1. business and industrial
2. company
3. merger and acquisition

SECTOR UPDATE
9 OCT 2014
Cement Mid-Cap Picks
Orient Cement
YE Mar
Net Sales (Rs mn)
EBITDA (Rs mn)
PAT (Rs mn)
P/E (x)
EV / EBITDA (x)
EV/T (US$)
Volumes (mT)
EBITDA/T (Rs)
FY15E
16.8
3.3
1.8
14.7
11.7
127
4.3
756
FY16E
23.7
5.2
1.6
16.2
7.5
81
5.5
928
FY17E
28.3
6.8
2.8
9.3
5.5
76
6.1
1,088
Sanghi Industries
YE Jun
Net Sales (Rs mn)
EBITDA (Rs mn)
PAT (Rs mn)
P/E (x)
EV / EBITDA (x)
EV/T (US$)
Volumes (mT)
EBITDA/T (Rs)
FY15E
12.4
2.3
0.6
20.1
7.3
106
2.7
847
FY16E
14.4
2.8
1.3
9.6
5.4
69
3.1
924
FY17E
15.7
3.5
2.0
6.5
3.6
70
3.2
1,083
Mangalam Cement
YE Mar
Net Sales (Rs mn)
EBITDA (Rs mn)
PAT (Rs mn)
P/E (x)
EV / EBITDA (x)
EV/T (US$)
Volumes (mT)
EBITDA/T (Rs)
FY15E
9.1
1.8
0.8
8.6
5.2
47
2.2
762
FY16E
11.8
2.5
1.4
4.7
3.4
44
2.7
904
FY17E
13.1
2.9
1.7
3.9
2.2
32
2.9
962
Ankur Kulshrestha
[email protected]
+91-22-6171-7346
Sustainable re-rating ahead?
Cement stocks have seen their valuations rerate
at an unprecedented pace in the past 6 months
or so, driven by heightened expectations of
demand growth. Large caps are trading at
multiple year high valuations, with several midcaps closing in the gap too. Most importantly,
valuation hierarchy has flipped (we believe,
sustainably) with a cost leader (Shree Cement)
now at the top of the band.
In line with above, we looked for the following
attributes:
Given an increasing proportion of non-trade
sales, higher RMC penetration and bulk (i.e. not
bag) cement sales, the premium pricing of
brand leaders will erode gradually. Historically,
the erosion of pricing premium has coincided
with periods of fast demand growth (implying
sudden utilization surges). Given the low entry
barriers in to the cement industry and relatively
slow expansion plans of pan-India companies
(Holcim/Lafarge mainly), market share for
erstwhile dominant players is shrinking.
Given this scenario, single/two region cost
leaders with better logistics will trump multiregion cost-laggards (op-ex and capex). Sharper
growth in cement consumption will suit nimbler
companies (faster execution and turnaround)
better than slower ones, and will also make
them better equipped to navigate periods of
weak demand. These companies will see their
valuations rerate substantially.

Proven operational cost leaders, who can
compete with pan India players on costs?

Companies with large expansions in their
catchment area (40-50% growth in capacity)
delivered/ready to be delivered in next 12
months to catch the upcycle.

Companies with multiple efficiency triggers in
their cost structures, waiting to be exploited.

Valuations
investors.
still
appealing
enough
for
Orient Cement (CMP:127; TP:177; BUY), Sanghi
Industries (CMP:63; TP:83; BUY) and Mangalam
Cement (CMP:243; TP: 415;
BUY) can
sustainably rerate during the coming upturn,
given the potential to catch the upcycle with a
40-60% jump in capacity and efficiency levers
waiting to be exploited. In three cases, leverage
will not be excessive upon capacity addition.
(Net Debt/EBITDA < 3.0 and net D/E < 1.2x).

Given that the frontline cement stocks are
already factoring in strong earnings growth,
these companies also carry with them a
margin of safety for investors in case a less
bullish demand scenario pans out.
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
CEMENT MID-CAP PICKS
Recommendation summary
Orient Cement
Key positives

Expanding ~60% at US$95/t,
with full capacity likely to be
available for majority of FY16.

Cost leadership
operations.

Specific risks
Sanghi Industries
in
current
Ability to replicate distribution
strength
in
markets
(Telengana, Maharashtra)
Mangalam Cement

Cement
clinker
mismatch
allows addition of ~38% of
grinding capacity to be added
at very low cost (US$17/t)

Low cost operations, with
multiple levers of efficiency
improvement available

Large limestone reserves

Sharply lower profitability due
to steeper costs in the new
plant

Return ratios may remain
depressed due to large asset
base

Strong gearing to Telengana,
susceptible to volatile pricing

Inability to shift product mix
towards PPC
Capacity (FY16E)

~63% additional capacity
available
(vs
FY14).
Brownfield expansion ensures
replication of fixed costs to a
great extent.

