cement industry evaluation ver 2
TRANSCRIPT
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Opportunities in Mid-Sized Cement Segment
May, 2008
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Executive summary
India is currently witnessing large demand momentum. Prevailing supply shortage situation
and firm prices are likely to continue over the next 1-2 years given demand momentum andfuture supply situation.
Perceived over-supply situation in future by analysts and brokers / investors causing themarket to discount earnings below fair value
Cement industry is largely governed by regional dynamics. Energy and freight constitute bulk
of the costs. Operating synergies due to scale economies are minimal.
Some mid-sized companies have efficient operations which make them competitive; thesewill continue to have strong future earnings
Some of these mid-sized companies are trading at substantially lower EV/T and xEV/EBIDTA (even, replacement cost) compared to large players
Hypothesis that opportunity exists to purchase earnings at cheap valuation and lower thanreplacement costs is tested
Analyses indicate that investments in mid-sized cement companies may not yield acceptablereturns at low risk
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Key characteristics
India has about 132 large plants (> 0.3 Mn TPA) with effective capacity of 167 Mn TPA and about 300 mini-plants (< 0.3 Mn TPA) with effective capacity of 6 Mn TPA
Plants are located close to limestone reserves to save on inward freight. 75% of the reserves are clustered in 5 states (2states in South India, 1 each in West, North and Central India) out of 29 states and as a result about 50% of capacity issituated out of these clusters.
Large players operate multiple plants to service local demands.
Mini-cement plants were set-up to make use of small reserves that cannot support large plants, and also benefit fromexcise concessions (proposed to be discontinued).
There are 52 companies operating large plants in India and top 5 companies have a combined marketshare of 46%.
Cement is a bulk commodity and transportation over large distances makes it uncompetitive. Prices are,thus, determined by regional supply-demand situation.
Industry profit potential is low as
Technology is available off-the-shelf
Capital requirement of $100-110 / T and gestation period of ~1.5-2 years for setting up plants (typical plant size is 1.5 MnTPA)
No import duty is levied. In spite of that, imports is low (3%) due to high freight cost, low shelf life, high clearance time atports and large economic quantity for sea transportation
Government intervenes from time to time to check cement prices
Access to cheap power and fuel, proximity to high quality limestone reserves and demand points contributeto critical success factors in this industry.
Cement industry in India is characterized by low industry profit potential
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Historical demand & supply
Historical Demand and Consumption - India
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4
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4
FY3 FY
4 FY
FY
FY
FY
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$
%
&
$ '
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$
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During h riod 3 o 2008, capacity grew at a CAGRof5 %
Consumption on the otherhandgrew at a CAGR of9%during the same period
Consumption includes exports whichwere in the range of3 to 5Mn TPA (~3%
arge share ofproduction in North, East andSouth isconsumed in the region only.However, about 20% ofrequirements in Center andWest were fedby North andSouth respectively
North East South West Centre Exports
North 87% 0% 0% % 8% 0%
East 0% 87% 0% 0% 3% %
South 0% 2% 97% 20% 0% 5%
West 0% % 3% 72% 3% 87%
Centre 13% 10% 0% 0% 76% %
Total 100% 100% 100% 100% 100% 100%
Dis
patc
ingRegions
Recei ing Regions
Inter-regional Mo ement of Cement - 2007
Legend:
+ : Supply Shortage
x : Supply Surplus
clusters
Over the past 5- years,growth in demandhas outstrippedgrowth in capacityaddition
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Short term demand supply situation
Current demand levels on a per capita basis is low which implies strong demand growthpossibilities for future
Per capita consumption of 150 Kg in India is half the world average. Compared to Chinas per capitacement consumption of 700 kg and Brazils 200 kg, Indias consumption is low.
Peak per capita cement consumption in various countries has been in the range of 650-800 kg
Key demand indicators include
Based on above demand estimates, demand will grow at 11% CAGR. However, due to slowdown ineconomy as currently being witnessed and future GDP projections, demand CAGR has been revised to8.5% (this does not include impact of price elasticity on demand and cross-elasticity with other buildingmaterials like fly ash and aggregates)
Demand will continue to grow at a rate of 8.5% CAGR (on the conservative side)over the next five years
Demand projections over the next 5 years
Key areas. Vol, (
n
) Details
Residential real estate 650 Indian real estate expected to add 14.3 bn sq ft over the next 5 years (2008-13) involving investments of$325 bn.
Commercial & retail 30
Infrastructure 380 As per planning commission, planned investments in infrastructure projects in 11th five year plan (2008-12)stands at $225 bn. This will translate into demand of380 Mn T of cement.
Others 50 Others include defense, exports, etc.
