Infrastructure/Cement/Building material Cement shines, Infrastructure mixed, Building material soft Sector Update

The cement sector reported yet another strong quarter (ex-Grasim, Q2FY2020 Results Review net profit up 48% y-o-y) led by realisation growth (up 8.8% y-o-y) Sector: Infra/Cement/Building and OPM expansion (up 347 BPS y-o-y), while demand environment remained muted (volume down 2% y-o-y). Infrastructure was mixed Sector View: Positive bag with IRB and KNR posting strong execution, while SEL and Ashoka performed poorly. However, project tendering remained weak, as seen since Q2FY2019. In the building materials space, Our coverage universe Century Plyboards outperformed due to OPM expansion, while Kajaria and Supreme felt demand and OPM pressure (although net CMP PT Companies Reco. profit was boosted by lower ETR). We expect cement companies to (Rs) (Rs) benefit from pricing discipline with October-November 2019 cement Cement prices increasing by 6.3% y-o-y, while key input costs such as power, 20358 Buy 22500 fuel and freight were benign. The infrastructure sector is expected to Ultratech see revival in project tendering from H2FY2020. Moreover, recently 4066 Buy 5000 Cement announced measures related to easing of norms for NHAI asset Grasim 778 Hold 803 monetisation and 75% payment of arbitral award under appeal are Industries key positives in reviving project tendering and improving liquidity The Ramco 791 Buy 920 Cement for the sector. As for building materials, weak demand and high JK Lakshmi competitive intensity are expected in the near term. Structural 281 Positive 384 Cement triggers related to GST implementation are still intact. The kick-start Infrastructure of government-led infrastructure investments, especially in roads IRB and affordable housing sectors from H2FY2020, is a key re-rating 85 Buy 105 Infrastructure trigger for all the three sectors. Sadbhav 121 Buy 171 Engineering Outlook: KNR 250 Positive 293 Constructions Cement continues to shine; Infrastructure mixed bag; Building Ashoka materials facing near-term pain: We expect cement companies to fare 94 Positive 113 Buildcon well in the near term as cement prices increased by 6.3% during October- Building November 2019 as compared to Q3FY2019. Key input costs are benign Materials even as demand remains weak for the short term. The infrastructure Supreme 1137 Buy 1350 sector is expected to pick up with road project tendering slated to Industries increase from H2FY2020, while most companies have been able to Century 170 Buy 213 Plyboards receive appointed dates for projects. Furthermore, the government’s Kajaria thrust continues on easing liquidity and improve project tendering for 520 Positive 614 Ceramics the sector. The building materials space may have to live with weak demand and competitive pressures in the near term. Valuation

Price chart Prefer companies with leadership, quality balance sheet and valuation comfort: We maintain a positive stance on the cement space for the 42000 3300 41000 3200 aforementioned reasons and prefer sectoral and regional leaders. In 40000 3100 39000 3000 the infrastructure space, we prefer companies having a relatively low 38000 2900 37000 2800 balance sheet leverage, strong order book and comfort on valuation. 36000 2700 35000 2600 In the building materials space, we prefer companies with a leadership 34000 2500 33000 2400 position in their product categories with capacity expansion plans in 32000 2300 18 18 19 18 19 19 19 18 19 18 19 19 19 19 18 19 19 ------place to reap benefits from unorganised players. Jul Jul Jan Jun - - Oct Oct Apr Sep Feb Sep Dec Aug Aug - Nov Nov - Mar - - May ------09 09 09 09 09 09 09 09 09 09 09 09 09 09 09 09 09 Key risks: Sustained macroeconomic weakness would lead to lowering of estimates and valuation multiples of companies. Leaders in Q2FY2020: Shree Cement, The Ramco Cements, JK Lakshmi Cement, IRB Infrastructure, KNR constructions, Century Plyboards Laggards in Q2FY2020: , Mangalam Cement, Sadbhav Engineering, Ashoka Buildcon, Kajaria Ceramics Preferred Picks: UltraTech, The Ramco Cements, JK Lakshmi Cement, KNR Construction, Ashoka Buildcon, Century Plyboards, Supreme Industries November 21, 2019 7 Sector Update