Significant improvements in
consumption parameters due
to enlarged kiln/GU

Low debt from expansion

Further
growth
reinvestment

Eventual ownership remains
uncertain
and
8.0 mTPA
3.6 mTPA
3.25 mTPA
2,937
3,111
3,525
LTM EBITDA/t (Rs)
472
689
289
Net Debt (Rs, FY16E)
13.5
3.0
1.6
Net Debt EBITDA (FY16E)
2.8
1.1
0.7
Net Debt/ Equity (FY16E)
1.24
0.26
0.23
LTM Op costs/t (Rs)
Source : Company, HDFC sec Inst Research
Page | 2
CEMENT MID-CAP PICKS
Valuation hierarchy has now flipped, with a cost leader now at the top of the band
1 yr rolling fwd EV/EBITDA (x)
ACC
Ambuja
UltraTech
Shree
Ramco
18.0
12.0
10.0
8.0
6.0
4.0
2.0
Oct-14
Dec-13
May-14
Jul-13
Feb-13
Sep-12
Apr-12
Jun-11
Nov-11
Jan-11
Aug-10
Oct-09
Mar-10
May-09
Jul-08
Dec-08
Feb-08
Apr-07
Sep-07
Nov-06
Jun-06
Jan-06
Aug-05
Mar-05
Oct-04
May-04
Dec-03
Jul-03
Feb-03
Sep-02
Apr-02
-
Jun-01
Shree Cement, a cost leader, now
commands valuations
comparable to pan-India players
and price leaders.
14.0
Nov-01
Current sector rerating has not
seen either Holcim companies
rerate substantially, given the
overhang of corporate action by
the parent. Further, absence of
visible growth triggers is hurting
too.
16.0
Jan-01
Previous bull runs saw ACC,
Ambuja, UltraTech and at times
Ramco at the peak of valuation
hierarchy.
Source: Companies, HDFC sec Inst Research
Based on historical actual and HDFC sec forward estimates
Page | 3
CEMENT MID-CAP PICKS
Valuation hierarchy has now flipped (cont’d.)
1 yr rolling fwd EV/T (US$)
Ambuja
ACC
UltraTech
Shree Cement
Ramco
300
200
150
100
50
Oct-14
Dec-13
May-14
Jul-13
Feb-13
Sep-12
Apr-12
Nov-11
Jan-11
Jun-11
Aug-10
Oct-09
Mar-10
May-09
Dec-08
Jul-08
Feb-08
Sep-07
Apr-07
Jun-06
Nov-06
Jan-06
Aug-05
Mar-05
Oct-04
May-04
Jul-03
Dec-03
Feb-03
Apr-02
Sep-02
Nov-01
-
Jun-01
However, the hierarchy has
flipped. Shree Cement, tipped to
be 23.5 mTPA by FY15 end, now
trades at par with UltraTech
cement and at a significant
premium to ACC/Ambuja/Ramco.
250
Jan-01
In capacity terms, valuations are
still well below the peak of 20072008.
Source: Companies, HDFC sec Inst Research
Page | 4
CEMENT MID-CAP PICKS
Where is the entry barrier?
In the past 5 years, ~32 mTPA of
capacity (~10% of current
installed capacity) was
announced/ordered by
“outsiders”. This was not limited
to sectors with some synergies to
cement making (steel, power),
but included diversified
industrials as oilseeds, FMCG and
shipyards.
Apart from Revati Cement and
ABG Cement, most of the
capacity is currently operational,
with some notable successes.
Bharathi has doubled from its
initial capacity, while Wonder
Cement is also in the process of
doubling its current cement
capacity and has established
itself as a strong competitor in
North.
New entrants in cement industry in past 5 years (Not an exhaustive list)
Company
ABG Cement
Parent co business
Shipyard
Capacity (mTPA) Location/Region
5.80
Kutch (Gujarat)
Current status
Kiln operational, yet to commission the
grinding capacity in Surat.
Plant commenced operations in 2009
JSW Cement
Steel
5.40
Nandyal (A.P.)
Reliance Cementation
Power & Infra
5.00
Satna (M.P.)
Bharathi Cement
Media (Sakshi Group)
5.00
YSR District (AP)
Wonder Cement
Marble
3.25
Revati Cement
Oilseeds (Ruchi Soya)
3.00
Emami Cement
FMCG
2.50
KJS Cement
Entreprenuer
2.30
Nirma Cement
FMCG
2.00
Adhunik Cement
Steel
1.30
Chittorgarh (Rajasthan) Plant operational since Feb-March 2012.
The company is now adding an
additional line of 2.5 mTPA.
Satna (M.P)
Kiln ordered in March 2011, no updates
on progress
Raipur (Chhattisgarh)
Environment clearance obtained in
2011, kiln has been ordered.
Satna (M.P)
Commenced operations in December
2011
Pali (Rajasthan)
Expected to be operational by
December 2014
Meghalaya
Acquired by Dalmia Bharat
Commissioned recently. Reliance plants
to add further capacity at Yavatmal
(Maharashtra)
Now owned by Vicat
Source: HDFC securities, MoEF, Companies
Reliance Cement also plans to
add an additional 5 mTPA (in
Maharashtra) with an eventual
stated target of 50 mTPA.
Page | 5
CEMENT MID-CAP PICKS
Pricing premium shrinks during periods of fast demand growth
Pricing premium vs demand growth
% premium ('A' grade vs 'B' grade, Realisations/t)
Domestic despatch growth (%)
25%
Given an increasing proportion of
non-trade sales, higher RMC
penetration and bulk (i.e. not
bag) cement sales; it is likely that
the premium pricing of brand
leaders will erode gradually (long
term trend).
Periods of sharp demand growth
typically coincide with a
reduction in pricing premium.
This is typically driven by a
regional surge in utilization
levels.
20%
15%
10%
5%
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
1QFY12
4QFY11
3QFY11
2QFY11
1QFY11
4QFY10
3QFY10
2QFY10
0%
1QFY10
However, the latest decline in
pricing premium is more likely
due to Binani closure, than a
result of demand surge.
Source: Companies, HDFC sec Inst Research
Note: ‘A’ grade includes companies which are premium priced in their respective regions (ACC, Ambuja, India Cement, Ramco). UltraTech excluded
due to significant white cement element
Non-premium companies include Shree Cement, JK Lakshmi, Birla Corp, Mangalam, Orient Cement
Page | 6
CEMENT MID-CAP PICKS
Valuation matrix
Orient, Sanghi and Mangalam
still trade at discounted
valuations, which do not reflect
their current operations and
future profitability
Company
UltraTech Cement
Ambuja Cement
CMP
MCap
EV/EBITDA (x)
P/E (x)
EV/T (US$)
Rs
Rs bn
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
2,549
701.5
15.5
13.2
29.6
26.3
199
188
208
319.9
12.9
10.9
22.5
18.3
161
158
Shree Cement
8,386
292.2
13.9
9.0
25.5
15.8
210
182
ACC
1,380
259.7
12.8
10.5
22.6
18.6
131
114
Madras Cements
306
72.7
11.9
8.7
23.4
15.8
139
135
Birla Corp
484
37.3
10.2
8.2
13.3
10.9
68
67
India Cements
108
33.1
7.4
6.2
17.9
11.7
69
68
Orient Cement
127
25.9
11.7
5.2
14.7
16.2
127
81
Sanghi Industries
63
13.8
7.3
5.4
20.1
9.6
106
69
Mangalam Cement
243
6.5
5.2
3.4
8.6
4.7
47
44
Note: Prices as of October 8, 2014 close. US$: INR = 61.0
Page | 7
CEMENT MID-CAP PICKS
Company Section
Page | 8
INITIATING COVERAGE
9 OCT 2014
Orient Cement
BUY
INDUSTRY
CMP (as on 8 Oct 2014)
Target Price
CEMENT
Rs 127
Rs 177
Nifty
7,843
Sensex
26,247
KEY STOCK DATA
Bloomberg/Reuters ORCMNT IN/ORCE.BO
No. of Shares (mn)
205
MCap (Rs bn) / ($ mn)
26/424
6m avg traded value (Rs mn)
41
STOCK PERFORMANCE (%)
52 Week high / low
Rs 140 / 34
3M
6M
12M
Absolute (%)
29.9 168.2
225.6
Relative (%)
27.3 150.7
194.3
SHAREHOLDING PATTERN (%)
Promoters
37.50
FIs & Local MFs
29.99
FIIs
Public & Others
Source : BSE
Ankur Kulshrestha
[email protected]
+91-22-6171-7346
3.46
29.05
The Gulbarga booster
Orient Cement (Orient) is catching up with the
industry leaders in South. It already runs one of the
most efficient operations in the country (LTM
operating costs at Rs 2,945/t vs Rs 3,400-3,800 for
peers ex-Shree). From its current base in Devapur
(Telangana, 3 mTPA) and Jalgaon (Maha. 2 mTPA),
the company is expanding by adding 3 mTPA cement
capacity at Gulbarga (Karnataka). At a total project
cost of ~Rs 17bn (~US$95/t) and a guided
commissioning by 1QFY16 (within 24 months from
ordering), the upcoming plant is expected to set a
new benchmark in greenfield project execution.
The next key challenge before the company is to
replicate its best-in-class current operations at the
new plant. Two solid advantages: Low landed cost of
of coal (due to proximity to the Singareni Collieries)
and fly ash (from Ramagundam TPP) are not
replicable. However, savings may accrue due to
newer, more efficient equipment (new kiln, VRMs
instead of ball mill-roller press combination). Further,
the catchment area of new plant would include
higher priced markets of Karnataka. As a result, the
new plant may be able to generate similar EBITDA/t
as the existing operations. At 8 mTPA capacity,
operations in two regions and established cost
leadership, the valuations at US$81/t are still below
peers like Ramco which trades at US$140/t.

Gulbarga booster : With the Devapur operations
nearly maxed out at current volumes, Gulbarga will
drive the next phase of volume growth (FY14-17 CAGR:
13%). While blended profitability will be dragged down
to some extent due to non-replication of current
advantages, we reckon EBITDA/t to be a healthy Rs
1,100/t in FY17. EBITDA/PAT can grow by a healthy
44/40% CAGR over the same period. Debt/EBITDA will
be a healthy 2.7x upon commissioning of the Gulbarga.

Outlook and view : The stock trades at 11.7/7.5x
FY15/FY16E EV/EBITDA and US$81/t on FY16 exit
financials. Given the booster from Gulbarga operations,
we believe that the company can command premium
valuations, especially given its best-in-class cost profile.
While the company may not yet have the scale of
Ramco, it is clearly the cost leader in South. Initiate
with a BUY rating and a TP of Rs 177 based on 9.5x
FY16 EV/EBITDA.
FINANCIAL SUMMARY (YE Mar)
(Rs mn)
Net Sales
FY13
FY14
FY15E
FY16E
FY17E
15,015
14,385
16,823
23,674
28,311
EBITDA
3,223
2,240
3,312
5,239
6,781
PAT
1,617
1,010
1,767
1,605
2,785
7.9
4.9
8.6
7.8
13.6
16.0
25.7
14.7
16.2
9.3
EV / EBITDA (x)
8.3
12.7
11.7
7.5
5.5
EV/T (US$)
87
93
127
81
76
21.4
12.7
19.7
15.6
22.9
Diluted EPS (Rs)
P/E (x)
RoE (%)
Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
ORIENT CEMENT : INITIATING COVERAGE
Industry cost range (Rs/t)
Industry Average
Freight costs remain extremely competitive (Rs 745/t,
ex inter unit clinker transfer) as its primary target
markets in Telengana and Maharashtra are at a very
low lead distance (< 350 kms). Including IUCL, the
freight costs (~Rs1,000/t) are in line with other
cement makers.

