chettinad cement -initiating coverage

Chettinad Cement

Initiating Coverage

Investment Rationale➚ Chettinad Cement Ltd (CCL) is the third largest cement company

in Tamil Nadu after India Cements and Madras Cement and has a12% share of the cement capacity in the state. The company has aninstalled capacity of 2.2mn MT and is coming up with 0.5 MTgrinding unit at a cost of about Rs.450mn to be financed throughinternal accruals. It is expceted to be operational by March 2006.

➚ Located on the Kerala -TN border, CCL plants are strategicallyplaced (freight cost) to take advantage of spurts in cement demandin Tamil Nadu and Kerala. Currently 70% of its sales are derivedfrom TN while Kerala contributes the remaining 30%.

➚ During FY05, CCL commissioned a 15 MW coal based captivepower plant at its Karikal unit which is expected to bring downits fuel and power consumption from Rs.630 per ton to Rs.510 perton.

➚ In operating terms i.e Power consumption and operating cost perton, CCL happens to be one of the most efficient cement companiesin south. Higher volumes and realizations would have a multipliereffect on its earnings leading to CAGR of 49% over next two years.

➚ On the back of increased thrust on infrastructure, constructionand planned capital expenditure from manufacturing sector, outlookfor cement demand in South India remains robust. Cementconsumption in South India grew by 22 percent during the Q1FY06as compared to Q1FY05. This trend is expected to continue duringthe remaining part of FY06 given the low base of last year.

➚ With the narrowing demand supply gap, cement prices haveremained firm even after arrival of monsoon as compared to asharp drop witnessed during previous years. The industry isoperating at an inventory of just around 20 days. This firming upof prices is expected to substantially improve operating marginsas well as the bottom line of CCL.

ValuationWe expect earnings of CCL to grow at a CAGR of 49% for the nexttwo years on the back of improved demand outlook in south,efficiency gains from new captive power plant and capacity expan-sion. At Rs.180, the stock is trading at a 11 and 8.3 times its FY06Eand FY07E earning and EV of 6.2xFY06E and 4.9x FY07 E EBITDA.

On asset valuation terms the stock is trading at EV/Ton of $81. Webelieve the stock is trading at a substantial discount to its peers andrecommend a BUY with a one year price target of Rs.225.

CMP : Rs. 180Buy

Industry : Cement

Price Target : Rs. 225

August 17, 2005

Analyst:Rajan Kumar+91 22 [email protected]

Previous

Recommendation BUYCMP (INR) 180Target Price (INR) 225

Key Data

www.chettinadcement.comBloomberg code NCHC@INReuters code CHET.BOBSE code 590001NSE code CHETNADCEMFace Value (INR) 10.0Market Cap. (INR mn.) 5310.052 Week High (INR) 185.052 Week low (INR) 71.3

Scrip Scan

Equity Rs mn 295.0FY06 E EPS 16.4FY06 E P/E 11.0FY06 E EV/EBIDTA 6.2FY06 EV/TON (USD) 81.8

Shareholding (01.04.05) (%)

Promoters 76.21Non promoter corporate 3.66Foreign 0.03FIs, Mutual Funds, Banks etc 8.50Others & Public 11.60Total 100.00

Relative Performance of Chettinad Cement

50.00

100.00

150.00

200.00

250.00

300.00

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Chettinad Sensex

Chettinad Cement

August 17, 2005 Initiating Coverage2

Chettinad Cement ltd (CCL) is part of the Chennai based Chettinad Groupwhose interest spans Manufacturing (Cement, Silica, Quartz, Grits), Services(Construction, Transports, Steel Fabrication, Ship Management andStevedoring, Clearing & Forwarding) Trading, Power Generation, Plantation,Farms and Logistics. With combined revenue of Rs 8.5 billion, the group isone of the most respected business houses in South India.

CCL started its first manufacturing facility with a 0.2 million MT capacityat Karur district of Tamil Nadu in ’62 and came up with another GreenfieldPlant at Karikali village at Dindigul District of TN during 2001. Today witha combined annual capacity of 2.2 mn tons, CCL is the third largest cementplayer in Tamil Nadu. Besides the company has got 30 cum/hr capacity ofRMC and 17 MW capacity of Wind Power in Coimbatore in TN. In October2005, the Company commissioned a 15 MW coal fired captive power plantat its Karikali unit and plans to add a 0.5 Million MT Grinding unit byMarch 2006.

Being located near Kerala-TN CCL is in an ideal position to cater to demandin Kerala which is a deficit state. Company derives 70% of its cement salesfrom Tamil Nadu and 30% of its Sale from Kerala.

