July 11, 2018 Construction Materials The India Cements Ltd. The India Cements Ltd. Bloomberg Code: ICEM IN India Research - Stock Broking BUY One Of The Largest Manufacturer Of Cement In South Recommendation (Rs.) CMP (as on Jul 10, 2018) 112 Drive to restructure itself and the value-added products to boost sales: Target Price 134 India Cements is refocusing on its core business and it wants to exit from non-core Upside (%) 19 business. The company has got the licenses to produce value-added products Stock Information like oil well cement and sleeper cement which will also cater to the niche markets, Mkt Cap (Rs.Bn/US$ Bn) 34.7 / 0.5 yielding higher contribution which would help the company to efficiently employ the 52-wk High/Low (Rs.) 218 / 102 resources and boost its sales. We are expecting the revenue to grow at CAGR of 3M Avg. daily value (Rs.Mn) 449.5 6.5% from FY17 to FY20E. Beta (x) 1.5 Supreme Court stay order on banning sand mining has offered relief to Sensex/Nifty 36240 / 10947 the company: The Supreme Court issued an interim stay on the Madras High O/S Shares(Mn) 309.3 Face Value (Rs.) 10.0 Court’s order that had directed shutting down of all sand quarrying activities across Shareholding Pattern (%) the state within six months. This move has provided relief to the cement companies. India cement is the biggest beneficiary as it accounts for 40% of its total capacity. Promoters 28.4 This would aid the company to improve upon its sales volume. FIIs 28.3 Government’s thrust on infrastructure building to improve the demand: DIIs 18.2 Others 25.1 Government’s initiatives for infrastructure development and 16 irrigation projects Stock Performance (%) have been identified as National Project Status to boost Cement Demand. 1M 3M 6M 12M The infrastructure spending has been increasing every year, where in FY16 it was Absolute (6) (26) (42) (45) 2.21 lakh crore, in FY17 it was 4.94 lakh crore and in FY18 it is 5.97 lakh crore, this Relative to Sensex (8) (31) (45) (52) clearly shows the thrust of the government for improving and meeting the needs of Source: Bloomberg infrastructure for the development of our economy. Relative Performance* Valuation and Risks 140 120 The India Cements Ltd. is currently trading at P/BV of 0.65x FY20E BV. So we 100 initiate the company for a “BUY” rating, valuing at 0.75x P/BV (10 year average 80 60 forward multiple) on FY20E BV for the target price of Rs. 134, representing an 40 18 18 18 17 17 17 17 17 18 17 18 17 18 18 - - - - - - - - - - - upside potential of 19%, for the next 12 to 15 months. Key risks are increase in raw - - - Jul Jul Oct Apr Jun Jan Jun Feb Sep Mar Aug Nov Dec material price and also increase in the custom duty on pet coke. May The India Cements Ltd. Sensex Source: Bloomberg; *Index 100 Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E Net Sales 48654 51625 54323 59190 62305 EBITDA 8605 8882 7090 8489 9412 EBITDA Margin (%) 17.7 17.2 13.1 14.3 15.1 Net Profit 1376 1510 664 1171 1835 EPS (Rs.) 4.5 5.3 2.3 3.9 6.1 RoE (%) 3.3 3.0 1.3 2.2 3.4 PE (x) 19.2 30.8 61.9 28.5 18.4 Source: Company, Karvy Research; *Represents multiples for FY16-FY18 are based on historic market price Analyst Contact Vishalkumar Shah For private circulation only. For important information about Karvy’s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, 040 - 3321 6277 Thomson Publishers & Reuters [email protected] 1 July 11, 2018 The India Cements Ltd. Investment Rationale: yyGovernment’s initiatives on infrastructure spending have been increasing every year, which would garner the cement demand. yyThe India Cements Ltd., a prominent player in south having the market share of 28%, has been focusing on its core business, is expected to meet the demand of the customers, especially from AP and Telangana, and even conditions in Tamil Nadu is expected to be on good growth, which would help the company to improve its sales. yyThe company has taken various cost mitigation measures which would help the company to reduce its costs and improve the Margins. yyThe company will be also producing value-added products that will garner higher contribution and boost its sales. yyThe company has got approval from the authorities for enhancing the capacity of Sankari and Dalavoi plants in Tamil Nadu. The company has also obtained approvals for installing new energy efficient cement grinding facility at Sankarnagar. Company Background: The India Cements Ltd. was founded in 1946 by Mr. SNN Sankaralinga Iyer and the first plant was set up at Thalaiyuthu in Tamil Nadu. India Cements is one of the leading cement manufacturing companies in India and also a market leader in South India with the market share of 28%. The Company’s