Ramagundam super TPP (2600 MW) is at a 60km
distance from Devapur, while Bhusaval power plant is
situated at a distance of 20 kms from Jalgaon GU.
This ensures availability of cost fly-ash with a low lead
distance too.
ORIENT
Rs/T
4,000
Low energy and freight costs drive the advantage
3,500
RM cost/T
Employee cost/T
3,000
3,000
2,000
2,500

Freight cost/T
1QFY15
2,000
1,500
1,000
Source: Company, HDFC sec Inst Research
Note: Industry includes ACC, Ambuja, UltraTech, Ramco, India
Cements, Shree Cement, JK Lakshmi, Mangalam Cement and Orient.
Average is weighted by respective volumes
Further, low specific consumption of power (76.4
kWh/T) and full integration (50MW at Devapur)
ensures lower electricity costs.
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
0
3QFY12
Current profitability is driven by low energy cost (LTM
Rs 940/t) which is in part driven by linkage coal
available in close proximity of the plant (Singareni
Collieries). Orient has linkages for its clinker lines
from Singareni collieries (0.67 mT coal or ~78% of
consumption in FY14, including power plant
requirement).
500
1QFY12

P&F Costs/T
Other expenditure
3,500
2,500
2QFY12
4,500
4QFY14
Brands
Birla A-1 (PPC, OPC
(43/53))
LTM operating costs of Rs 2,940/t, best-in-class
3QFY14
Singareni Collieries
2QFY14
Coal Source
1QFY14
Ramagundam
TPP/Bhusaval TPP
4QFY13
Flyash Source
3QFY13
50 MW CPP

Orient Cement’s current operations out Devapur (AP)
and Jalgaon (Maharashtra) are best-in-class, with
industry leading costs (LTM operating costs at
Rs2,945/t).
2QFY13
Captive power

1QFY13
3 mTPA (Devapur)
2 mTPA (Jalgaon)
4QFY12
Cement
capacity
Best-in-class operations
3QFY12
3.5 mTPA
2QFY12
Kiln capacity
Key investment arguments
1QFY12
Current operations
Source: Company, HDFC sec Inst Research

Current operations at Devapur/Jalgaon compare
favorably vs Ramco on all cost parameters. With a
tight leash on overall costs, the current operations
of Orient remain comfortably placed for a upswing
in demand.
Page | 10
ORIENT CEMENT : INITIATING COVERAGE
New capacity addition at US$95/t

Particulars
Clinker capacity
2 mTPA
Supplier
FL Smidth
Cement capacity
3 mTPA
Limestone mine life
93 years
Captive power
45 MW CPP
Waste Heat recovery
7 MW
Location
Chittapur (Kar.)
Project cost
Rs 17.2bn
Debt:equity
70:30
Source of coal
Market purchase
Source of flyash
Ramagundam TPP


The Chittapur (Gulbarga) 3 mTPA capacity (2 mTPA
clinker) is being added for a capital cost of ~Rs
17.0bn, of which ~12bn will be funded through debt
and remainder via internal accruals.
The capacity will also include a 45MW CPP and 7MW
waste heat recovery systems, thereby ensuring full
captive power availability for the plant.
The plant is expected to be commissioned by June
2015, and is will likely contribute to volumes
significantly in FY16 (Our estimates: 1.19/1.78 mT in
FY16/17, or 40%/70% utilization levels).

Given the kiln was ordered in June 2013, the
commissioning timeline of 24 months is an industry
benchmark for green-field projects.

The new plant is expected to be more efficient vs the
current operations due to single kiln operation (vs. 3
at Devapur currently) and newer equipment.
However, the advantages of low cost fuel (linkage
coal at Devapur) and fly-ash (Ramagundam TPP) will
not be available and the company will have to ferry
these ~400 kms (from current sources to Gulbarga).
Source: Company, HDFC sec, MoEF

We believe that upon full ramp-up, Gulbarga
operations will be marginally lower than current
operations due to the above mentioned ~400kms
lead distance and market linked coal for the kiln (vs.
linkage coal for 2 lines and CPP in Devapur).

A mine life of 93 years based in ~300 mTPA reserves
also allows the company further scope to expand the
capacity at a later stage .
Valuations yet to factor in the new capacity

Sometime in FY16, Orient will be a 8 mTPA entity
with operations in South, but with key target markets
in the lucrative regions of Maharashtra.

Orient will have a net Debt/Equity of ~1.2x and net
Debt/EBITDA (FY16E) of ~2.8x upon plant
commissioning in June -15. This compares well with
other cement cos undertaking a ~50% expansion
currently.

Given its West focus, the volume growth potential of
the company is much higher than that of its South
India peers, which face an uphill task as far as volume
growth is concerned.

