Reduce Sell 15% 11% 27

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Title Thank you Mangesh Bhadang mangesh.bhadang@quantcapital.co.in 91 22 4088 0381 612, maker chambers IV, nariman point, Tushar Manudhane mumbai 400 021, india tushar.manudhane@quantcapital.co.in phone 91 22 4088 0100, 3025 0100 91 22 4088 0392 fax 91 22 4088 0198, 3025 0198 29