Q2FY2020 Result Snapshot Sales (Rs. cr) OPM (%) Adj. PAT (Rs. cr) Particulars Q2 Q2 y-o-y q-o-q Q2 Q2 y-o-q q-o-q Q2 Q2 y-o-y q-o-q FY20 FY19 (%) (%) FY20 FY19 (bps) (bps) FY20 FY19 (%) (%) Cement Sector Coverage 18170 17758 2.3 -11.1 19.9 18.5 134 -408 1643 1583 3.8 -27.3 Shree Cement 2802 2587 8.3 -7.7 30.1 22.2 796 42 309 281 10.0 -14.9 UltraTech 9254 8869 4.3 -16.0 19.6 15.8 377 -574 639 371 72.3 -49.5 Grasim 4797 5118 -6.3 -4.1 13.7 20.9 -714 -313 526 817 -35.5 19.8 The Ramco 1317 1184 11.2 -4.9 22.4 20.9 154 -354 168 114 46.9 -12.4 Cements Soft coverage 9246 8574 7.8 -7.3 14.5 12.4 205 -520 604 397 52.3 -41.8 ACC 4150 3433 20.9 0.0 13.4 12.9 52 -543 300 206 45.9 -33.5 Ambuja 2626 2614 0.5 -11.8 16.7 13.7 305 -670 235 179 31.4 -43.1 Cements 1246 1387 -10.2 -15.2 11.8 11.2 65 -466 9 1 - -87.9 JK Lakshmi 935 851 9.9 -10.2 15.9 10.8 513 -41 46 8 - -34.1 Cement Mangalam 289 288 0.5 -13.2 15.4 5.6 981 -501 15 3 - -55.6 Cement Grand total 27416 26331 4.1 -9.9 18.0 16.5 151 -450 2247 1980 13.5 -31.9 Total (ex-Grasim) 22618 21213 6.6 -11.0 19.0 15.5 347 -470 1720 1163 47.9 -39.9 Construction Active coverage IRB Infrastructure* 1,752 1,432 22.3 -1.2 42.7 46.8 -413 -559 200 173 15.7 -3.1 Sadbhav 565 691 -18.2 -32.5 12.3 12.1 25 -17 26 38 -32.5 -34.5 Engineering Soft coverage KNR 546 416 31.2 17.6 23.0 20.0 306 365 74 45 64.7 55.3 Constructions Ashoka Buildcon 1,038 1,005 3.3 -11.2 35.5 32.4 308 511 18 (2) - - Total 3,901 3,544 10.1 -8.1 33.6 32.8 81 50 318 254 25.3 16.0 Building materials Active coverage Supreme 1,271 1,321 -3.8 -11.5 13.6 16.4 -284 195 140 107 30.1 60.2 Industries Century 589 564 4.4 2.7 15.2 13.7 157 -78 52 45 14.4 8.8 Plyboards* Soft coverage Kajaria Ceramics 715 725 -1.5 2.1 14.7 15.0 -29 -41 93 54 73.8 82.7 Total 2,575 2,611 -1.4 -5.0 14.3 15.4 -116 81 284 206 38.1 53.3 Source: Company, Sharekhan Research; *Consolidated financials

November 21, 2019 8 Sector Update

Valuation Price EV/EBITDA (x) P/E (x) Companies Reco target CMP (Rs) FY19 FY20E FY21E FY19 FY20E FY21E (Rs) Cement Shree Cement Buy 22,500 20358 25.9 18.8 16.2 62.3 47.8 38.5 Ultratech Cement Buy 5000 4066 20.1 13.9 11.9 48.2 26.0 21.2 Grasim Industries* Hold 803 778 6.3 6.2 5.5 17.7 19.5 17.8 The Ramco Cement Buy 920 791 19.4 15.7 13.0 37.2 26.6 21.4 Soft coverage India Cements Not Rated 78 7.3 6.1 5.8 34.8 15.8 13.8 JK Lakshmi Cement Positive 281 9.4 7.4 5.6 41.6 17.2 11.8 Mangalam Cement Not Rated 283 21.8 5.6 4.7 -37.3 9.1 7.7 Infrastructure IRB Infrastructure Buy 105 85 6.1 6.5 6.9 3.5 4.1 6.4 Sadbhav Engineering Buy 171 121 6.7 6.8 5.8 11.1 12.6 9.4 Soft coverage KNR Constructions Positive 250 7.1 6.6 5.4 13.2 14.2 11.3 Ashoka Buildcon Positive 94 5.6 2.6 1.6 - 30.0 22.3 Building Materials Century Plyboards Buy 213 170 13.7 10.8 9.2 22.8 17.0 14.6 Supreme Industries Buy 1,350 1,137 18.2 16.3 14.2 37.9 30.4 25.4 Soft Coverage Kajaria Ceramics Positive 520 18.1 17.1 14.5 35.7 27.1 24.2 Source: Company, Sharekhan Research * Standalone financials