At 7.5x FY16E EV/EBITDA and ~US$80/t, valuation
have plenty of room for upside, especially when
compared with its South Indian peers like Ramco and
Dalmia Cement.
Page | 11
ORIENT CEMENT : INITIATING COVERAGE
KEY ASSUMPTIONS
Year Ending March
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Cement volumes (mn t)
3.64
3.83
4.09
4.20
4.25
5.54
6.13
5%
7%
3%
1%
30%
11%
3,636
3,669
3,422
3,958
4,275
4,617
26%
1%
-7%
16%
8%
8%
956
927
926
944
992
1,033
12%
-3%
0%
2%
5%
4%
341
349
349
365
414
435
20%
2%
0%
5%
14%
5%
975
983
990
1,040
1,092
1,146
41%
1%
1%
5%
5%
5%
% growth
Realizations (Rs/t)
2,894
% growth
P&F cost/t (Rs/t)
851
% growth
Raw material cost/t (Rs/t)
285
% growth
Freight cost/t (Rs/t)
694
% growth
EBITDA/t
% growth
786
1,131
779
511
756
928
1,088
44%
-31%
-34%
48%
23%
17%
Source: HDFC sec Inst Research
Page | 12
ORIENT CEMENT : INITIATING COVERAGE
Recent operational trends
QUARTERLY FINANCIALS SNAPSHOT
Profitability has remained rangebound due to weak pricing in
Maharashtra and Telengana.
(Rs mn)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
3,724
3,212
3,406
3,960
3,803
Power & Fuel
988
848
1,003
1,053
1,074
Freight Expenses
863
683
717
866
878
RM Costs
643
532
623
673
Despite operating in South,
Orient enjoys ~85% capacity
utilization levels, which is
facilitated by its exposure to
Maharashtra
644
Net Sales
Employee costs
148
143
145
146
173
(116)
119
(50)
162
(123)
Other Operating Expenses
484
539
476
547
516
EBITDA
(Increase)/Decrease in stock
714
347
491
512
641
Other operating income
12
11
6
54
24
Other Income/(expense)
17
39
26
10
10
Interest Cost
39
39
35
31
35
Depreciation
139
140
141
143
111
PBT
566
218
347
402
529
Tax
192
73
118
139
180
APAT
373
145
229
263
350
-
-
-
-
-
373
145
229
263
350
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
1.07
0.95
0.99
1.20
1.08
3,484
3,381
3,440
3,300
3,528
P&F costs (Rs/T)
924
893
1,013
878
996
RM costs (Rs/T)
602
560
630
561
597
Freight costs (Rs/T)
807
719
724
722
814
Other costs (Rs/T)
344
693
430
591
364
Cement EBITDA/T (Rs/t)
668
365
496
427
595
2,815
3,016
2,944
2,873
2,933
E/o (adj for tax)
RPAT
Source: Company, HDFC sec Inst Research
Tightly managed operations
resulting in a flattish overall cost
profile (LTM costs/t: Rs 2,945)
PER TONNE ANALYSIS
Per tonne data
Volumes (cement & clinker, mT)
Blended realisations (Rs/T)
Cement costs/t
Source: Company, HDFC sec Inst Research
Page | 13
ORIENT CEMENT : INITIATING COVERAGE
Realisation trend
3,500
(5.00)
3,000
(10.00)
Source: Company, HDFC sec Inst Research
EBITDA/t trend
Key costs trend
2,500
(30.00)
2,000
Source: Company, HDFC sec Inst Research
.
1QFY15
4QFY14
3QFY14
1,000
500
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
0
4QFY13
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
(60.00)
4QFY12
0
3QFY12
(50.00)
2QFY12
200
Freight cost/T
1,500
3QFY13
(40.00)
400
2QFY13
600
(20.00)
1QFY13
800
3,000
4QFY12
1,000
P&F Costs/T
Other expenditure
3,500
(10.00)
3QFY12
1,200
-
2QFY12
Rs/T
RM cost/T
Employee cost/T
1QFY12
1,400
YoY (%)
%
2QFY14
1QFY15
1QFY14
(15.00)
4QFY13
2,500
Source: Company, HDFC sec Inst Research
1QFY12
At ~Rs 2,950/t, Orient is an
undisputed cost leader in its
operating regions.
5.00
3QFY13
(10.00)
15.00
10.00
4,000
2QFY13
0.0
%
1QFY13
(5.00)
YoY (%)
Rs/T
1QFY12
0.2
4QFY14
-
3QFY14
0.4
2QFY14
5.00
1QFY14
0.6
4QFY13
10.00
3QFY13
0.8
2QFY13
15.00
1QFY13
1.0
4QFY12
20.00
3QFY12
1.2
4,500
4QFY12
25.00
3QFY12
mnT
1.4
EBITDA/T (Rs)
EBITDA/t rebound likely soon
given strong pricing in
South/Maharashtra
Cement realisations (Rs/T)
YoY(%)
2QFY12
Sales volume (mT)
1QFY12
Realizations have remained soft,
especially in AP/Telengana. Spike
expected in 2QFY15 following
steep hike in prices in AP.
Volume trend
2QFY12
Volumes have peaked out given
capacity constraints, growth
expected from newer capacity
only
Source: Company, HDFC sec Inst Research
Page | 14
ORIENT CEMENT : INITIATING COVERAGE
INCOME STATEMENT
BALANCE SHEET
(Rs mn)
Net sales
FY13
FY14
FY15E
FY16E
FY17E
15,015
14,385
16,823
23,674
28,311
Growth %
Manufacturing expenses
Employee Expenses
SG&A Expenses
Other operating expenses
Operating profits
Operating Profit Margin (%)
Other operating income
EBITDA
EBITDA %
EBITDA Growth %
Other Income
Depreciation
7.8
(4.2)
16.9
40.7
19.6
9,159
9,975
11,063
14,975
17,229
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
SOURCES OF FUNDS
Share Capital
205
205
205
205
205
Reserves
7,363
8,083
9,490
10,735
13,161
522
582
640
832
1,082
Total Shareholders Funds
7,567
8,288
9,695
10,940
13,366
1,934
1,680
1,905
2,731
3,326
Long Term Debt
462
453
12,000
12,000
12,000
213
0
0
0
0
Short Term Debt
1,027
2,823
2,000
3,000
1,000
3,186
2,147
3,214
5,137
6,674
Total Debt
1,489
3,277
14,000
15,000
13,000
21.2
14.9
19.1
21.7
23.6
Deferred Taxes
1,293
1,266
1,266
1,266
1,266
Long Term Provisions & Others
37
93
97
102
107
3,223
2,240
3,312
5,239
6,781
21.5
15.6
19.7
22.1
24.0
APPLICATION OF FUNDS
(26.1)
(30.5)
47.8
58.2
29.4
Net Block + CWIP
11
0
46
46
46
TOTAL SOURCES OF FUNDS
383
580
580
580
580
10,733
13,410
25,541
27,786
28,212
8,538
8,257
8,180
21,940
23,699
Investments, LT Loans & Advs
254
1,181
1,181
1,181
1,181
561
564
577
1,240
1,240
Inventories
869
713
1,659
2,335
2,792
2,673
1,676
2,781
4,045
5,587
Debtors
765
647
784
1,103
1,319
187
144
144
1,650
1,430
Cash & Equivalents
763
816
1,075
1,478
1,750
PBT
2,486
1,532
2,637
2,395
4,157
ST Loans & Advances, Others
1,000
724
724
724
724
Tax
870
522
870
790
1,372
Total Current Assets
3,396
2,899
4,241
5,640
6,585
PAT
1,617
1,010
1,767
1,605
2,785
Creditors
-
-
-
-
-
APAT
1,617
1,010
1,767
1,605
2,785
APAT Growth (%)
(32.0)
(37.5)
74.9
(9.2)
73.6
EBIT
Interest
EO items (net of tax)
Source: Company, HDFC sec Inst Research
766
880
1,014
1,427
1,706
Other Current Liabilities & Provns
1,085
1,323
1,323
1,323
1,323
Total Current Liabilities
1,851
2,203
2,337
2,750
3,029
Net Current Assets
TOTAL APPLICATION OF FUNDS
1,545
697
1,905
2,890
3,556
10,733
13,410
25,541
27,786
28,212
Source: Company, HDFC sec Inst Research
Page | 15
ORIENT CEMENT : INITIATING COVERAGE
CASH FLOW
KEY RATIOS
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
Reported PAT
1,617
1,010
1,767
1,605
2,785
PROFITABILITY (%)
Non-operating & EO items
FY13
FY14
FY15E
FY16E
FY17E
257
(93)
(144)
(149)
(154)
EBITDA Margin
21.5
15.6
19.7
22.1
24.0
1,874
917
1,623
1,456
2,632
APAT Margin
10.8
7.0
10.5
6.8
9.8
Interest expenses
187
144
144
1,650
1,430
RoE
21.4
12.7
19.7
15.6
22.9
Depreciation
561
564
577
1,240
1,240
RoIC
23.9
14.5
13.1
12.9
16.6
38
357
(949)
(582)
(394)
RoCE
21.6
13.2
12.2
12.1
15.5
EFFICIENCY
35.0
34.1
33.0
33.0
33.0
Asset Turnover (x)
2.5
1.1
0.8
0.8
1.0
Inventory (days)
21
18
18
18
18
Debtors (days)
19
16
17
17
17
PAT from Operations
Working Capital Change
OPERATING CASH FLOW ( a )
2,659
1,982
1,395
3,764
4,908
Capex
(182)
(3,540)
(11,500)
(2,500)
(1,000)
Free cash flow (FCF)
2,478
(1,558)
(10,105)
1,264
3,908
Investments
(466)
(0)
0
0
0
INVESTING CASH FLOW ( b )
(647)
(3,540)
(11,500)
(2,500)
(1,000)
Share capital Issuance
Tax Rate (%)
0
0
0
0
0
Payables (days)
19
22
22
22
22
(1,000)
2,022
10,723
1,000
(2,000)
Cash Conversion Cycle (days)
21
12
13
13
13
Interest expenses
(187)
(144)
(144)
(1,650)
(1,430)
Debt/EBITDA (x)
0.2
1.1
2.7
2.8
2.1
Dividend
(479)
(360)
(360)
(360)
(360)
Net D/E (%)
9.6
29.7
133.3
123.6
84.2
(1,666)
1,519
10,220
(1,010)
(3,790)
Interest Coverage
17.0
14.9
22.3
3.1
4.7
346
(39)
115
255
119
PER SHARE DATA
EPS (Rs/sh)
7.9
4.9
8.6
7.8
13.6
CEPS (Rs/sh)
10.6
7.7
11.4
13.9
19.6
DPS (Rs/sh)
2.0
1.5
1.5
1.5
1.5
BV (Rs/sh)
36.9
40.5
47.3
53.4
65.2
16.0
25.7
14.7
16.2
9.3
Debt Issuance
FINANCING CASH FLOW ( c )
NET CASH FLOW (a+b+c)
Source: Company, HDFC sec Inst Research
VALUATION
P/E
P/BV
3.4
3.1
2.7
2.4
1.9
EV/EBITDA
8.3
12.7
11.7
7.5
5.5
OCF/EV (%)
10.0
7.0
3.6
9.5
13.2
FCF/EV (%)
FCFE/Market Cap (%)
Dividend Yield (%)
9.3
(5.5)
(26.0)
3.2
10.5
51.6
15.9
23.9
29.4
24.4
1.6
1.2
1.2
1.2
1.2
Source: Company, HDFC sec Inst Research
Page | 16
INITIATING COVERAGE
9 OCT 2014
Sanghi Industries
BUY
INDUSTRY
CMP (as on 8 Oct 2014)
Target Price
CEMENT
Rs 63
Rs 83
Nifty
7,843
Sensex
26,247
KEY STOCK DATA
Bloomberg/Reuters
SNGI IN/SNGI.BO
No. of Shares (mn)
220
MCap (Rs bn) / ($ mn)
14/227
6m avg traded value (Rs mn)
10
STOCK PERFORMANCE (%)
52 Week high / low
Rs 63 / 14
3M
6M
12M
Absolute (%)
134.5 290.1
324.2
Relative (%)
131.9 272.7
292.8
SHAREHOLDING PATTERN (%)
Promoters
FIs & Local MFs
FIIs
Public & Others
Source : BSE
71.03
3.50
25.47
Scripting a quiet turnaround
Sanghi Industries (SNGI) operates a 3 mTPA clinker
capacity (2.6 mTPA grinding) in Kutch, Gujarat. It has
access to soft marine limestone spread over ~1,500
hectares (containing ~1 bnt of proven reserves). The
operations are fully integrated with captive power
(63 MW), have the ability to use lignite in both kiln
and CPP and a captive jetty within 1 km of the
cement grinding plant. Its port terminals at Navlakhi
(Rajkot) and Dharamtar (Maharashtra) are used to
access their respective markets. The company also
exports clinker from Kutch, opportunistically tapping
the cement markets in Middle East and Africa.
SNGI’s profitability is driven by low cost raw
material, essentially surface mined limestone.
Proximity to lignite mines of GMDC, ability to import
coal at its captive jetty and excess captive power
allow it low energy costs. On the flipside, low
blending (C:C ratio at 1.1 in FY14) and a very high
proportion of road transport (given no option of
railway) eat away large chunks of profitability. As a
result, the company reports some of the highest P&F
and selling costs in the industry.

Ankur Kulshrestha
[email protected]
+91-22-6171-7346
The road forward : SNGI is investing in additional
cement capacity (1 mTPA grinding unit) at the existing
location, likely to be commissioned in FY16. Given the
ample availability of fly ash in the vicinity and a gradual
shift towards PPC, P&F costs can trend lower. Further,
increasing focus on low cost coastal freight should
lower freight, while accessing newer markets. In
addition to existing terminals, SNGI is looking at setting
up distribution capacity on the western coast and is
acquiring vessels for transportation.

