12 October 2010

Construction Materials
Worst may be over, we remain wary
We believe the sharp 2QFY11F EBITDA declines (15.8-95.26%) were widely
expected by the market. But, given strong price hikes (10-50%) towards the end
of the quarter, which we did not expect, the bigger question is whether or not we
are past the worst cement margins. We remain cautious on the sector.

Key recommendations & forecasts

Reuters Year end Recom Price Target EPS PE

price 1fcst 1fcst
ACC¹ ACC.BO Dec 2010 Sell Rs1015.10 Rs720.93 68.45 14.8
Ambuja Cements¹ ABUJ.BO Dec 2010 Sell Rs141.80 Rs98.52 8.54 16.6
Grasim Ind¹ GRAS.BO Mar 2011 Hold Rs2351.80 Rs1986.00 252.01 9.3
India Cements¹ ICMN.BO Mar 2010 Buy Rs118.90 Rs154.78 11.54 10.3
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
Source: Company data, RBS forecasts

2QFY11 results to reflect sharp margin pressure.

All-India average cement prices were 9-11% lower yoy in 2QFY11, with prices down 21-22%
in south India, 13-17% in the west and 10-12% in central areas. Northern and eastern
markets showed 2-3% yoy price declines in the same period. We expect all companies in our
coverage universe to show sharp EBITDA/mt declines yoy due to the sharp price fall. We
expect 2QFY11 EBITDA declines of 95% yoy for India Cements (which has more than 90%
exposure to southern markets), 42.8% yoy for ACC, 29.9% yoy for Grasim (consolidated)
and 15.8% yoy for Ambuja Cement.

Sharp price hikes towards quarter’s end improve earnings outlook

Cement prices in most markets, particularly in south India, posted sharp increases towards
end-September. Prices in Andhra Pradesh rose from Rs140-150/bag to Rs220-230/bag,
while other markets have seen modest 10-15% hikes. We believe the 2HFY11 earnings
outlook has improved due to these increases.

We were surprised by the price hikes and remain cautious

Recent prices hikes have been sharper than we expected. If prices remain at these levels,
we see significant upside to our FY11 and FY12 earnings forecasts. We estimate domestic
cement capacity of 285.5m metric tonnes by end-FY11 and 304.4m by end-FY12, against
demand of 220.2m and 239.6m mt. Considering the industry’s FY11-12F capacity utilisation
rate of 78%, we believe production discipline needs to be maintained for the next 12-15
months. However, based on historical trends, we are not confident that these price hikes can
be sustained, and remain cautious.

Researched by
RBS Equities (India) Limited
Institutional Team

Mafatlal Chambers – C Wing, Ground

Floor, N.M. Joshi Marg, Lower Parel (E),
Mumbai 400 013, India. Tel : +91 022
6754 8411 Fax : +91 022 6754 8420

www.rbs.in/broking Important disclosures can be found in the Disclosures Appendix.

 Extended monsoon weighs on 2Q volumes
The June-August monsoon season is generally a lean period for Indian cement companies as
construction activity slows. This year’s rainy season extended to mid-September, resulting in late
cement demand pick-up and lower cement off-take in many regions during 2QFY11.

Sales volume posted consistent month-on-month declines during April to August FY11, with sales
volume falling from 18.12m mt to 15.8m. However, according to major cement companies, price
hikes and marginal demand recovery following the monsoon season drove volume growth in
September, which should provide some respite (see Table 3). On a regional basis, while cement
demand had fallen in southern and northern regions, it has remained strong in central and
western regions on the back of higher rural and government infrastructure spending.