November 21, 2019 9 Sector Update

Revision in earnings estimate Reco/ Price Company Change in Estimates Reason View Target Cement Active Coverage Stocks Shree Cement Upwards We have increased our net earnings estimate for FY2020- Buy 22,500 FY2021, factoring improvement in OPM, led by higher realisation and lower opex. On account of upward revision in estimates along with favourable regional dynamics, we have upgraded the stock to Buy with a revised PT of Rs. 22,500. Ultratech Shifted to Standalone We have moved towards standalone reporting on account Buy 5,000 estimates of management’s plans of exiting overseas operations in China, UAE, Europe and Bangladesh. We continue to believe that UltraTech, being a market leader, will benefit from the government’s focus on infrastructure and affordable housing segments. Hence, we have a Buy rating. Grasim Downwards We have lowered our standalone net earnings estimates Hold 803 for FY2020 FY2021, factoring lower profitability of VSF and chemical divisions due to weak demand, capacity overhang and continuing U.S.-China trade war. On account of increasing losses in , its rising funding requirements and little clarity emerging from Grasim’s management on funding Vodafone Idea, we have a Hold rating on the stock. The Ramco Upwards The company’s cost-reduction initiatives have started Buy 870 Cements yielding results leading us to upwardly revise OPM estimates for FY2020-FY2021. Ramco is well-placed to benefit in catering to the incremental demand emanating in Southern India with capacity expansions lined up. We continue to maintain a Buy rating. Cement Soft Coverage Stocks JK Lakshmi Upwards We have increased our earnings estimates for FY2020- Positive 22-25% Cement FY2021 factoring in higher realisation (offsetting lower volume growth) leading to higher OPM during the same period. We expect healthy volume growth, better realisation and muted rise in opex to aid in 4x rise in net earnings for JKL during FY2019- FY2021E. Hence, we maintain our Positive view. Infrastructure Active Coverage Stocks IRB Infrastructure Downwards We have trimmed down our earnings estimates for FY2020- Buy 105 FY2021, factoring lower construction revenue especially in FY2021, factoring cancellation of projects along with delay in execution of few projects. We have cut our SOTP-based PT to Rs. 105 (factoring lower BOT valuation compared to GIC deal), while we maintain our Buy rating due to comfort on valuation. Sadbhav Downwards We have lowered our net earnings estimates for FY2020- Buy 171 Engineering FY2021, factoring weak execution in Q2FY2020. We believe execution coming back on track in H2FY2020, deleveraging benefits accruing from asset sale, reverse merger of SIPL and an overall improvement in business outlook would lead to re-rating of valuation multiple for SEL. Hence, we maintain our Buy rating. Infrastructure Soft Coverage Stocks KNR Constructions Fine tuned We have fine tuned our earnings estimate for FY2020- Positive 18-20% FY2021 factoring higher interest and depreciation led by increased revenue booking from irrigation projects. We expect a pick-up in execution and a revival in project tendering during H2FY2020 to re-rate the valuation multiple for KNR. Hence, we maintain our Positive view on the stock. Ashoka Buildcon Fine tuned We have fine tuned our estimates for FY2020-FY2021, Positive 18-20% factoring weak Q2. Ashoka’s strong order backlog as of date of Rs. 9,748 crore and appointed dates for all five HAM projects in place are expected to lead to healthy EPC revenue growth over FY2019-FY2021. We maintain our Positive view on the stock.