Outlook and view : SNGI has multiple levers of
profitability improvement: product mix, volumes, and
transportation. While product mix shift may take
longer to play out, improvement on account of latter
two should become visible earlier. Cash flows (at
existing profitability levels) are strong enough to pare
down the debt in next 2-3 years (Net debt FY14
~Rs5.7bn (D/E: 0.69x), even as earnings/RoEs appear
depressed due to high asset base. The next phase of
capacity build-out can then begin, truly exploiting the
billion tonne limestone reserves. Initiate with a BUY,
and a TP of Rs 83 (7.5x FY16E EV/EBITDA, US$100/t).
FINANCIAL SUMMARY (YE June)
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
10,550
11,906
12,426
14,447
15,691
2,009
1,948
2,307
2,835
3,508
PAT
459
496
634
1,327
1,968
Diluted EPS (Rs)
2.1
2.3
2.9
6.0
8.9
27.8
25.7
20.1
9.6
6.5
EV / EBITDA (x)
9.8
9.2
7.3
5.4
3.6
EV/T (US$)
124
113
106
69
70
RoE (%)
5.6
5.7
6.9
13.0
16.6
Net Sales
EBITDA
P/E (x)
Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
SANGHI INDUSTRIES : INITIATING COVERAGE
Key investment arguments
Low cost scalability of operations
Shift to coastal shipping

Installed clinker capacity (~3 mTPA) is enough to
support volumes of up to 4.3 mTPA, theoretically.
(Implied C:C ratio of 1.43).

SNGI has not been able to capitalise on its coastal
location and captive jetty, for domestic volumes.


However, given limited grinding capacity, SNGI has
remained constrained in its volume output with a
maximum cement production of 2.5 mTPA in FY08.
The nearest railhead, Bhuj, is ~140 kms from the
plant, rendering rail transport infeasible.

As a result, SNGI ships cement on road to its key
markets, with a high lead distance. As a result, its
freight costs are amongst the highest in the industry.

The company is planning to purchase vessels for
cement transport, and has earmarked a capex of Rs
1.0bn for the same. Vessels are expected to be
delivered by 2HFY15 and will likely result in
substantial freight cost savings.
Particulars
Distance from key markets (kms)
140
Rajkot
370
Ahmedabad
470
Surat
730
Mumbai
~1,000

Further, 63MW of captive power can easily support
~4.5 mTPA cement capacity, implying that the future
cement capacity additions will be lower cost.
Volumes peaked out in FY08 at ~2.5 mTPA due to
inadequate grinding capacity
Cement capacity (mTPA)
Cement production (mT)
Utilisation (%)
%
3.00
Freight costs/t, Rs
FY12
FY13
FY14
120%
100%
2.00
80%
1.50
60%
1.00
40%
0.50
20%
-
0%
Source: Company, HDFC sec Inst Research
Note: FY11 was 15 month ending June 2011.
SNGI faces consistently high freight costs due to an
adverse mix
1,400
2.50
FY04
Bhuj
To address this mismatch, SNGI is adding a 1 mTPA
GU at a cost of Rs 1bn (~US$ 17/t). The GU is being
added at existing site, which is close to the captive
jetty. Likely to be commissioned in FY16, the cement
grinding capacity will provide SNGI with additional
volumes at a low cost.
FY14
Brand

FY13
Import/GMDC
Sanghi Cement (OPC,
PPC)
FY12
Source of coal
FY11*
Sanghipuram (Guj.)
FY10
63 MW CPP
Location
FY09
Captive power
FY08
2.6 mTPA
FY07
Cement capacity
FY06
3 mTPA
FY05
Clinker capacity
1,200
1,000
800
600
UTCEM
ACC
ACEM
Ramco
SRCM
SNGI
Source: Company, HDFC sec Inst Research
Note: FY11 was 15 month ending June 2011.
Page | 18
SANGHI INDUSTRIES : INITIATING COVERAGE
Improvement in product mix (More PPC)


SNGI sells primarily OPC, given low grinding/blending
capacity and brand positioning. Of late the company
has attempted to foray in to PPC manufacturing.

This is likely to bring down the production costs even
lower on a per tonne basis, since the landed cost of
fly ash is lower than clinker production cost.

Higher specific consumption of power vs benchmarks
Power consumption/t of cement, kWh
120.0
With multiple fly ash sources available in the vicinity
(Mundra/Tata Power) and increasing grinding
capacity, share of PPC in the mix should increase. The
eventual product mix will still tilt towards OPC, given
the market dynamics of Gujarat, where OPC is
preferred over PPC. Further, the product mix shift is
usually slow/gradual and needs marketing effort.
C:C ratio (RHS)
1.20
1.50
1.10
1.00
20.0
UTCEM
FY14
FY13
FY12
FY11*
FY10
FY09
FY08
FY07
FY06
FY05
Source: Company, HDFC sec Inst Research
Note: FY11 was 15 month ending June 2011.
ACEM
Ramco
With the improvement in blending ratio, the specific
power consumption can trend lower.
Huge reserve potential

SNGI has access to ~1bn tonnes reserves of soft
marine limestone, spread over ~1,500 hectares

In 2008, the company had received environment
clearance to mine ~12 mTPA limestone.

Surface mining is used to tap the limestone reserves,
which yields low cost limestone and as a result low
RM costs.

Given vast reserves and availability of land for
expansion, Sanghi Industries can potentially increase
its capacity manifold, without having to invest in
additional land/limestone leases.
1.00
FY04
-
ACC
Source: Company, HDFC sec Inst Research.
1.05
0.50
SNGI
40.0
1.15
2.00
SRCM
60.0