Company Background

Strategic Location

Scripts CMP Capacity EV/Tons EV/EBIDTA FY06 E FY07 EMn Tons USD FY 06 PE(x) PE(x)

ACC 459.0 18.3 119.6 12.5 15.0 12.0Gujarat Ambuja 65.0 15.0 145.9 10.7 14.6 11.9Madras Cement 1328.0 6.0 86.9 10.5 15.2 11.0India Cement 93.0 7.7 96.7 10.8 NA NAChettinad Cement 180 2.2 81.8 6.2 11 8.3

Chettinads Karur Plant

Chettinads Dindigul Plant

Chettinad Cement


The company’s product mix consists of cement (97%), clinker (2.4%) andready mix concrete (0.6%). The company sells 30% cement as OPC and 70%as PPC and expects to maaintain this ratio after expansion. This translateinto a blending ratio of 1.23.

South India’s Cement demand which grew with a CAGR of 7.5% betweenFY98 and FY04 de-grew during FY05 mainly on account of assemblyelections which delayed the implementation of Infrastructure Projects inAP and Karnataka. However against the industry trend, Chettinad Cementmanaged to increase its production and despach figures by an impressive14% during FY05.

With the demand drivers like Housing, Infrastructure and Planned Capitalexpenditure of manufacturing sector back in place, cement demand in SouthIndia has started showing an impressive upturn. During Q1FY06 cementconsumption in southern states showed a y-o-y increase of 22% comparedto all India consumption growth of 11.5%.

Demand scenario in Tamil Nadu and Kerala also witnessed a similar kindof upturn with the consumption growing by about 22% and 20% duringQ1FY06.At current levels plants in TN, Kerala and Karnataka are operatingalmost at par with the All India levels. The surplus demand supply situationin south is mainly on account of Andhra Pradesh where capacity utilizationstill remains 74.2%.

Product Mix

Demand Upturn In SouthIndia

Cement Demand Estimate of South India

05000

10000150002000025000300003500040000

FY02 FY03 FY04 FY05 FY06 E FY07 E

Demand (000 tonnes)

Demand Supply Scenario in TN/Kerala

0

5000

10000

15000

20000

FY04 FY05 FY06 E FY07 E

Cement Demand Production Capacity

000 tones Capacity Production Capacity Consumption Utilization

(Annual) Q1FY06 Q1FY06 Q1FY06TN 14564.0 3451.1 94.8 2404.0Kerala 620.0 166.8 107.6 1632.0Andhra Pradesh 21831.0 4047.4 74.2 2349.0Karnataka 10086.0 2497.4 99.0 2107.0South India 47681 10162 86 8729

Demand Supply Scenario in South India

Demand Supply Scenario in TN/Kerala – Market For Chettinad Cement

000 tones Capacity Production Capacity Consumption Utilization

(Annual) Q1FY06 Q1FY06 Q1FY06

TN 14564.0 3451.1 94.8 2404.0

Kerala 620.0 166.8 107.6 1632.0

TN/Kerala Combine 15184 3617.9 95.28 4036.0

With the economic growth projected at 6.9 percent and given the low baseof cement consumption in FY05, we estimate FY06 and FY07 cementconsumption to increase by 14 percent and 8 percent to 36 MT and 39 MTrespectively in southern states.

Chettinad Cement


This trend is reflected in prices of cement in southern states. Though priceshave shown a mixed trend in south, they have been firm in Tamil Naduand Kerala - Major Markets for Chettinad Cement. On y-o-y basis Q1FY06prices were up 3% and 2% in TN and Kerala respectively over Q1FY05. Weexpect the prices in the TN-Kerala combine to remain firm during the yearand next on account of robust demand drivers and favorable demandsupply situation. Without factoring in the gain from implementation ofVAT, we estimate the realization to grow on an average by 4% and 3.5%y-o-y during FY06 and FY07 for the company.

Though Kerala implemented VAT from April 05, Tamil Nadu is yet toimplement VAT. Since Sales Tax Rate on cement happens to be highest inTN/Kerala, Implementation of VAT would lead to about 3.5 to 7% increasein realization for cement sold in TN and 2.25 % increase in realization inKerala assuming 50% of the benefit being passed on to the consumers.