November 21, 2019 10 Sector Update

Revision in earnings estimate Reco/ Price Company Change in Estimates Reason View Target Building Materials Active Coverage Stocks Century Plyboards Fine tuned We have revised our net earnings estimates for FY2020 and Buy 213 FY2021, factoring in improvement in OPM, while marginally lowering revenue growth estimates. We expect its net earnings to report a CAGR of 25% over FY2019-FY2021E, while the stock is currently trading at a P/E of 14.4x its FY2021E earnings, which is below its historical average of 21x. Hence, we maintain Buy. Supreme Indus- Fine tuned To factor in healthy H1FY2020 performance on account of Buy 1,350 tries margin beat and anticipated continued growth momentum in plastic piping system, partially offset by continued soft demand in certain segments and lower realisation. Management has increased FY2020E volume growth guidance to 10-12% from 8-10% earlier. Building materials Soft Coverage Stocks Kajaria Ceramics Downwards We have lowered our volume growth estimates for FY2020 Positive 10-12% owing to weak Q2FY2020 and expecting gradual recovery in H2FY2020 leading to downward revision in net earnings estimates for FY2020 and FY2021. We believe Kajaria Ceramics is well placed to benefit, reporting industry- leading volume growth and capturing market share from unorganised players. Source: Company, Sharekhan Research

Company-wise volume (lakh tonne) Companies Q2FY20 Q2FY19 y-o-y (%) Q1FY20 q-o-q (%) Coverage 262.1 261.9 0.1% 293 -10.4% Shree Cement 57.2 56.4 1.5% 60.6 -5.6% UltraTech 177.6 180.8 -1.8% 204.9 -13.3% The Ramco Cements 27.2 24.7 10.3% 27.0 0.8% Soft coverage 170.3 179.3 -5.0% 191.0 -10.8% ACC 64.4 65.4 -1.5% 72.0 -10.6% Ambuja 52.3 54.6 -4.2% 58.2 -10.1% India Cements 26.7 30.8 -13.3% 30.4 -12.3% JK Lakshmi Cement 20.6 21.3 -3.1% 23.3 -11.6% Mangalam Cement 6.3 7.3 -13.5% 7.1 -10.8% Grand total 432.3 441.2 -2.0% 484 -10.6% Source: Company, Sharekhan Research

Company-wise realisation (Rs. per tonne) Companies Q2FY20 Q2FY19 y-o-y (%) Q1FY20 q-o-q (%) Coverage 5,103 4,826 5.7% 5,279 -3.3% Shree Cement 4,653 4,268 9.0% 4,701 -1.0% UltraTech 5,210 4,905 6.2% 5,379 -3.1% The Ramco Cements 4,595 4,622 -0.6% 4,911 -6.4% Soft coverage 5,431 4,781 13.6% 5,222 4.0% ACC 5,478 5,249 4.3% 5,764 -5.0% Ambuja 5,021 4,787 4.9% 5,117 -1.9% India Cements 4,616 4,449 3.8% 4,783 -3.5% JK Lakshmi Cement 4,541 4,003 13.4% 4,472 1.6% Mangalam Cement 4,599 3,960 16.1% 4,726 -2.7% Grand total 5,232 4,808 8.8% 5,256 -0.5% Source: Company, Sharekhan Research

November 21, 2019 11 Sector Update

Power and fuel cost (Rs. per tonne) Companies Q2FY20 Q2FY19 y-o-y (%) Q1FY20 q-o-q (%) Coverage Shree Cement 825 842 -2.0% 806 2.4% UltraTech 1010 1194 -15.4% 1042 -3.1% The Ramco Cements 996 956 4.2% 984 1.2% Soft coverage ACC 1217 1117 9.0% 1133 7.4% Ambuja 1145 1007 13.7% 1046 9.5% India Cements 1251 1324 -5.5% 1240 0.9% JK Lakshmi Cement 1014 1059 -4.2% 958 5.8% Mangalam Cement 1233 1349 -8.6% 1282 -3.8% Grand Total 1087 1106 -1.8% 1061 2.4% Source: Company, Sharekhan Research

Freight cost (Rs. per tonne) Companies Q2FY20 Q2FY19 y-o-y (%) Q1FY20 q-o-q (%) Coverage Shree Cement 1013 1093 -7.3% 1103 -8.1% UltraTech 1175 1256 -6.4% 1218 -3.5% The Ramco Cements 990 1095 -9.5% 1040 -4.8% Soft coverage ACC 1483 1434 3.4% 1451 2.2% Ambuja 1299 1339 -3.0% 1272 2.1% India Cements 1002 1008 -0.6% 1048 -4.4% JK Lakshmi Cement 895 950 -5.9% 914 -2.1% Mangalam Cement 1115 1107 0.7% 1318 -15.4% Grand Total 1121 1160 -3.3% 1170 -4.2% Source: Company, Sharekhan Research

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November 21, 2019 12 Know more about our products and services

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