2.50
FY13
80.0
Cement production (mT)
3.00
FY12
100.0
Low C:C ratio (low blending) renders the power/fuel
advantage ineffective
Clinker ground (mT)
Further, SNGI’s power consumption is on the higher
side when compared to other cement makers (~100
kWh/t vs 85 kWH/t for others). This is direct result of
low blending.
Page | 19
SANGHI INDUSTRIES : INITIATING COVERAGE
KEY ASSUMPTIONS
Year Ending March
FY11*
FY12
FY13
FY14
FY15E
FY16E
FY17E
Blended volumes (mn t)
2.62
2.31
2.30
2.82
2.72
3.07
3.24
% growth
34%
-12%
0%
23%
-3%
13%
6%
3,431
4,087
4,300
3,709
4,026
4,158
4,277
Realizations (Rs/t)
% growth
3%
19%
5%
-14%
9%
3%
3%
P&F cost/t (Rs/t)
957
1,267
1,126
925
955
956
956
% growth
-3%
32%
-11%
-18%
3%
0%
0%
Raw material cost/t (Rs/t)
208
178
228
169
255
295
330
% growth
15%
-15%
28%
-26%
51%
16%
12%
1,143
1,128
1,451
1,233
1,295
1,327
1,227
47%
-1%
29%
-15%
5%
2%
-8%
Freight cost/t (Rs/t)
% growth
Other costs (Rs/t)
246
560
440
624
541
524
541
% growth
-35%
128%
-21%
42%
-13%
-3%
3%
EBITDA/t
568
807
873
691
847
924
1,083
Source: HDFC sec Inst Research
Note: FY11 was 15 month ending June 2011
Page | 20
SANGHI INDUSTRIES : INITIATING COVERAGE
Recent operational trends
QUARTERLY FINANCIALS SNAPSHOT
Pricing gains and cost
improvements have led to
profitability jumping few
notches.
(Rs mn)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2,565
2,090
2,846
2,882
2,882
Power & Fuel
661
400
719
798
692
Freight Expenses
829
484
841
891
1,000
RM Costs
136
73
134
136
134
Cement costs have remained on a
tight leash, helped in part by a
benign fuel price environment
Employee costs
Net Sales
(Increase)/Decrease in stock
Other Operating Expenses
EBITDA
131
111
111
120
109
(107)
230
378
(74)
(49)
697
562
264
392
306
218
232
399
619
691
Other operating income
1
4
9
4
6
Other Income/(expense)
44
12
23
37
19
Interest Cost
11
66
47
45
(17)
Depreciation
689
367
370
364
377
PBT
(438)
(185)
15
252
355
Tax
(81)
0
(60)
0
0
(357)
(185)
75
252
355
(357)
(185)
75
252
355
1QFY14
0.74
2QFY14
3QFY14
4QFY14
1QFY15
0.50
0.85
0.74
0.73
3,466
4,198
3,348
3,911
3,943
894
803
846
1,083
947
1,120
971
989
1,208
1,369
APAT
E/o (adj for tax)
RPAT
Source: Company, HDFC sec Inst Research
PER TONNE ANALYSIS
Per tonne data
Volumes (cement & clinker, mT)
Blended realisations (Rs/T)
P&F costs (Rs/T)
Freight costs (Rs/T)
RM costs (Rs/T)
Other costs (Rs/T)
Cement EBITDA/T (Rs/t)
Cement costs/t
183
146
158
185
183
1,007
2,001
910
545
351
295
474
480
846
952
3,171
3,724
2,868
3,065
2,991
Source: Company, HDFC sec Inst Research
Page | 21
SANGHI INDUSTRIES : INITIATING COVERAGE
Realisation trend
5,500
%
Rs/T
4,500
4,000
3,500
3,000
EBITDA/t trend
Key costs trend
Source: Company, HDFC sec Inst Research
.
4QFY14
3QFY14
2QFY14
4QFY14
3QFY14
1QFY14
0
4QFY13
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
0
1,000
3QFY13
200
2,000
2QFY13
400
1QFY13
600
3,000
4QFY12
800
Freight cost/T
4,000
3QFY12
1,000
P&F Costs/T
Other expenditure
50.00
40.00
30.00
20.00
10.00
(10.00)
(20.00)
(30.00)
(40.00)
5,000
2QFY12
1,200
700.00
600.00
500.00
400.00
300.00
200.00
100.00
(100.00)
(200.00)
1QFY12
Rs/T
RM cost/T
Employee cost/T
4QFY11
1,400
YoY (%)
%
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
4QFY11
2,500
Source: Company, HDFC sec Inst Research
EBITDA/T (Rs)
YoY (%)
5,000
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
(10.00)
(20.00)
Source: Company, HDFC sec Inst Research
4QFY11
Strong gains in EBITDA /t, led by
benign energy costs.
1QFY12
4QFY11
Binani closure led pricing gains in
past 2 quarters.
mnT
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
1QFY12
Volumes have peaked out given
capacity constraints, growth
expected from newer capacity
only
Cement realisations (Rs/T)
YoY(%)
1QFY12
Sales volume (mT)
2QFY14
Volume trend
Source: Company, HDFC sec Inst Research
Page | 22
SANGHI INDUSTRIES : INITIATING COVERAGE
INCOME STATEMENT
BALANCE SHEET
(Rs mn)
Net sales
FY13
FY14
FY15E
FY16E
FY17E
10,550
11,906
12,426
14,447
15,691
Growth %
Manufacturing expenses
8.3
12.8
4.4
16.3
8.6
3,848
4,655
4,489
5,148
5,608
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
Share Capital
2,962
2,895
2,895
2,895
2,895
Reserves
6,200
6,695
7,329
8,656
10,624
SOURCES OF FUNDS
423
451
496
545
600
Total Shareholders Funds
9,162
9,590
10,224
11,551
13,519
3,990
4,662
4,856
5,625
5,666
Long Term Debt
4,511
4,869
4,869
4,869
4,869
280
190
280
294
308
Short Term Debt
2,475
475
475
475
475
2,009
1,948
2,307
2,835
3,508
Total Debt
6,986
5,344
5,344
5,344
5,344
19.0
16.4
18.6
19.6
22.4
Deferred Taxes
(540)
(540)
(540)
(540)
(540)
EBITDA Growth %
7.8
(3.0)
18.4
22.9
23.7
Long Term Provisions & Others
Other Income
121
106
106
106
106
TOTAL SOURCES OF FUNDS
1,454
1,478
1,509
1,200
1,100
APPLICATION OF FUNDS
EBIT
677
576
904
1,741
2,513
Net Block + CWIP
Interest
149
141
111
82
53
PBT
528
436
793
1,658
2,460
Tax
69
(60)
159
332
492
PAT
459
496
634
1,327
1,968
Debtors
Cash & Equivalents
Employee Expenses
SG&A Expenses
Other operating expenses
EBITDA
EBITDA %
Depreciation
APAT
APAT Growth (%)
EPS
EPS Growth (%)
Source: Company, HDFC sec Inst Research
49
1,119
1,119
1,119
1,119
15,657
15,514
16,148
17,474
19,443
13,815
12,632
12,123
11,923
11,323
546
593
593
593
593
CWIP
Investments, LT Loans & Advs
1,384
244
244
244
244
Inventories
2,112
1,478
1,478
1,478
1,478
251
125
125
125
125
459
496
634
1,327
1,968
(43.9)
8.0
27.9
109.2
48.4
ST Loans & Advances, Others
2.09
2.25
2.88
6.03
8.95
Total Current Assets
(43.9)
8.0
27.9
109.2
48.4
Creditors
24
340
1,482
3,009
5,577
141
1,593
1,593
1,593
1,593
2,528
3,536
4,678
6,205
8,773
569
764
764
764
764
Other Current Liabilities & Provns
2,047
749
749
749
749
Total Current Liabilities
2,615
1,513
1,513
1,513
1,513
(88)
2,023
3,165
4,692
7,260
15,657
15,514
16,148
17,474
19,443
Net Current Assets
TOTAL APPLICATION OF FUNDS
Source: Company, HDFC sec Inst Research
Page | 23
SANGHI INDUSTRIES : INITIATING COVERAGE
CASH FLOW
KEY RATIOS
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
Reported PAT
459
496
634
1,327
1,968
Non-operating & EO items
121
106
106
106
106
PAT from Operations
337
390
528
1,221
1,862
Interest expenses
FY13
FY14
FY15E
FY16E
FY17E
PROFITABILITY (%)
EBITDA Margin
19.0
16.4
18.6
19.6
22.4
APAT Margin
4.3
4.2
5.1
9.2
12.5
149
141
111
82
53
RoE
5.6
5.7
6.9
13.0
16.6
Depreciation
1,454
1,478
1,509
1,200
1,100
RoIC
4.0
4.7
5.2
10.3
15.3
Working Capital Change
(367)
248
0
0
0
RoCE
4.0
4.7
4.9
8.8
11.6
OPERATING CASH FLOW ( a )
1,573
2,256
2,148
2,503
3,016
EFFICIENCY
Capex
(467)
(406)
(1,000)
(1,000)
(500)
Tax Rate (%)
12.7
N/M
20.0
20.0
20.0
Free cash flow (FCF)
1,105
1,850
1,148
1,503
2,516
Asset Turnover (x)
0.6
0.7
0.8
0.9
1.0
0
(0)
0
0
0
Inventory (days)
67
55
43
37
34
(467)
(406)
(1,000)
(1,000)
(500)
Debtors (days)
8
6
4
3
3
Investments
INVESTING CASH FLOW ( b )
Share capital Issuance
Debt Issuance
0
0
0
0
0
Payables (days)
22
20
22
19
18
(1,115)
(1,475)
0
0
0
Cash Conversion Cycle (days)
53
40
25
21
20
(149)
(141)
(111)
(82)
(53)
0
0
0
0
0
(1,264)
(1,615)
(111)
(82)
(158)
234
1,037
1,421
Interest expenses
Dividend
FINANCING CASH FLOW ( c )
NET CASH FLOW (a+b+c)
Source: Company, HDFC sec Inst Research
Debt/EBITDA (x)
3.7
2.9
2.0
1.1
0.1
Net D/E (%)
89.2
64.1
44.6
26.2
3.4
(53)
Interest Coverage
13.5
13.9
20.7
34.4
65.9
2,462
PER SHARE DATA
EPS (Rs/sh)
2.1
2.3
2.9
6.0
8.9
CEPS (Rs/sh)
8.7
9.0
9.7
11.5
13.9
-
-
-
-
41.6
43.6
46.5
52.5
61.5
27.8
25.7
20.1
9.6
6.5
P/BV
1.4
1.3
1.2
1.1
0.9
EV/EBITDA
9.8
9.2
7.3
5.4
3.6
OCF/EV (%)
7.4
11.5
11.7
14.8
21.1
FCF/EV (%)
5.2
9.5
6.2
8.9
17.6
FCFE/Market Cap (%)
7.8
13.1
8.2
11.0
18.5
-
-
-
-
-
DPS (Rs/sh)
BV (Rs/sh)
VALUATION
P/E
Dividend Yield (%)
Source: Company, HDFC sec Inst Research
Page | 24
INITIATING COVERAGE
9 OCT 2014
Mangalam Cement
BUY
INDUSTRY
CMP (as on 8 Oct 2014)
Target Price
CEMENT
Rs 243
Rs 415
Nifty
7,843
Sensex
26,247
KEY STOCK DATA
Bloomberg/Reuters
MGC IN/MGLC.BO
No. of Shares (mn)
27
MCap (Rs bn) / ($ mn)
6/106
6m avg traded value (Rs mn)
30
STOCK PERFORMANCE (%)
52 Week high / low
Rs 268 / 95
3M
6M
12M
Absolute (%)
17.4
90.4
138.2
Relative (%)
14.8
72.9
106.9
SHAREHOLDING PATTERN (%)
Promoters
27.41
FIs & Local MFs
1.14
FIIs
1.12
Public & Others
Source : BSE
Ankur Kulshrestha
[email protected]
+91-22-6171-7346
70.33
Ripe for a rerating
Mangalam Cement has recently added 63% cement
capacity to reach 3.25 mTPA. In addition to scale, the
expansion also gives the company new levers of
efficiency improvement. Gains will be manifold; 1)
the expanded kiln/grinding unit will have vastly
improved power & fuel consumption parameters that
can save up to Rs 200/t in costs; 2) improvement in
PPC proportion from current levels will save another
Rs 60-70/t in costs and; 3) tie up of ~1,500tpd (~0.5
mTPA) of grinding capacity in NCR will lower freight
costs.
The expansion has been prudently executed, leaving
the company only ~Rs3.2bn in net debt as of FY14
end (0.64 net D/E ratio). With the first repayment on
term loans starting only in June 2015, Mangalam is
well set to reap the benefits of recent expansion. We
believe the company can generate cash flows to wipe
out the debt completely in FY15-16. The company sits
on >50 years of limestone reserves in its current
location. Next phase of expansion may likely include
a split grinding unit in Aligarh (as previously
planned) and clinker upgradation/new line at Morak.
Given the ability of current operations to sustain a 23 year build cycle, we believe Mangalam is well set
to leapfrog into the 5 mTPA league. Initiate with a
BUY and a TP of Rs 415 (5.0x FY16 EV/EBITDA and
US$65/t).