Table 1 : Monthly cement dispatch trend

(m mt) Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
ACC 1.78 1.65 1.63 1.69 1.66 1.88 1.91 1.71 1.94 1.79 1.75 1.78 1.56 1.57 1.58
% growth 5% 9% -2% -1% -4% -1% 1% -2% -3% -1% -2% -2% -12% -5% -3%
Ambuja 1.44 1.43 1.36 1.46 1.55 1.73 1.75 1.69 1.92 1.90 1.86 1.69 1.41 1.43 1.48
% growth 4% 15% -1% 3% 4% 4% 8% 2% 11% 16% 14% 6% -2% 0% 9%
Grasim (combined) 2.70 2.89 2.77 2.82 2.93 3.29 3.43 3.19 3.70 3.38 3.35 3.16 2.92 2.96 2.85
% growth 11% 33% 16% 11% 15% 11% 14% 10% 10% 6% 6% 2% 8% 2% 3%
India Cements 1.02 0.93 0.84 0.88 0.89 1.00 0.92 0.93 1.10 0.92 0.89 0.84 0.97 0.863 0.88
% growth 18% 14% 13% 41% 33% 35% 30% 23% 33% 17% 16% 2% -5% -7% 5%
Jaiprakash Associates 0.74 0.70 0.70 0.78 1.03 1.06 1.17 1.16 1.37 1.25 1.33 1.33 1.22 1.08 1.17
% growth 36% 36% 13% 35% 49% 60% 60% 61% 75% 57% 63% 70% 64% 55% 68%
Shree Cement 0.83 0.69 0.68 0.70 0.71 0.86 0.88 0.78 0.92 0.75 0.85 0.79 0.66 0.70
% growth 43% 30% 14% 12% 15% 22% 18% 6% 11% -4% 16% 1% -20% 2%
Total Cement Dispatch 15.95 15.47 14.73 15.37 15.67 17.87 18.02 17.11 19.64 18.13 17.78 17.26 16.28 15.8
% growth 10% 17% 6% 8% 9% 12% 13% 6% 8% 9% 8% 3% 2.0% 2.1%
Source: Company data

Over the next few months, sales volume could be hit by lower demand as the monsoon season
begins in southern regions (particularly in Tamil Nadu). Demand from Andhra Pradesh, a major
market, could also remain sluggish for a few months.

Table 2 : FY10-11 cement sales growth Table 3 : Major cement producers’ September sales

Month Sales (m mt) yoy (%) Company Sales (m mt) Growth (%)
Apr-10 18.13 8.90% ACC 1.58 -3.07
May-10 17.78 8.10% Ambuja 1.48 8.98
Jun-10 17.26 3.40% UltraTech 2.85 2.71
Jul-10 16.28 2.00% Jaypee 1.17 61
Aug-10 15.8 2.10%
Source: Cement Manufacturers Association Source: Company data

Price hike sustain ability questionable

Cement manufacturers in south India increased prices in March 2010 citing power shortages, but
could not sustain the new prices beyond June. We believe that prices reached a floor in July and
August 2010 as most players were reporting marginal EBITDA/mt. In September, we saw two
cement price hikes in southern regions on the back of production cuts.

Construction Materials | Investment View | 12 October 2010 2

 Chart 1 : All-India average cement prices

260

250

240

230

220

210

200

190

All India Average Cement Prices

Source: Company data

However, we are not convinced that these price hikes are sustainable due to the Indian cement
industry’s fragmented structure (over 40 companies in the mix) and our forecast of 78% capacity
utilisation rates for the next 18 months. If EBITDA margins fall back to Rs900-1000/mt, smaller
manufacturers could be tempted to raise production levels to better recover fixed costs.

Table 4 : FY10 demand /supply conditions

FY10 Net effective Potential supply Domestic Cement Total Demand/

capacity* at 90% utilisation demand exports exports supply
North 78.0 57.4 60.9 -3.5
East 28.4 20.2 32.7 -12.5
Central 37.2 31.3 9.3 22.0
North+east+central 143.6 108.9 103.0 6.0
West 32.2 27.0 36.7 4.0 4 -13.6
South 92.1 71.1 57.5 13.6
South+west 124.4 98.1 94.2 -0.1
Total all India 268.0 207.0 197.2 4.0 4 5.9

Total cement sales 201.16

Total sales 201.16

Incremental 57 24.6 17.3 9.4%

Cement demand growth 9.4%

Capacity utlisation rate 75.1%
Capacity growth 27.0%
* If we included non-operational capacity total gross capacity would increase by 6.2m mt
Source: Cement Manufacturers Association

Construction Materials | Investment View | 12 October 2010 3

 Table 5 : FY11F demand/supply conditions

FY11F Net effective Potential supply Domestic Cement Total Demand/

capacity* at 90% utilisation demand exports exports supply
North 81.3 71.5 67.0 4.5
East 29.0 25.8 36.3 -10.5
Central 38.9 34.2 10.1 24.0
North+east+central 149.2 131.5 113.5 18.0
West 39.2 31.8 40.0 4.0 4 -12.2
South 97.1 84.9 62.7 22.2
South+west 136.4 116.7 102.7 10.0
Total all India 285.5 248.2 216.2 4.0 4 28.0