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Companies economics
Total cost of operations (including interest charges) varied from Rs 1712 / T to Rs3070 / T for the year 2007 across various players
*
Diversifiedcompanies;total cost datafor thesecompaniescomputedbased onhistorical dataand
assumptions oncostappropriation
Companies
nterest
otal
Raw Mat'l
uel & Power
reight Manpower Overheads Interest TotalShree Cements 354 485 322 102 424 25 1,712
Zuari 279 596 388 98 338 60 1,759
Prism 187 719 239 88 476 22 1,731Madras 358 554 397 101 374 45 1,829
Ambuja 165 548 472 92 532 50 1,858India 288 652 599 121 153 178 1,991
Sanghi 163 577 673 59 398 271 2,141
Binani 194 591 611 74 423 136 2,029Birla Corp 291 556 360 107 510 33 1,857
JK Lakshmi 341 695 403 102 361 139 2,041
Chettinad 411 683 439 107 345 68 2,052
Lafarge NA NA NA NA NA NA NARain 167 595 635 71 708 192 2,368My Home NA NA NA NA NA NA NA
ltratech 335 664 591 66 360 51 2,066
Penna 554 658 415 37 622 47 2,333KCP * 333 512 93 205 600 40 1,782
Orient * 279 486 494 170 440 80 1,949ACC 492 372 500 165 536 38 2,105
OCL * 382 580 439 98 442 106 2,047
Guj Sidhee 182 833 571 84 508 79 2,256Dalmia * 312 585 300 136 545 153 2,031
Grasim * 342 685 581 169 386 41 2,204
Century * 204 401 385 374 533 55 1,952Tamil Nadu 420 966 257 386 225 45 2,299
Saurashtra 379 864 249 97 664 168 2,420Mysore 312 780 46 180 971 105 2,395
Mangalam 390 893 586 120 305 9 2,303
JK Cements 287 723 571 107 685 123 2,497Andhra 332 917 340 279 681 521 3,070
Jaypee * 190 336 498 141 617 261 2,044
KCL 205 821 197 342 - 94 1,659Kesoram * 411 494 558 166 319 44 1,991
Malabar 448 334 9 322 1,181 46 2,339CCI 383 388 247 732 977 122 2,850
Deccan Cement 597 600 511 70 217 12 2,007
Sagar Cement 241 603 340 91 795 30 2,099
ixed
verheads
Varia
le Costs
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Lon term cost structures
Operating cost structures were in the range of Rs 1690/T to Rs 2670/T in 2007.With impending over-supply situation and drop in realization, units with high cost
structures may turn delinquentro uct on ost ontnuum
0
20
40
60
80
100
120
140
160
180
1600 1800 2000 2200 2400 2600 2800 3000
ost of Operations ( ncluding nterest
harges , Rs / T
umulative
apacityin
ndia,
nT
n 2010, ndia is likely to have
supply surplus of 44 n T.nits producing at Rs 2100 / T
or above will either turndelinquent or make losses.
cross all regions, there will be excess capacity as a result of new capacities being added. This willresult in price erosion. High-cost units will not be able to sustain price pressures.
ost of production has gone up over the last 5 years. Hence, prices will not go down to previous lowsas seen in 2003 and 2004 but will settle at levels commensurate to current cost structures.
However, as companies are adding to reduce costs, cost structures across companies will
improve by Rs 150-200 / T but prices will also drop to partially negate this cost advantage
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Hypotheses and analyses
Hypothesis: Opportunities exist in purchasing earnin s of mid-sized cement companies at cheap valuation and
significantly lower replacement costs which can yield accepta le returns
Testing Parameters:
1. Establish whether these mid-sized companies are available at cheap valuation and lower thanreplacement costs
2. Establish whether future earnings will continue to be attractive for mid-sized companies
3. Establish whether acceptable returns will be generated at current entry levels and reasonable exitassumptions
Methodology:
Compile exhaustive list of mid-sized companies and arrive at a consideration set based on initial
screening parameters Compare entry costs
Estimate future earnings and yields
Estimate return on investment
Initial hypothesis on attractive opportunities in mid-sized segment tested insubsequent slides
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Screenin of mid cap cement companies
Andhra Cements
CCI
Chettinad Cements
Deccan Cements
Deepak Cements
Gujarat Sidhee
JK Lakshmi Cements
Kalyanpur Cements
Kesoram Industries
KCP
Mangalam Cements
My Home Cements
Mysore Cements
Panyam Cements
Penna Cements Prism Cements
Rain Industries
Sagar Cements
Saurashtra Cements
Shree Digvijay Cements
Zuari Cements
Deccan Cements
Mangalam Cements
Gujarat Sidhee
Chettinad Cements
Saurashtra Cements
Shree Digvijay Cements
Sagar Cements
Prism Cements
JK Lakshmi Cements
Companies eliminated on account of thefollowing:
Trading suspended / nlisted
No information available
An exhaustive list of mid-sized companies considered on which screening criteriawere applied
List of id Sized Cement Companies
Consideration Set