Accelerating profitability: Mangalam Cement is
likely to see its EBITDA/PAT grow by 23/25% CAGR over
FY13-17 period*. EBITDA/t is likely to improve to
Rs900-1,000/t
levels,
driven
by
efficiencies
aforementioned and a volume CAGR of 12% is well
within grasp. We have not built in any benefits from a
7-year VAT exemption in Rajasthan from the new
capacity (1.25 mTPA, for sales in Rajasthan).

Outlook and view : The stock trades at 5.2/3.4x
EV/EBITDA and US$44/t on FY16 numbers. Given the
impending improvements in cost structure and its
comfortable balance sheet for another transformative
expansion (2 mTPA implies 62% capacity addition); we
believe there is a substantial scope for the stock to
sustainably rerate.
FINANCIAL SUMMARY
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
Net Sales
6,987
6,875
9,086
11,762
13,090
EBITDA
1,306
558
1,775
2,549
2,865
PAT
776
267
753
1,388
1,665
Diluted EPS (Rs)
29.0
10.0
28.2
52.0
62.4
P/E (x)
8.4
21.9
8.6
4.7
3.9
EV / EBITDA (x)
5.9
17.4
5.2
3.4
2.2
EV/T (US$)
63
80
47
44
32
16.8
5.3
14.1
22.3
22.1
RoE (%)
Source: Company, HDFC sec Inst Research
* FY14 saw upgrade of a clinker line and concomitant shutdown and
hence is not suitable to use as a base year
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
MANGALAM CEMENT : INITIATING COVERAGE
Further, the new grinding line (1.25mTPA) is expected
to have lower specific consumption of fuel compared
to the existing 2 lines. As the new line ramps up,
blended specific power consumption is likely to
reduce by ~10 units/t of cement volumes.
Specific power consumption to trend lower
Line - 1 (1 mTPA)
Line - 3 (1.25 mTPA)
85%
94
71
70
FY17E
94
75
70
FY16E
94
71
70
FY15E
94
60.0
New capacity to also yield substantial efficiencies
 The upgradation of kiln is likely to result in savings of
cement
75
70.0
FY14
80.0
Source: Company, HDFC sec Inst Research
upto ~Rs 200/t of
upgradation alone.
90.0
95
FY17E
FY16E
FY15E
60%
100.0
71
65%
110.0
FY13
70%
120.0
105
75%
73
3.25
2.88
3.25
2.71
2.20
2.00
1.80
3.25
80%
Line - 2 (1 mTPA)
Blended
FY12
90%

98
95%
Impact
Rs/t
Post upgrade
Specific power
20.0 units/t of
1
14.2 units/t
45
consumption
clinker
Specific fuel
840 kcal/kg of
710 kcal/kg of
2
164
consumption
clinker
clinker
Source: FLSmidth: The art of upgrading, HDFC sec Inst Research
1
Based on Mangalam Cement’s captive generation cost of Rs
5.45/kWH and C:C ratio of 1.4 (target)
2
Based on fuel cost of Rs 0.9/’000 kcal and C:C ratio of 1.4
79
Cement volumes (mT)
Pre upgrade
FY11
Cement capacity (mTPA)
Utilisation (%)
Parameter
95
These capacity enhancements can give it steep
volume growth in FY13-17 period (We estimate
volume CAGR of 12%).
Volume growth driven by 63% capacity addition
EFFICIENCIES WAITING TO BE UNLOCKED
81

This is driven by lower fuel consumption in the kiln
(lesser by 130kcal/kg of clinker) and lower specific
power consumption for the pyro unit (~6 units/t of
clinker).
FY10
It further aims to tie up ~1,500tpd of grinding
capacity in NCR region (Ghaziabad) by December
2014. This will enhance the available grinding
capacity by a further 0.5mTPA.
FY14
Brands

2.00
1.84
Fuel Source
Adani
Power,
Kota
Thermal Power plant
Linkages with SECL and
WCL, petcoke, open
market coal
Birla Uttam (PPC, OPC
(43/53))
FY13
Flyash Source
2.00
1.51
Location
mTPA cement/clinker expansion in May 2014. Post
expansion, its installed capacity stands at 3.25 mTPA,
which represents a ~63% expansion on its standing
capacity (2 mTPA).
FY12
Captive power

Near 63% capacity addition to drive volumes
 Mangalam Cement has finished its 1.25 mTPA/0.5
2.00
1.64
3.25
mTPA
(Three
grinding units)
35 MW CPP, 13.65 MW
windmills
Morak (Rajasthan)
FY11
2.3 mTPA (2 lines)
Cement capacity
2.00
1.64
Kiln capacity
Key investment arguments
FY10
EXPANDED OPERATIONS
produced
from
Source: Company, HDFC sec Inst Research
Page | 26
MANGALAM CEMENT : INITIATING COVERAGE
Product and geographic mix to further aid margins
Free cash flow to accelerate, wipe out debt


With the full capacity expansion in the bag, FY14 end
net debt was Rs 3.2 bn (Net D/E ratio: 0.6).

With a rampup in the new capacity and profitability
improvements, we expect the net debt to be wiped
out in 2-3 years.

As a result, Mangalam is well placed to embark on a
future round of expansion.


Mangalam Cement currently produces 60% PPC
cement, which can increase to 85-90%, given its
market dynamics. The switch from OPC to PPC can
yield further efficiency benefits, especially given the
availability of fly ash is available via long term
contracts.
The expanded capacity will have VAT exemption in
Rajasthan for first 7 years of operations. As a result,
the company is likely to increase its supplies to
Rajasthan markets (~30% of dispatches at present). In
addition to the savings on VAT, this will also result in
reduction in lead distance and savings in freight costs.
Valuations remain attractive