vision is to create value on a sustained basis for all stakeholders through lofty standards of transparency, accountability and leadership in cement manufacture. The company has 8 cement factories in 4 States i.e. 3 in Tamil Nadu (Sankarnagar, Tirunelveli District, Sankari, Salem District, Dalavoi, Ariyalur District) , 2 in Andhra Pradesh (Chilamakur, Kadapa District, Yerraguntla, Kadapa District), 2 in Telangana (Vishnupuram, Nalgonda District, Malkapur, Ranga Reddy District) and 1 in Rajasthan (Nokhla, Banswara District) and the company also has 2 Grinding units, 1 in Tamil Nadu (Vallur Village, Tiruvallur District) and other one in Maharashtra (Parli Vaijnath, Beed District). The company also has 3 Ready Mix Concrete (RMC) units in Tamil Nadu, Karnataka and Telangana. Exhibit 2: Shareholding Pattern (%) Exhibit 3: Revenue Segmentation (%) Other Operating Others revenue 25.1% 4.5% FIIs 18.2% Promoters Sales (from 28.4% cement and DIIs clinker) 28.3% 95.5% Source: BSE, Karvy Research Source: Company, Karvy Research 2 July 11, 2018 The India Cements Ltd. ABOUT CEMENT SECTOR Installed capacity and the key market of cement in different regions: Exhibit 4: Market area of cement West Central 19.7% 18.1% The pie chart explains about the installed capacity and key markets East 16.9% of cement in key different regions. South 45.4% Source: IBEF, Karvy Research Highlights of cement sector: yyIndia is the second largest producer of cement in the world. yy*Cement Production capacity was nearly 425 Mn tons in Sep 2017 yy**India’s production capacity is expected to reach 550 Mn tons by 2025. Exhibit 5: Production Capacity 600 500 550 400 425 300 390 370 366 350 336 200 323 100 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17* FY25E** Production Capacity (Mn Tons) Source: IBEF, Karvy Research yyOf the total capacity, 98% lies with the private sector and the rest with public sector yyThere are 210 large cement plants out of which 77 plants are located in the states of Andhra Pradesh, Rajasthan & Tamil Nadu yyCement sector has attracted huge investments both from India as well as the foreign investment after its deregulation in 1982. According to data released by the Department of Industrial Policy and Promotion (DIPP), cement and gypsum products attracted Foreign Direct Investment (FDI) worth US$ 5.24 Bn between April 2000 and March 2017. India has a lot of potential for development in infrastructure and construction sector and cement sector is expected to benefit largely from it, some of the recent initiatives taken by the government such as the development of 100 smart cities are expected to provide the major boost to this sector. 3 July 11, 2018 The India Cements Ltd. Demand outlook - Driven by housing and infra: yyA major proportion of cement demand comes from housing. Rural housing contributes 35% to the cement demand and 30% of the cement demand comes The demand for cement is from urban housing. With declining household sizes (nuclearization) and population growth, the number of families with housing requirements would only rise. In this driven majorly by Housing backdrop, housing will continue to be a major demand drivers for the cement and Infra, and further as industry for the years to come. the economy develops it yyInfrastructure segment, constituting 15% of the total cement volumes, includes would boost the demand of roads, railways, bridges, dams, power plants, irrigation projects and others. cement. yyCommercial construction constitutes 11%, and industrial consumption 9% of the cement volumes, comprising offices, complexes, malls and others. Exhibit 6: Cement Demand Infrastructure sector 13.0% Hosing Sector Commercial 67.0% construction 11.0% Industrial consumption 9.0% Source: IBEF, Karvy Research Outlook for the cement sector: There are expectations of a turnaround in the economy with a projected GDP growth of 6.75% in the current fiscal year and 7 to 7.5% during the next year. Economic activity is also expected to rebound with the pick-up in global growth and global trade. The Budget As the government’s focus for 2018-19, has retained the Government’s thrust on the rural economy, infrastructure is on the development of development, road projects, irrigation projects and affordable housing with a provision the economy, with its thrust of higher outlays for the sectors. While there are expectations of the cement industry on rural, infrastructural getting over the weak off-take in the coming quarters, it continues to face cost pressure development, housing from rising custom duty on pet-coke. projects and many more shall strive up the cement The recent interim stay granted by the Supreme Court staying the Madras High Court demand.