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Company Valuation Centre & East ( rism Cement)
SHP Promoters: Rajan Raheja group (62%)
Non-promoter (non-institution):32%
Current operations & uture Plans Operates 2.5 Mn T unit in Satna (MP)
Capacity additions in planning stage
Key strengths / advantages
Deep value: $100 / T No CPP, lowest freight costs in the industry, efficient
operations
Entry cost at current share prices and yields
IRR for exit in 3 years and for various x EV /EBIDTA
Entry at 4 % discount to current share prices willyield 25% IRR at exit x EV/EBIDTA of 7.0 x and
EV/T of $80
Company Summary Valuation Summary
Operations Operates largest kiln in the country andhas efficient operations with one of thelowest specific power and fuelconsumptions
Efficient freight management (least
freight cost in the industry)Advantages Local linkage for coal leading to lower
procurement costs (Rs 2300 / T)
High brand recall able to charge apremium of 5%
Railway siding
Prism likely to have strong future earnings but high entry cost causing high risk inreturns on investment at conservative exit assumptions
0
0
0
2
Equit lue12
,
27
12,
27
12,
27
12,
27
12,
27Net ebt (
,286) (
,870) (
,
0) (6,
04) (7,
87)EV, M
,240 7,657 6,
86 6,12
4,5
9EV T,
89 $74 $67 $59 $44
EV E I TA 2.74x 3.41x 7.89x 5.22x 2.02xash iel 14% 13% 5% 7% 13%
EV/ E I TA 5.0x 6.0x 7.0x 8.0x 9.0xExit EV, M 5,864 7,036 8,209 9,382 10,555Exit EV/T, $56 $68 $79 $90 $101Exit Net ebt (6,404) (6,404) (6,404) (6,404) (6,404)Exit Equit 12,267 13,440 14,613 15,786 16,958IRR (3 ears) -1% 2% 5% 8% 11%
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Company Valuation orth (JK Lakshmi)
SHP Promoters: Singhania group (42%)
Non-promoter (non-institution):31%
Current operations and future plans Operates 3.4 Mn T in Rajasthan (North India)
Operates 5 RMC plants as well
Capacity addition to reach 5 Mn TPA by Q1, 09 and another 7RMC plants during the same year
Key strengths / advantages
Deep value: $90 / T $ 10 Mn for RMC; and 20% discount on replacement
cost for existing asset due to age and inefficiency(Power: 85 nits / T)
Entry cost at current share prices and yields
IRR for exit in 3 years and for various x EV /EBIDTA
Entry at 4 % discount to current share prices willyield 25% IRR at exit x EV/EBIDTA of 10.0 x and
EV / T of $50
Company Summary Valuation Summary
JK Lakshmi available at low entry cost but low expected future earnings causinghigh risk in returns on investment at conservative exit assumptions
Operations Specific power & fuel consumptionclose to industry average
New unit & CPP to result in low cost
Advantages
Commissioned 36 MW CPP to meetentire power requirement, with 10 MWthrough waste heat recovery. Railwaysiding at the factory
High brand recall
Accumulated tax losses to last foranother3 years
orward integration into RMC
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08!
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09!
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10!
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12Equity Value 6,565 6,565 6,565 6,565 6,565et De t 2,035 3,063 2,512 1,897 1,218
EV, n 8,600 9,629 9,078 8,462 7,783EV/ , $63 $48 $45 $42 $39x EV/ EBID 2.45 x 3.25 x 9.31 x 8.68 x 7.98 xCash ield 48% 38% 8% 9% 10%
x EV/EBID 5.00 x 8.00 x 10.00 x 15.00 x 20.00 xExit EV, n 4,875 7,800 9,750 14,625 19,500Exit EV / , $24 $39 $49 $73 $97Exit et De t 1,897 1,897 1,897 1,897 1,897Exit Equity 2,978 5,903 7,853 12,728 17,603IRR (3 ears) -23% -3% 6% 25% 39%
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Industry Comparators
Recent transactions in Indian cement industry
Historical trading multiples for consideration set
Acquirer ar et ear Stake Capacity, n ransaction at EV /
Cimpor Shree Digvijay Cements 2007 53.63% 1.07 $ 162 / T
Italcementi Shri Vishnu Cements 2006 50.00% 1.30 $ 80 / T
CRH My Home Industries 2008 50.00% 2.50 $ 215 / T
Heidelberg Mysore Cement 2006 54.89% 2.30 $ 112 / T
Historica EV/ or i Cap ayers
$0
$50
$100
$150
$200
a shmi Mangalam rism Chettinad Saurashtra
% &
'
a(
shmi $83 $92 $61 $45
Mangalam $73 $101 $54 $33 $42)
rism $113 $93 $76 $55 $52
Chettinad $172 $145 $75 $51 $71
Saurashtra $83 $76 $75 $57 $53
0
1
07 01
06 01
05 01
04 01
03
Historica EV/E I A or i Cap ayers
-10
0
10
20
a shmi Mangalam rism Chettinad Saurashtra
% &
'
a(
shmi 4 10 13 26
Mangalam 3 6 9 5 -41)
rism 3 7 9 10 18
Chettinad 8 17 9 6 11
Saurashtra 9 32 90 -11 274
0
1
070
1
060
1
050
1
040
1
03
ean: / Me ian: 4/
Industry comparators indicate that exit assumptions made for computing IRRwere on the conservative side
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ThankY
ou