* TN has two tier Sales Tax (ST) structure. ST is 19.3% for OPC sold at Rs.145/kg and PPC sold atRs.135/kg. For OPC sold above Rs.145/kg and PPC sold above Rs.135/kg, ST is 27.7% (Prices areinclusive of Sales Tax)

Price Trend in South

Cement Price Trend In Southern Region (Rs/50 Kg Bag)

Apr-04 Apr-05 May-05 Jun-05

Chennai 168.6 180.9 179.6 179.1

Calicut/Tiruanantpuram 185.0 190.0 185.0 185.0

Hyderabad 135.8 121.4 113.7 118.2

Bangalore 159.0 154.3 155.5 155.7

Realization to showimpressive gain when VATis implemented in TN

Realization Gains Due To VAT

Sales Tax Surcharge Add Tax Effective Tax Vat Realization On Gain

Ac of VAT

TN 16/24 5/5 2.5/2.5 19.3/27.7 12.5 3.5/7

Kerala 15 15 17.25 12.5 2.25

Andhra Pradesh 16 16 12.5 1.75

Karnataka 15 15 12.5 1.25

CCL happens to be one of the most efficient players in the country. Itspower consumption of 73 Kwh/tons of cement is among the lowest in theindustry. Besides its per unit operating expenditure at Rs.1340/ton is lowcompared to its peers in south India like India Cement (Rs.1583) and MadrasCement (Rs.1687). With the improvement in prices of cement from FY04, Itsper unit operating profit improved from Rs.284/ton in FY03 to Rs.420/tonin FY04. The company maintained EBIDTA/ton of Rs.420/ton on account ofimproved realization despite a 105% increase in international coal prices.With savings realised from captive power plant we expect the EBIDTA/tonto further improve to Rs.525/tons and Rs.555/tons in FY06 and FY07.

Operational Characteristics

Electricity Consumption

86 86 89

7283

73

0102030405060708090

100

ACC GujaratAmbuja

IndiaCement

MadrasCement

Grasim ChettinadCement

Kw

h/T

on

ne

Clin

ker

Chettinad Cement


The company installed 15 MW coal fired power plant in September 04 atits Karikali plant. With the installation of captive power plant, the companywill be able to meet its total requirement of power internally. Besides it isexpected to bring down power and fuel cost for the company from Rs.630per ton to Rs.510 per ton.

The company supplies the power generated at its wind power mills atCoimbatore, to TNEB and has an arrangement for adjusting the bills againstthe power used at its cement plant.

The company is coming up with addition of 0.5 Million Metric tons grindingunit at its karikali unit. The expansion would entail an investment ofRs.450mn and would entirely be funded through internal accruals. Thisexpansion will give the company much needed leverage to increase itsvolume as its plants are already operating at more than 100% capacity.Both the power plant as well as grinding units is being financed by internalaccrual.

Among the southern states the limestone reserves are limited in TamilNadu and that makes it not a very attractive proposition for others tocome up with a cement plant. Other than Brownfield expansion by DalmiaCement, we see no major threat of new capacity expansion in TN.

Coal Linkages : The Company as of now does not have any coal linkagesfrom Coal India Ltd and meets its entire requirement through import. Anyincrease in International Coal Prices/Freight will adversely impact company’smargin.

Freight Cost : Since 70% of its a despatches are through roadways anysteep hike in petrol & diesel prices could adversly impact company’s marginand profitability.

Low Limestone’s ReservesLimits New CapacityAddition in TN

Investment Concerns

Cost Efficiency Gains fromCaptive Plant

Capacity Expansion to drivevolume growth

Chettinad Cement


Financial Analysis...Financials (Rs. mn)Income Statement Mar-04 Mar-05 Mar-06E Mar-07ESales 3248 3865 4447 5293Other Income 14 19 19 19Total Income 3261 3884 4466 5312Operating Exp 2440 2942 3168 3737EBIDTA 808 923 1279 1556EBIDTA Margin 25 24 29 29Interest 301 204 200 180EBDT 507 720 1079 1376Depreciation 283 311 360 425PBT 238 427 738 970Tax 99 148 254 333PAT 140 280 484 637

Balance Sheet (Rs.Cr) Mar-04 Mar-05 Mar-06E Mar-07E

Sources of Funds

Equity Sh.Cap. 295 295 295 295Reserves 1035 1209 1493 1863Equity Share holders Fund 1330 1504 1788 2158Loans 2891 2620 2360 1735Deferred Tax Liability 447 600 799 1065Cap. Emp. 4667 4723 4947 4957

Appn. of FundsGross Block 6476 6838 7318 7318Less Depreciation 2255 2566 2926 3351Net Block 4221 4272 4392 3967

Inventories 600 724 833 991Sundry Debtors 151 169 195 232Cash and Bank Balance 140 140 196 563Loans & Advances 246 255 293 349