Total cement sales 220.2

Total sales 220.2

Incremental 17.6 41.2 19.0

Cement demand growth 9.6%

Capacity utilisation rate 77.1%
Capacity growth 7%
*If we included non-operational capacity total gross capacity would increase by 6.2m mt
Source: Cement Manufacturers Association, RBS forecasts

Table 6 : FY12F demand/supply conditions

FY12F Net effective Potential supply Domestic Cement Total Demand/

capacity* at 90% utilisation demand exports exports supply

North 83.8 74.1 73.0 1.1
East 32.6 27.5 39.6 -12.1
Central 38.9 35.1 11.1 24.0
North+east+central 155.3 136.7 123.7 13.0
West 41.7 36.3 43.6 4.0 4 -11.3
South 107.3 91.5 68.3 23.2
South+west 149.1 127.8 111.9 11.9
Total all India 304.4 264.5 235.6 4.0 4 24.9

Total cement sales 239.6

Total sales 239.6

Incremental 18.8 16.3 19.5

Cement demand growth 9.0%

Capacity utlisation rate 78.7%
Capacity growth 7%
*If we included non-operational capacity total gross capacity would increase by 6.2m mt
Source: Cement Manufacturers Association, RBS forecasts

Average 10.2% yo y revenue decline f or coverage universe in 2QFY11F

Although cement dispatch numbers grew 5-7% yoy in September, we expect cement
manufacturers to report 2QFY11 revenue declines due to lower prices in June and July 2010. We
also forecast margin deterioration for the quarter due to lower prices and higher coal and freight
costs.

Construction Materials | Investment View | 12 October 2010 4

Table 7 : Earnings forecasts

ACC Ambuja India Cement

Sep-10 Jun-10 Sep-09 CY10F Sep-10 Jun-10 Sep-09 CY10F Sep-10 Jun-10 Sep-09 FY11F
Sales 18,696 21,669 20,774 85,978 15,514 20,476 16,110 73,649 8,221 8,807 9,894 38,576
Total revenue 18,696 21,669 20,774 85,978 15,514 20,476 16,110 73,649 8,221 8,807 9,894 38,576
EBITDA 3,744 5,510 6,541 22,046 3,620 6,032 4,300 20,924 141 1,001 2,977 5,842
EBITDA margin (%) 20.0% 25.4% 31.5% 25.6% 23.3% 29.5% 26.7% 28.4% 1.7% 11.4% 30.1% 15.1%
Depreciation 1,050 1,047 876 4,418 1,000 1,001 719 4,423 600 599 572 2,680
EBIT 2,694 4,463 5,665 17,628 2,620 5,031 3,581 16,501 -459 402 2,405 3,163
EBIT Margin (%) 14.4% 20.6% 27.3% 20.5% 16.9% 24.6% 22.2% 22.4% -5.6% 4.6% 24.3% 8.2%
Interest 150 142 136 78 100 81 52 214 300 298 374 1,318
Other Income (incl Op Other Income) 600 604 517 1,813 650 667 894 2,849 50 27 55 1,200
PBT 3,144 4,926 6,047 19,363 3,170 5,618 4,423 19,135 -709 132 2,086 3,045
Exceptional items 50 142 -13 -142
PBT 3,144 4,926 6,047 19,363 3,170 5,618 4,423 19,135 -659 274 2,074 2,902
Tax 927 1,437 1,898 6,196 951 1,705 1,238 6,123 -128 24 704 913
PAT 2,217 3,489 4,149 13,167 2,219 3,912 3,185 13,012 -581 108 1,382 2,131
PAT after minority interest (Reported) 2,217 3,489 4,149 13,167 2,219 3,912 3,185 13,012 -531 250 1,369 1,989
PAT Margin After minority interest (%) 11.9% 16.1% 20.0% 15.3% 14.3% 19.1% 19.8% 17.7% -6.5% 2.8% 13.8% 5.2%
Source: Company data, RBS forecasts

Table 7 : Earnings forecasts (Cont’d)