The stock trades at 5.2/3.4x FY15/16 EV/EBITDA and
US$44/t (FY16 end).
The grinding capacity tie-up in NCR will also lead to a
reduction in freight costs.
Page | 27
MANGALAM CEMENT : INITIATING COVERAGE
KEY ASSUMPTIONS
Year Ending March
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Cement volumes (mn t)
1.64
1.51
1.84
1.80
2.20
2.71
2.88
-7%
22%
-3%
22%
23%
6%
3,003
4,108
3,788
3,824
4,130
4,336
4,553
37%
-8%
1%
8%
5%
5%
933
1,087
1,088
954
913
949
989
17%
0%
-12%
-4%
4%
4%
564
610
732
723
746
782
1%
8%
20%
-1%
3%
5%
1,017
973
1,039
1,091
1,145
1,203
37%
-4%
7%
5%
5%
5%
626
668
256
762
904
962
74%
7%
-62%
198%
19%
7%
% growth
Realizations (Rs/t)
% growth
P&F cost/t (Rs/t)
% growth
Raw material cost/t (Rs/t)
559
% growth
Freight cost/t (Rs/t)
743
% growth
EBITDA/t
% growth
359
Source : HDFC sec Inst Research
Page | 28
MANGALAM CEMENT : INITIATING COVERAGE
Recent operational trends
QUARTERLY FINANCIALS SNAPSHOT
Revenue growth in past 2-3
qaurters aided by newly
operational kiln capacity (0.5
mTPA) and strong pricing due to
Binani closure.
(Rs mn)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
1,683
1,449
1,606
2,137
2,281
Power & Fuel
419
359
289
648
549
Freight Expenses
507
489
580
517
611
RM Costs
282
244
279
511
481
Employee costs
99
98
120
109
128
(Increase)/Decrease in stock
(4)
88
232
(45)
(6)
Other Operating Expenses
133
129
176
157
164
EBITDA
Net Sales
247
41
(69)
240
354
Other operating income
10
30
10
47
22
Other Income/(expense)
6
7
8
25
8
Interest Cost
9
9
23
45
67
Depreciation
61
61
70
86
71
PBT
193
9
(145)
181
247
Tax
5
(17)
(149)
103
83
188
26
5
78
164
0
0
0
0
34
188
26
5
78
129
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
0.45
0.41
0.48
0.53
0.54
3,728
3,517
3,346
4,032
4,243
APAT
E/o (adj for tax)
RPAT
Source: Company, HDFC sec Inst Research
PER TONNE ANALYSIS
Per tonne data
Volumes (cement & clinker, mT)
Blended realisations (Rs/T)
P&F costs (Rs/T)
929
871
602
1,223
1,021
1,122
1,187
1,208
975
1,136
RM costs (Rs/T)
624
593
581
964
895
Other costs (Rs/T)
505
765
1,099
416
533
Cement EBITDA/T (Rs/t)
548
100
(145)
454
659
3,180
3,416
3,491
3,579
3,585
Freight costs (Rs/T)
Cement costs/t
Source: Company, HDFC sec Inst Research
Page | 29
MANGALAM CEMENT : INITIATING COVERAGE
Cement realisations (Rs/T)
YoY(%)
EBITDA/t trend
Key costs trend
-
200
(50.00)
0
(100.00)
Source: Company, HDFC sec Inst Research
.
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
(150.00)
3QFY12
-200
1QFY15
4QFY14
2,000
1,000
0
-1,000
1QFY15
50.00
4QFY14
400
2QFY14
100.00
3,000
4QFY13
150.00
600
Freight cost/T
4,000
3QFY13
200.00
800
2QFY13
250.00
1QFY13
%
P&F Costs/T
Other expenditure
4QFY12
Rs/T
RM cost/T
Employee cost/T
3QFY12
1,000
YoY (%)
2QFY12
EBITDA/T (Rs)
3QFY14
(15.00)
1QFY12
2,500
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
(10.00)
Source: Company, HDFC sec Inst Research
2QFY12
LTM costs at Rs 3,585/t. Likely to
to trend lower driven by
efficiencies unlocking.
(5.00)
3,000
Source: Company, HDFC sec Inst Research
1QFY12
Recent EBITDA/t strength led by
pricing. Improvements in
P&F/freight will be visible as
expanded capacity ramps up.
2QFY12
1QFY12
0.0
-
2QFY14
0.1
5.00
3,500
1QFY14
0.2
10.00
1QFY14
0.3
20.00
15.00
4,000
4QFY13
0.4
%
3QFY13
0.5
YoY (%)
Rs/T
2QFY13
0.6
4,500
1QFY13
60.00
50.00
40.00
30.00
20.00
10.00
(10.00)
(20.00)
(30.00)
4QFY12
%
3QFY12
mnT
2QFY12
Sales volume (mT)
0.7
Realisations have sustained
EBITDA/t in recent quarters,
direct benefit of Binani closure
Realisation trend
3QFY14
Volume trend
1QFY12
Volume growth should resume as
new capacity scales up
Source: Company, HDFC sec Inst Research
Page | 30
MANGALAM CEMENT : INITIATING COVERAGE
INCOME STATEMENT
BALANCE SHEET
(Rs mn)
FY13
FY14
FY15E
FY16E
FY17E
Net sales
6,987
6,875
9,086
11,762
13,090
Growth %
12.3
(1.6)
32.2
29.5
11.3
2,769
3,303
3,599
4,597
5,093
Manufacturing expenses
Employee Expenses
SG&A Expenses
Other operating expenses
Operating profits
Operating Profit Margin (%)
Other operating income
(Rs mn)
SOURCES OF FUNDS
Share Capital
6,543
8,008
8,275
2,110
3,435
3,435
3,435
3,435
567
Long Term Debt
567
594
654
719
791
Short Term Debt
21.1
4
254
121
121
121
2,114
3,688
3,556
3,556
3,556
Deferred Taxes
586
610
610
610
610
Long Term Provisions & Others
824
856
856
856
856
8,447
10,225
10,645
11,832
13,297
3,492
5,150
7,270
6,933
6,589
Total Debt
73
98
98
98
98
1,306
558
1,775
2,549
2,865
EBITDA %
18.7
8.1
19.5
21.7
21.9
APPLICATION OF FUNDS
EBITDA Growth %
28.7
(57.3)
218.3
43.6
12.4
Net Block + CWIP
71
46
46
46
46
EBITDA
Other Income
Depreciation
EBIT
Interest
251
277
430
488
494
1,126
326
1,391
2,107
2,417
48
87
387
257
197
PBT
1,078
239
1,004
1,850
2,220
Tax
304
(57)
251
463
555
PAT
EO items (net of tax)
APAT
APAT Growth (%)
EPS
EPS Growth (%)
774
296
753
1,388
1,665
(2)
29
-
-
-
776
267
753
1,388
1,665
38.5
(65.5)
181.8
84.2
20.0
28.98
10.01
28.22
51.98
62.38
38.2
(65.5)
181.8
84.2
20.0
267
6,810
3,873
2,767
267
5,356
515
20.8
267
5,623
3,480
2,451
267
4,803
468
18.5
267
5,070
2,688
1,677
FY17E
4,656
426
6.7
FY16E
4,923
2,092
460
FY15E
Total Shareholders Funds
381
17.6
FY14
Reserves
2,036
1,233
FY13
TOTAL SOURCES OF FUNDS
Investments, LT Loans & Advs
797
866
866
866
866
1,366
1,159
583
1,673
838
Debtors
302
227
271
374
343
Cash & Equivalents
923
464
1,413
1,918
4,337
ST Loans & Advances, Others
666
1,007
1,007
1,007
1,007
Inventories
Total Current Assets
3,257
2,857
3,273
4,972
6,526
Creditors
566
689
805
1,129
1,023
Other Current Liabilities & Provns
680
631
631
631
631
Total Current Liabilities
1,246
1,320
1,436
1,760
1,654
Net Current Assets
2,011
1,538
1,837
3,212
4,871
TOTAL APPLICATION OF FUNDS
8,447
10,225
10,645
11,832
13,297
Source: Company, HDFC sec Inst Research
Source: Company, HDFC sec Inst Research
Page | 31
MANGALAM CEMENT : INITIATING COVERAGE
CASH FLOW
KEY RATIOS
(Rs mn)
Reported PAT
Non-operating & EO items
PAT from Operations
Interest expenses
FY13
FY14
FY15E
FY16E
FY17E
FY13
FY14
FY15E
FY16E
FY17E
774
296
753
1,388
1,665
PROFITABILITY (%)
(144)
(144)
(144)
(144)
(144)
629
152
609
1,243
1,521
EBITDA Margin
18.7
8.1
19.5
21.7
21.9
APAT Margin
11.1
3.9
8.3
11.8
12.7
48
87
387
257
197
RoE
16.8
5.3
14.1
22.3
22.1
Depreciation
251
277
430
488
494
RoIC
16.2
5.7
13.3
19.8
23.1
Working Capital Change
210
(104)
649
(869)
760
RoCE
14.2
5.2
11.9
16.4
16.5
28.2
(23.7)
25.0
25.0
25.0
OPERATING CASH FLOW ( a )
1,138
413
2,075
1,119
2,972
EFFICIENCY
Capex
(2,176)
(2,294)
(550)
(300)
(300)
Tax Rate (%)
Free cash flow (FCF)
(1,038)
(1,882)
1,525
819
2,672
Asset Turnover (x)
1.0
0.7
0.8
1.1
1.2
(345)
0
0
0
0
Inventory (days)
51
67
35
35
35
(2,521)
(2,294)
(550)
(300)
(300)
Debtors (days)
16
12
10
10
10
Investments
INVESTING CASH FLOW ( b )
Share capital Issuance
Debt Issuance
Interest expenses
0
0
0
0
0
Payables (days)
30
37
30
30
30
1,963
1,463
(133)
0
0
Cash Conversion Cycle (days)
37
43
15
15
15
(48)
(87)
(387)
(257)
(197)
Debt/EBITDA (x)
0.3
4.8
1.6
0.8
0.2
Dividend
(186)
(94)
(200)
(200)
(200)
Net D/E (%)
24.2
63.6
38.1
24.0
N/M
FINANCING CASH FLOW ( c )
1,729
1,283
(720)
(458)
(397)
Interest Coverage
25.5
5.3
4.3
9.5
14.1
NET CASH FLOW (a+b+c)
346
(599)
805
361
2,275
PER SHARE DATA
Non-operating and EO items
144
144
144
144
144
EPS (Rs/sh)
29.0
11.1
28.2
52.0
62.4
Closing Cash & Equivalents
923
464
1,413
1,918
4,337
CEPS (Rs/sh)
38.4
21.5
44.3
70.3
80.9
DPS (Rs/sh)
6.0
3.0
7.0
7.0
7.0
184.4
189.9
210.6
255.1
310.0
P/E
8.4
21.9
8.6
4.7
3.9
P/BV
1.3
1.3
1.2
1.0
0.8
EV/EBITDA
5.9
17.4
5.2
3.4
2.2
OCF/EV (%)
14.8
4.3
24.1
13.8
52.2
FCF/EV (%)
(13.5)
(19.4)
17.7
10.1
46.9
FCFE/Market Cap (%)
157.6
(55.8)
177.4
108.9
404.3
2.5
1.2
2.9
2.9
2.9
Source: Company, HDFC sec Inst Research
BV (Rs/sh)
VALUATION
Dividend Yield (%)
Source: Company, HDFC sec Inst Research
Page | 32
CEMENT MID-CAP PICKS
Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period
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Page | 33