LessCurrent Liability & ProvisionsCurrent Liabilities 608 733 844 1004Provisions 85 103 118 141Net Current assets 446 451 555 991Total Assets 4667 4723 4947 4957

Chettinad Cement


Ratios

Mar-04 Mar-05 Mar-06E Mar-07E

Basic Ratio

EPS (Rs.) 4.7 9.5 16.4 21.6

CEPS (Rs.) 14.3 20.0 28.6 36.0

Dividend Per share (Rs.) 2.0 4.0 6.0 8.0

Dividend(%) 20.0 40.0 60.0 80.0

BVPS (Rs.) 45.1 51.0 60.6 73.2

PE (x) 38.0 19.0 11.0 8.3

P/CEPS (x) 12.6 9.0 6.3 5.0

P/BV (x) 4.0 3.5 3.0 2.5

EV/EBIDTA (x) 10.5 8.9 6.2 4.9

EV/Net Sales (x) 2.6 2.2 1.8 1.5

EV/Ton(USD) 81.9 64.6 59.3

Growth Ratio

Net Sales (%) 22.0 19.0 15.1 19.0

Adjusted Net Profit (%) - 100.3 73.2 31.5

EBITDA (%) 68.5 14.3 38.5 21.7

EPS (%) - 100.3 73.2 31.5

CEPS (%) 105.2 39.9 42.9 25.8

Profitability Ratio

ROCE (%) 11.5 13.4 19.0 23.2

ROE (%) 7.9 13.3 18.7 19.8

EBIDTA Margin (%) 24.9 23.9 28.8 29.4

EBDTA Margin (%) 15.6 18.6 24.3 26.0

Net Profit Margin (%) 4.3 7.2 10.9 12.0

Turnover & Capitalization Ratio

Average collection period (Days) 16.9 16.0 16.0 16.0

Average Payment Period (Days) 68.4 69.3 69.3 69.3

Net Fixed Assets (x) 0.8 0.9 1.0 1.3

Leverage Ratio

Interest Coverage (x) 1.8 3.1 4.7 6.4

Debt to Equity Ratio (x) 1.4 1.1 0.8 0.5

Chettinad Cement


Technical View

Scrip has been in a major uptrend. Moving averages are on the riseso as MACD. The volumes are also rising however at higher levelvolumes have reduced a bit. The momentum and oscillator chartsare also rising albeit nearing an over bought zone. In the currentuptrend scip has a resistance around 200-220 level in short tomedium term which if surpassed with force and volumes then 250is likely in medium to long term.

Chettinad Cement


Networth Research: E-mail- [email protected]

Research Department Sector eMail id Telephone nos.

Janish Shah Auto/FMCG/Power [email protected] 022-22836307/8/11Kanan Shah Banking/Metals/Shipping [email protected] 022-22836307/8/11Vikas Sonawale Pharmaceuticals [email protected] 022-22836307/8/11Amit Whabi Oil & Gas/Petrochemicals [email protected] 022-22836307/8/11Vaibhav Doshi Telecom/Media [email protected] 022-22836307/8/11Nimesh Mistry Information Technology [email protected] 022-22836307/8/11Shashin Shah Mid caps [email protected] Kumar Cement [email protected] 022-22836307/8/11Viral Doshi Equity Strategist [email protected] 022-22836307/8/11Shekhar Phadnis Research Associate [email protected] 022-22836307/8/11Rupa Shah Research Associate [email protected] 022-22836307/8/11Rati Pandit Research Associate [email protected] 022-22836307/8/11Taral Mehta Research Associate [email protected] 022-22836307/8/11Networth Dealing: E-mail- [email protected]

Institutional Sales

Raj Bhandari/Jignesh Desai/ Jay Doshi [email protected] 022-22633020

Disclaimer: The information contained in this report is obtained from reliable sources and is directed at market professionalsand institutional investors. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of anyoffer to, buy or sell the securities or commodities mentioned in this report. No representation is made that the transactionsundertaken based on the information contained in this report will be profitable or that they will not result in losses.Networth Stock Broking and/or its representatives will not be liable for the recipients’ investment decision based on thisreport.

Networth Stock Broking Ltd.

Regd. Office:- 5 Churchgate House, 2nd floor, 32/34 Veer Nariman Road, Fort, Mumbai - 400001.Tel Phone nos. :- 022 - 22850428/4/5/6 Fax nos. : 022 - 22856191

Corporate Office :- 143-B, Mittal Court, B wing, 224, Nariman Point, Mumbai – 400021.Tel Phone nos. :- 022 - 22836307/8/11 Fax nos. :- 022 - 22836313

chettinad cement -initiating coverage

Documents