Grassim (Consolidated) Grassim (Standalone) Ultratech

Sep-10 Jun-10 Sep-09 FY11F Sep-10 Jun-10 Sep-09 FY11F Sep-10 Jun-10 Sep-09 FY11F
Sales 38,876 50,552 46,823 192,396 9,775 9,449 29,838 39,444 29,101 17,898 15,408 130,952
Total revenue 38,876 50,552 46,823 192,396 9,775 9,449 29,838 39,444 29,101 17,898 15,408 130,952
EBITDA 10,403 13,039 14,849 52,198 3,318 3,012 10,162 14,240 7,085 4,057 4,700 32,018
EBITDA margin (%) 26.8% 25.8% 31.7% 27.1% 33.9% 31.9% 34.1% 36.1% 24.3% 22.7% 30.5% 24.5%
Depreciation 2,745 2,672 2,424 11,404 445 445 1,359 1,813 2,300 1,016 967 8,475
EBIT 7,658 10,367 12,425 40,794 2,873 2,567 8,803 12,428 4,785 3,042 3,733 23,543
EBIT Margin (%) 19.7% 20.5% 26.5% 21.2% 29.4% 27.2% 29.5% 31.5% 16.4% 17.0% 24.2% 18.0%
Interest 905 912 831 4,769 105 102 505 729 800 279 299 3,531
Other Income (incl Op Other Income) 1,350 1,598 1,455 6,617 600 593 1,432 4,420 750 483 308 1,823
PBT 8,103 11,053 13,049 42,643 3,368 3,058 9,729 16,119 4,735 3,246 3,743 21,835
Exceptional items
PBT 8,103 11,053 13,049 42,643 3,368 3,058 9,729 16,119 4,735 3,246 3,743 21,835
Tax 2,235 3,199 4,231 14,064 909 820 2,986 5,319 1,326 819 1,234 7,205
PAT 5,868 7,854 8,818 28,578 2,458 2,238 6,743 10,800 3,409 2,427 2,509 14,629
PAT after minority interest (Reported) 4,625 5,751 7,808 21,672 2,458 2,238 6,743 10,800 3,409 2,427 2,509 14,629
PAT Margin After minority interest (%) 11.9% 11.4% 16.7% 11.3% 25.1% 23.7% 22.6% 27.4% 11.7% 13.6% 16.3% 11.2%
Source: Company data, RBS forecasts

Stock valu ations partially reflect early recovery

We believe that the recent 20% share price appreciation for Indian cement stocks partially reflects
current strong prices. We remain cautious regarding the sustainability of higher cement prices
given the industry’s fragmented nature. With the exception of India Cements and Grasim, which
are trading at what we see as cheap EV/EBITDA and EV/mt valuations, we believe other stocks in
the sector suffer downside risk if cement prices do maintain current levels.

Construction Materials | Investment View | 12 October 2010 5

Table 8 : Valuation by company

EV/EBITDA EPS PER EV/mt

FY09 FY10 FY11F FY12F FY13F FY08 FY09 FY10 FY11F FY12F FY13F FY08 FY09 FY10 FY11F FY12F FY13F FY08 FY09 FY10 FY11F FY12F FY13F
ACC 10.69 7.08 7.96 7.92 7.04 65.0 56.3 83.3 68.5 65.8 72.5 15.4 17.8 12.0 14.8 15.2 13.8 161.2 154.5 135.6 128.0 124.5 123.1
EBITDA/mt 803 1,144 989 885 904 13.7% -13.4% 47.9% -15.8% -6.2% 10.2%

Ambuja 11.5 10.7 9.0 9.8 8.8 9.2 7.2 8.0 8.5 7.7 8.5 15.2 19.5 17.5 16.6 18.3 16.4 213.1 206.9 201.5 164.1 170.0 158.9
Cement
EBITDA/mt 1,011 993 1,013 839 886 -6% -22% 11% 7% -10% 11%

Grasim 6.2 4.6 5.1 5.6 4.4 284.2 238.5 300.9 236.3 212.2 254.1 8.1 9.6 7.6 9.7 10.8 9.1 136.8 101.3 82.5 83.3 90.9 74.4
EBITDA/mt 1042 1154 903 801 958 35% -16% 26% -21% -10% 20%

Ultra Tech 9.2 7.7 9.6 9.9 7.3 80.9 78.5 87.8 60.6 53.6 77.4 13.6 14.0 12.5 18.2 20.5 14.2 187.2 159.6 146.4 139.6 163.2 139.1
EBITDA/mt 937 975 867 801 958 -3% 12% -31% -12% 44%

India 5.5 7.3 9.9 6.9 4.7 22.6 15.3 12.5 11.5 11.0 16.0 5.31 7.8 9.61 10.3 10.9 7.5 119.3 95.8 994.4 82.5 77.2 70.0
Cements
EBITDA/mt 1014 677 479 581 737 4% -32% -18% -48% 70% 45%

Source: Company data, RBS forecasts

Construction Materials | Investment View | 12 October 2010 6

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Construction Materials | Disclosures Appendix | 12 October 2010